Pain — Three Days Grace

This life is filled with hurt
When happiness doesn’t work

In case you haven’t noticed, major economic disruptions are painful. It is mentally painful, emotionally painful, and sometimes physically painful. Mentally we all try to figure a way out of this mess. How can we make more money? What can we do about our current circumstances? We tie ourselves in knots trying to solve the enigma. It has no solution. These circumstances lead to emotional pain most often caused by the scarcity of money. We are unable to support our lifestyles, we have to cut back, and sometimes this is not enough. Sometimes the cutbacks are made for us. Creditors close financial lifelines, and lenders foreclose on homes. This can lead to destructive behaviors: divorces, alcoholism, smoking, and a whole host of other problems. This emotional pain leads to stress and physical pain. People start having health problems, and since they can’t afford a doctor’s visit, these problems often go unattended. In short, recessions really suck.

I was watching an HBO comedy special with Ricky Gervais the other night. In part of his routine, he was making fun of the lessons we learn in children’s stories. One of these stuck out because it speaks to today. He tells the story of the industrious mouse and the lazy mouse. The industrious mouse is busy gathering food and storing it away for the coming winter whereas the lazy mouse eats until he is full then either parties or lies around and does nothing. When winter comes, the industrious mouse is safe in his warm shelter and has plenty of food. The lazy mouse is cold, hungry and in pain. Finally the lazy mouse knocks on the door of the industrious mouse and pleads for some food and a place to stay. What does the industrious mouse do? He invites him in and gives him food and shelter.

Hmmm…

What lesson is being learned here?

From a spiritual standpoint, the actions of the industrious mouse are the correct ones. You should always be generous in times of need, particularly if you have plenty. But what of the lazy mouse? What has he learned? He has learned that he can party and be irresponsible and some compassionate fool is going to take him in and save him. The industrious mouse did not evaluate whether or not the lazy mouse deserved to be saved, and he did not concern himself with the precedent this sets. He acted as his conscious told him. In doing so, he did a terrible disservice to the lazy mouse who is being rewarded for his bad behavior. But then again, perhaps he saved his life.

Anger and agony
Are better than misery
Trust me I’ve got a plan

When thinking about the behavior of everyone caught up in The Great Housing Bubble, it is easy to see how most were acting like the lazy mouse. They were borrowing huge sums of money, living the good life, and having no concern for tomorrow. It is winter now. There is pain ahead. There is no fruit on the money tree, and people are being thrown out of their homes. The decisions we make now as a society will have lasting implications. Do we bail out all the foolish speculators and lenders who created this mess? If we do, aren’t we guaranteeing we will see this behavior again? If we do not bail these people out, are the rest of us failing to be compassionate? Should we do more to help out our fellow man?

I don’t know what the answers are. These are questions we must grapple with as a society. It will be interesting to see what we choose.

Asking Price: $819,000

Income Requirement: $204,750

Downpayment Needed: $163,800

Monthly Equity Burn: $6,825

Purchase Price: $900,000

Purchase Date: 5/21/2004

Address: 35 Calevera, Irvine, CA 92606

Perhaps including 7 exclamation points makes this weak description look less half-assed.

This property is one of the steepest discounts we have seen at the high end to date. It is being offered for almost 10% off its 2004 purchase price. However, you need to peer into the mortgage records to see how big of a drop this really is.

• The property was purchased on 5/21/2005 for $900,000. The owner used a $719,920 first mortgage, a $179,980 second mortgage, and a $100 downpayment. (Does anyone who rents have a security deposit smaller than this?)
• On 8/5/2005 the owner refinanced for $990,000 taking out is whopping $100 downpayment and $90,000 for all the hard work he did being a property owner for 3 months.
• On 4/26/2007 he took out a second mortgage for $137,390.
• Total property debt is $1,127,390.
• Total mortgage equity withdrawal is $227,490.
• Total discount from peak value is 27%

As I stated previously, this is one the largest discounts we have seen on a high-end property to date. If The Bank of New York can get its asking price, and if a 6% commission is paid, the total loss on the property will be $357,530.

I wonder if the more aggressive disposition of REOs is a result of the capital infusion from the TARP program? Previously, the banks were in a more difficult capital position and unable to take some of these large write offs. With several billion dollars of government money in their possession, they can now take more write-downs and still maintain their capital ratios. We may see more of this.

{book}

Pain, without love
Pain, can’t get enough
Pain, I like it rough
‘Cause I’d rather feel pain than nothing at all

Anger and agony
Are better than misery
Trust me I’ve got a plan
When the lights go up you’ll understand

Pain — Three Days Grace

Little Lies — Fleetwood Mac

Tell me lies
Tell me sweet little lies

Real estate always goes up. I will pay back this loan. Stated Income is OK. The market will recover to peak prices soon. There is a huge pent up demand. They are running out of land. Buy now or be priced out forever.

You all recognize the lies of The Great Housing Bubble. I imagine you could compile a longer list than I can. A great many people believed these lies (and many still do) because they wanted to. As long as prices were going up, any reason to buy seemed like a good one. There is one lie that everyone who buys real estate believes: prices will go up from here. Yes, there are people who claim they know prices will drop further, but nobody who buys think this will be very much or for very long.

I remember reading an article last year where a knife catcher was buying in a suburb of Los Angeles because prices had dropped about 10%. He said in the article that prices might drop 1%, 2% at most. Of course, prices have dropped 30% since then. It has been fascinating to me to watch knife catchers buy properties during this decline. I had always wondered what was going through people’s minds when they bought while prices are dropping. From what I have witnessed, they all believe they are buying the bottom.

Close my, close my, close my eyes

There will come a time when prices are still dropping that I may buy. I will do so because the purchase will save me money versus renting. At that price level, there is another valid economic reason to buy. Appreciation does not matter if a purchase has another economic benefit. Today’s knife catchers do not have that benefit. They are getting the worst of both worlds. They have equity evaporation, and they have a negative cashflow as compared to renting. It takes blind faith in the lies of the bubble and baptismal acceptance of kool aid to buy in this market.

Today’s featured property is actually one of the better deals I have seen. It is still above rental parity, but it is quickly approaching that threshold.

Asking Price: $456,000

Income Requirement: $114,000

Downpayment Needed: $91,200

Monthly Equity Burn: $3,800

Purchase Price: $645,000

Purchase Date: 6/30/2005

Address: 15 Woodland Drive, Irvine, CA 92604

Beds:	3
Baths:	3
Sq. Ft.:	1,655
$/Sq. Ft.:	$276
Lot Size:	2,645 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1976
Stories:	2
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	U8004956
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours) Fixer-upper

ALL CAPS.

When I plug the inputs into the calculator, the cost of ownership comes to about $3,000 a month (the HOA Dues are a killer). I would estimate this would rent for about $2,400 a month, so it is only 20% overvalued. That sounds like a lot, but given that Irvine properties were 100% or more overvalued at the top, this is significant progress.

This house was purchased on 6/30/2005 for $645,000. The owner used a $516,000 first mortgage, a $129,000 second mortgage, and a $0 downpayment (big surprise). If this property sells for its asking price, and if a 6% commission is paid, the lender stands to lose $216,360.

This property is being offered for 29% off its 2005 purchase price. That is a significant discount for a single-family detached house in Irvine.

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.

🙂

{book}

If I could turn the page
In time then Id rearrange just a day or two
Close my, close my, close my eyes

But I couldnt find a way
So Ill settle for one day to believe in you
Tell me, tell me, tell me lies

No more broken hearts
Were better off apart lets give it a try
Tell me, tell me, tell me lies

Little Lies — Fleetwood Mac

Helena — My Chemical Romance

Everyone is wondering when the market will bottom and at what price. For prices to stabilize, they must reach levels of affordability where people can make the payments with a reasonable percentage of their income. These levels are almost completely dependant upon income and financing terms. During The Great Housing Bubble, credit was very loose, and people were able to finance huge sums based on both their real and imagined income. The only limits to prices were imposed by people’s dreams and their willingness to lie on loan applications.

Now that the loose financing has resulted in unprecedented default rates and foreclosures, lenders are tightening credit in the hope of not losing even more money. The tightening of credit will continue. This will result in a continued decrease in the amounts lenders are willing to loan which in turn will lower the amounts buyers are able to bid. Prices will continue to fall.

The first signs of market stabilization will be when prices reach levels of affordability commensurate with historical norms. Prices are still far elevated from these levels. When we get to the bottom, prices at the low end of the market will stabilize first. The bottom tier of the market is the foundation of market stability. It is not until these prices stabilize and begin to rise that will people have equity to move up to larger homes. People who are buying more expensive properties today are not taking their equity from less expensive properties to finance a move up. There is little no equity in these low-end properties, and their continued price decline is making an equity transfer to a more expensive property much more difficult. The ongoing erosion of the equity positions of low-end properties coupled with tightening financing is going to continue to put pressure on high-end homes.

Many low-end properties in the most beaten down markets are nearing rental parity. There has been a dramatic increase in sales volumes of low-end properties where prices are at rental parity. Those markets are beginning the price stabilization process. The same is not true of Irvine. Our low-end properties still have further to fall as they have not yet reached rental parity for an owner-occupant. Many of the least desirable will likely fall below rental parity to price levels where investors can generate a positive cashflow. In short, we are nowhere near the bottom.

Today’s featured property is a typical low-end foreclosure in Irvine. The buyers used 100% financing about 1 year before the peak, and with prices plummeting and the cost of ownership being double the cost of a similar rental, the owners stopped making payments and allowed the property to go to auction in foreclosure. It is a familiar story, and it is one we will see more of here in Irvine over the next few years.

Asking Price: $439,900

Income Requirement: $109,975

Downpayment Needed: $87,980

Monthly Equity Burn: $3,665

Purchase Price: $605,000

Purchase Date: 7/29/2005

Address: 1 Helena #22, Irvine, CA 92604

I guess I can’t make fun of this description.

This property was purchased on 7/29/2005 for $605,000. The owners used a $484,000 first mortgage, a $121,000 second mortgage, and a $0 downpayment. These owners either could not afford the payments, or they saw little reason to continue making them. The lender bid $484,000 at the foreclosure auction which was the outstanding balance on the first mortgage. This is typical of loss mitigation procedures, although we have been seeing some lenders show a willingness to allow properties to go for less than the amount of the first mortgage. Many lenders feel it is more cost effective to lose a little more at auction than to deal with subsequent property management and sale after a foreclosure.

If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $191,494.

This property is being offered for 27% off its 2005 sales price.

{book}

Long ago
Just like the hearse you died to get in again
We are so far from you

Came a time
When every starfall brought you to tears again
We are the very hurt you sold
And what’s the worst you take (worst you take)
From every heart you break (heart you break)
And like the blade you stain (blade you stain)
Well I’ll be holding on tonight

Helena — My Chemical Romance

Purple Kool Aid — Incubus

But then they’re not crazy they’re just high on kool-aid

Evidence of kool aid intoxication can be found in nearly every property I examine. Everyone in the ownership chain began extracting home equity starting in 2000-2001 and continuing up through 2007 when the lenders cut everyone off. Our society in California has become completely dependent upon ever-increasing home prices to permit mortgage equity withdrawal to fuel our economy. This borrowed money flowed into cars, boats, trips, home remodels, and many consumer goods, but it also flowed into business start ups, commercial rents, computers, phone systems, employee salaries and many beneficial uses as well. Unfortunately, none of it was sustainable. It was all built on a Ponzi scheme of debt structures and false insurance which has now come crashing down.

At this point, the residents of California are as addicted as any opium addict. In fact, OPM, or other people’s money, is the drug everyone craves. The conventional wisdom, if there is such a thing, in California right now is that house prices will go up again because demand is high, but people just can’t get loans. There is a certain truth to this as people proved during the bubble that they are kool aid intoxicated enough to take on any loan offered to them; however, the lenders are not going to make these loans available again. Making toxic loans at extreme property valuations is what caused them to lose so much money. The days of lenders enabling this behavior are over.

Today’s featured property shows the pattern of mortgage equity withdrawal and ever-increasing loan balances with previous owners of the property. The final owner was the bagholder who used 100% financing and passed the losses on to the lender (who incidentally is Fannie Mae/Freddie Mac which is now us).

Asking Price: $587,900

Income Requirement: $146,975

Downpayment Needed: $117,580

Monthly Equity Burn: $4,899

Purchase Price: $775,000

Purchase Date: 4/21/2006

Address: 15 Liliano, Irvine, CA 92614

The first owner my records show in the chain of ownership purchased on 3/20/1996 for $224,000. The owners used a $179,200 first mortgage and a $44,800 downpayment. This was typical at the time. In 1998, they refinanced for $182,000, and in 2001, they opened a $23,000 HELOC. When they sold the property, they had more debt than when they started.

The second owner purchased on 4/3/2002 for $395,000. She used a $315,500 first mortgage, a $40,000 second mortgage, a $40,000 HELOC, and a $10,000 downpayment. As you can see, downpayment requirements were already dropping by 2002. This owner sold in less than one year.

The third owner purchased on 1/29/2003 for $457,500. He used a $366,000 first mortgage, a $91,500 second mortgage, and a $0 downpayment. It is early 2003, and downpayments are already a thing of the past. About a year later, the owner refinanced for $445,000, and opened a HELOC for $35,000 taking out $22,500 in spending money.

The fourth owner purchased on 4/21/2006 for $775,000. She used a $620,000 first mortgage, a $155,000 second mortgage, and a $0 downpayment. Since this was the peak of the market, she let the property go into foreclosure, and it was auctioned for $634,800 on 9/9/2008.

Of the four owners shown in the property records going back to 1996, none of them paid down their mortgages by any amount. Two of the four added to the mortgage, one of the four didn’t own the property long enough to do so, and the final owner never had any equity to withdrawal. These patterns of behavior are very widespread, and deeply engrained into the society. As I have said before, mortgage equity withdrawal was the rule not the exception.

The lender who now owns the property is not even trying to get their money back. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $222,374. The Fannie/Freddie second mortgage of $155,000 is already gone, and the holder of the first mortgage is going to lose the rest.

This property is being offered for 24% off its peak sale price.

{book}

The purple kool-aid cult is back, I’m paranoid again
Would someone please appease all the stress of my

I’m being…
I’m being chased by seven kids high on kool-aid
But then they’re not crazy cause they’re high on kool-aid
But then they’re not crazy they’re just high on kool-aid

Purple Kool Aid — Incubus

Privacy — Michael Jackson

The Irvine Housing Blog has an unwritten policy concerning privacy that needs to be stated.

1. We do not use names. We do not have an ax to grind with any particular homeowner. The stories we convey are representative of many faceless owners and borrowers in Irvine and around the country. We uncover the microeconomic factors that underpin the major macroeconomic problems facing the country and the world today. There is no need to reveal names, although since these names are in the public record, we could do so if we chose to.
2. We post information from the public record. All the sales and mortgage information is a matter of public record. There is no expectation of privacy concerning this information. If the owners of the properties we profile have a problem with that, I suggest they take it up with the state legislature. Of course, that will not go anywhere because our entire real property transaction system operates on the public nature of this information. Up until the real estate bubble, there weren’t any real stories found in these public records, so very few people bothered to write about it. Now there is, so now we do.
3. The information is accurate. There may be instances where the public record is in error, but not very often. I occasionally read about bloggers being threatened with libel lawsuits. This is crazy. First, for the printed word to be libelous, it must be inaccurate. What we post is not. Second, the inaccuracy of this information must be reasonably known to the person printing it. Since we post only what is in the public records it is either accurate, or there is no way we could have known it was inaccurate. Either way, we are not being libelous. If someone wants to bring suit anyway, I suggest they read California Civil Code Section 425.10-425.16: the anti-SLAPP legislation.

I can understand that some people find this information embarrassing. Of course, they should have thought of that before they did something that they might find embarrassing later on. Those who are obsessed with “keeping up with the Jones” and worried about what the neighbors think are the most prone to abuse their HELOCs and pretend they are rich. These are the people who feel the most embarrassment because they obsess on what they believe other people think about them. There is an old adage which says, “you wouldn’t worry about what other
people think about you if you realized how little they did.” I cannot control people’s reactions to these posts, nor do I want to. Quite honestly, I don’t give them a second thought after the post has had its day. I am certainly not going to stop blogging because someone might be embarrassed if their illusion of wealth and prosperity is exposed for what it is.

I am not trying to embarrass people. If these stories could be told in a way so nobody was embarrassed, I would do so. Unfortunately, there is no other way to tell these stories, and the lessons these stories teach to individuals and society are important. If these stories are not told, another generation might be tempted to abuse their HELOCs and refinance themselves out of their homes. If these stories are not told, another generation of lenders may repeat the mistakes of the bubble and risk a catastrophic implosion of our financial system. If we do not learn the lessons of history, we are doomed to repeat its mistakes.

Today’s featured property was purchased right at the peak with 100% financing. Of course the owners are walking away now, and the lender is absorbing the loss. For those keeping score, this on is being offered for 27.6% off its peak purchase price.

Asking Price: $445,000

Income Requirement: $153,750

Downpayment Needed: $123,000

Monthly Equity Burn: $5,125

Purchase Price: $615,000

Purchase Date: 11/21/2006

Address: 14212 Utrillo Drive, Irvine, CA 92606

If the kitchen has been upgraded, why now show a picture of it?

This property was purchased on 11/21/2006 for $615,000. The owners used a $492,000 first mortgage a $123,000 second mortgage, and a $0 downpayment. One very interesting thing about this property is that the bank did not bid up to the amount of the first mortgage. Instead they bid almost 15% less at $425,475, and they won the auction anyway. The bank was willing to take a loss of $189,525 at the courthouse steps.

{book}

Ain’t the pictures enough, why do you go through so much
To get the story you need, so you can bury me
You’ve got the people confused, you tell the stories you choose
You try to get me to lose the man I really am
You keep on stalking me, invading my privacy
Won’t you just let me be
‘Cause your cameras can’t control, the minds of those who know
That you’ll even sell your soul just to get a story sold

I need my privacy, I need my privacy
So paparazzi, get away from me

Privacy — Michael Jackson