Shine On, Harvest Moon — Leon Redbone

The boy began to sigh, looked up in the sky,
And told the moon his little tale of woe.

People have harvested all the money they are going to get out of their houses for quite some time. From 2001-2006, the median home price in Irvine rose each year by an amount equal to the median income. Every homeowner had another breadwinner in the family: the house itself. People proceeded to harvest this free money. A few resisted the temptation. Some took it out slowly, and some took it out as fast as it accumulated. From what I am seeing in my daily searches through the property records, the majority took out something, many took out a great deal, and some took out all of it.

There are those readers who believe I make too much of this issue; it can’t really be that bad. Well, when I start running out of new properties where the sellers took out all their equity, I will start to believe those that did this are already purged from the system. As it stands today, I have a steady stream of new properties with HELOC abuse, and there are many more that I don’t write about. I am able to be choosy. I can pick the most egregious cases or the ones with the most interesting storylines. There is no shortage of these borrowers out there.

I have written before about Mortgage Equity Withdrawal, and Calculated Risk has been tracking MEW for quite a while. Just as he predicted, MEW has fallen off a cliff.

Today’s featured property is an interesting case study in how owner’s managed their debts, and how lenders enabled this insanity. The lenders are now reaping the harvest they were sowing during the bubble years. The toxic loans they planted have grown to poison our entire financial system.

Asking Price: $415,000

Income Requirement: $103,750

Downpayment Needed: $83,000

Monthly Equity Burn: $3,458

Purchase Price: $550,000

Purchase Date: 12/23/2005

Address: 82 Orchard, Irvine, CA 92618

Beds:	3
Baths:	2
Sq. Ft.:	1,300
$/Sq. Ft.:	$319
Lot Size:	3,780 Sq. Ft.
Property Type:	Single Family Residence
Style:	Other
Year Built:	1977
Stories:	1 Level
Floor:	1
View:	Park or Green Belt
Area:	Orangetree
County:	Orange
MLS#:	S551599
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

No Common Walls! I guess that is the big selling point for this property…

Why Is This Description Written In Title Case?

This property is interesting because it has so many subplots. Let’s start with the previous owners…

Previous Owners

This property was purchased by a couple on 5/1/2001 for $246,000. They used a $242,065 first mortgage, a $7,375, and if those numbers are correct, they cashed out $3,440 at the closing. On 5/29/2003 they refinanced with a $245,600 first mortgage and a $30,700 second. On 5/3/2004 they refinanced with a $322,000 first mortgage. Their total mortgage equity withdrawal was $76,000.

So was this behavior punished or rewarded? Well, they sold the property to the bagholders for $550,000, so they paid off the bill the ran up and still made almost $200,000. Like many people during the bubble, these people behaved irresponsibly, and they got away with it. One has to suspect that these people and those like them continued this behavior when the moved to their next property. Unfortunately, I could not find them in the property records to verify.

Bagholder Owners

The greater fools in our story today was another couple who bought this property on 12/23/2005 for $550,000. I imagine they were very excited that Christmas to be in their new home. Visions of sugar-plums danced in their heads… They bought the property with 100% financing, and it appears as if they either couldn’t or wouldn’t make the payments. The property went to foreclosure auction on 10/1/2008, and the bank did not bid the property up to its $440,000 first mortgage. In fact, it doesn’t look like the bank bid at all. The property went to a flipper from Laguna Beach for $306,000. Encore Credit managed to lose almost $250,000 on this property. Yikes!

New Flipper

Here enters our bottom feeder who picked up this “bargain” property at auction for far less than the mortgage note amount. Of course, he immediately adds $109,000 to the purchase price hoping for a quick sale and a huge profit. He will probably be successful. It pays to have cash during a credit crunch.

HELOC abusing owners, late buying bagholders and greedy flippers: this property has it all.

{book}

The night was mighty dark so you could hardly see,
And the moon refused to shine;
Couple sittin’ underneath the willow tree; for love they pined.
The little maid was kinda ‘fraid of darkness, so
She said, “I guess I’ll go.”
The boy began to sigh, looked up in the sky,
And told the moon his little tale of woe.

I can’t see why a boy should cry when by his side
Is a girl he loves so true;
All he has to say is, “Won’t you be my bride, for I love you.”
But why should I be telling you this secret when
I know that you can guess?
Harvest moon will smile, shine on all the while,
If the little girl should answer “Yes”!

Shine On, Harvest Moon — Leon Redbone

Once, Twice, Three Times a Lady — Commodores

And now that we’ve come to the end of our rainbow
There’s something I must say out loud…

WHERE THE HELL IS MY POT OF GOLD?!

There was supposed to be a pot of gold here. At least that is what our third flipper thought. I have written on other occasions about the phenomenon of trading stucco boxes (Houses and Commodities Trading, and Houses Should Not Be a Commodity). People were buying properties, often not even living in them, waiting for a short time, and then selling them to another speculator who would do the same thing. It was a classic Ponzi Scheme dependent upon greater and greater levels of debt to perpetuate higher and higher prices. Today’s property is probably the finest example of this phenomenon I have encountered here in Irvine. Let’s take a closer look.

Asking Price: $549,000

Income Requirement: $174,750

Downpayment Needed: $139,800

Monthly Equity Burn: $5,825

Purchase Price: $680,000

Purchase Date: 5/4/2006

Address: 422 Quail Ridge, Irvine, CA 92603

highly upgraded? What does this mean? Can a property be just “upgraded?” Can it be “lightly upgraded?” Can it be “highly, highly upgraded?” Where does it end?

nestled… I am developing an aversion for that word.

The sales and mortgage history of this property gets a bit involved, but bear with me, it tells a great story of greed gone wild.

Flipper #1

This property was first purchased from the builder on 9/30/2004 (just over 4 years ago) for $502,000. Flipper #1 used a $400,000 first mortgage, a $76,750 second mortgage, and a $25,250 downpayment. He waited two whole months before opening a HELOC for $120,000 on 11/22/2004 withdrawing his downpayment. On 5/5/2005, about 6 months later, he opened another HELOC for $200,000 and paid off the first. On 5/26/2005 he sold the property to flipper #2 for $610,000 netting him $63,400 after a 6% commission. Not a bad profit for holding property around 9 months.

Flipper #2

Flipper #2 paid $610,000 on 5/26/2005. He used a $496,000 first mortgage, and a $124,000 second mortgage. If these numbers are correct, he cashed out $10,000 at the closing. He then sold the property almost a year later to flipper #3 for $680,000. If he paid a 6% commission, he only made $29,200.

Flipper #3

Flipper #3 paid $680,000 on 5/4/2006. He used a $544,000 first mortgage, a $136,000 second mortgage, and a $0 downpayment. His rainbow had no pot of gold. He is now a short sale asking $540,000

Look at these three transactions. Only the first one had any kind of downpayment, and he only had that in the property for about 60 days. Every penny of the remaining transactions was borrowed money. Of all the painful lessons lenders learned during the bubble, giving out 100% financing to anyone with a pulse has to be the most painful. If leverage is very low (large downpayments or low CLTV limits,) then speculators have to use large amounts of their own money to capture what become relatively small price movements. If leverage is very high (small downpayments or high CLTV limits,) then speculators do not have to put up much money to capture what become relatively large price movements. The more leverage (debt) that can be applied to residential real estate, the greater the degree of speculative activity that market will see. Also, the smaller the amount of money required to speculate in a given market, the more people will be able to do so because more people will have the funds necessary to participate. When lenders began to offer 100% financing, it was an open invitation to rampant speculation. This makes the return on investment infinite because no investment is required by the speculator, and it eliminates all barriers to entry to the speculative market. Further, it passes all of the risk on to the lender as the speculator can simply refuse to pay the debt and allow the lender to foreclose on the property. 100% financing, coupled with negative amortization loans, caused our market prices to get inflated, and its elimination is one of the main reason prices are falling now.

{book}

Thanks for the times that you’ve given me
The memories are all in my mind
And now that we’ve come to the end of our rainbow
There’s something i must say out loud

You’re once, twice, three times a lady
And I love you… I love you…

Once, Twice, Three Times a Lady — Commodore

A Hard Rain’s a-gonna Fall — Bob Dylan

I was looking through the local rags this weekend, and I was overwhelmed by the number of “you should buy now” articles. There was one titled, “Why you’re nuts if you don’t buy now.” There is no limit to the bull$hit the real estate community can put out there. I would like to see that changed.

The sales tactics of the National Association of Realtors should be examined and potentially come under the same restrictions as securities brokers through the Securities and Exchange Commission. After the stock market crash which helped precipitate the Great Depression, Congress created the Securities and Exchange Commission to regulate the sales activities of securities brokers. There are strict regulations in place governing the representations made concerning the future performance of investment opportunities. These protections were put in place to protect the general public from the false promises made by stockbrokers in the 1920s which many naïve investors believed. The same analogy holds true for Realtors.

The National Association of Realtors has launched numerous advertising campaigns suggesting erroneously that residential real estate is a great investment and appreciation will make home buyers wealthy. The mantra of all realtors is that house prices always go up. There are currently no limits to the distortions and outright lies realtors can tell prospective buyers with regards to the investment potential of residential real estate. Buyers are already prone to believe the fallacies of unlimited riches in real estate, and these fallacious beliefs lead to housing bubbles. Realtors should be prevented from making representations concerning the investment potential of real estate. Since the regulatory framework for this kind of regulation and oversight is already in place under the auspices of the Securities and Exchange Commission, Congress would merely need to make Realtors subject to these regulations in order to solve the problem.

We really need to do this…

Today’s featured property is a high-end REO being offered for 25% off its peak purchase price — a discount greater than $250,000. Is it a good buy? Are you nuts for not buying it? IMO, this house will likely drop another $200,000 in value, depending on how quickly the crash plays out. If I am right, it is not a good time to buy. If the realtors are right, this is the bottom, and it is a great time to buy. Since I have been consistently right, and they have been consistently wrong, you can choose between an impartial observer giving advice based on detailed analysis, or you can place your faith in a group looking to profit off the transaction who have done no analysis at all. You decide.

Asking Price: $764,500

Income Requirement: $191,125

Downpayment Needed: $152,900

Monthly Equity Burn: $6,370

Purchase Price: $1,040,000

Purchase Date: 11/9/2006

Address: 3 Raines, Irvine, CA 92602

That description must have taken all of 10 seconds to write.

As you might have guessed, this was a 100% financing deal. DB Home Lending Inc. loaned these people $1,040,000 and required no money down. Think about how insane that is. Over $1,000,000 with no personal investment? The insanity of lenders during the bubble was truly remarkable. No wonder our entire banking system is insolvent.

If this property sells for its asking price, the total loss to the bagholder who bought this mortgage will be $321,370 after a 6% commission.

What happened? I thought real estate always went up?

{book}

BTW, if you want to find out who I am, buy the ebook linked on the sidebar. My name is on the front cover.

.

Oh, where have you been, my blue-eyed son?
Oh, where have you been, my darling young one?
I’ve stumbled on the side of twelve misty mountains,
I’ve walked and I’ve crawled on six crooked highways,
I’ve stepped in the middle of seven sad forests,
I’ve been out in front of a dozen dead oceans,
I’ve been ten thousand miles in the mouth of a graveyard,
And it’s a hard, and it’s a hard, it’s a hard, and it’s a hard,
And it’s a hard rain’s a-gonna fall.

Oh, what did you see, my blue-eyed son?
Oh, what did you see, my darling young one?
I saw a newborn baby with wild wolves all around it
I saw a highway of diamonds with nobody on it,
I saw a black branch with blood that kept drippin’,
I saw a room full of men with their hammers a-bleedin’,
I saw a white ladder all covered with water,
I saw ten thousand talkers whose tongues were all broken,
I saw guns and sharp swords in the hands of young children,
And it’s a hard, and it’s a hard, it’s a hard, it’s a hard,
And it’s a hard rain’s a-gonna fall.

A Hard Rain’s a-gonna Fall — Bob Dylan

Falling Down — Scarlett Johansson

Go on and take a swig
Of that poison and like it

So much kool aid… So many properties… When will it all end? I have speculated it will end near rental parity. Based on the inputs for this property, rental parity is around $2,250 a month depending on financing and tax considerations. It is even lower for someone in the highest tax bracket, but the owner-occupant of this property probably would not be. Could this property rent for that? I think that is a bit high, but it might.

Asking Price: $315,000

Income Requirement: $78,750

Downpayment Needed: $63,000

Monthly Equity Burn: $2,625

Purchase Price: $442,500

Purchase Date: 7/8/2004

Address: 38 Fallbrook, Irvine, CA 92604

Beds:	3
Baths:	2
Sq. Ft.:	1,150
$/Sq. Ft.:	$274
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	1979
Stories:	1 Level
Floor:	1
Area:	Woodbridge
County:	Orange
MLS#:	S549956
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

You have to put more money into a property you will lose money on. Great deal… Not.

This property is another in our endless series of speculators who milked the mortgage teat and are leaving the lender dry. This property was purchased on 7/8/2004 with a $376,125 first mortgage, a $66,375 second mortgage and a $0 downpayment. The property was refinanced on 8/16/2006 with a $397,500 Option ARM with a 1.75% teaser rate and a $79,000 stand-alone second. Total mortgage equity withdrawal is $34,000. Total debt (peak appraised value) of $476,500. If this property sells for its asking price, the mortgage holders stand to lose $180,400 after a 6% commission.

BTW, this is the kind of thing that really makes my blood boil: McCain calls for federal bailout of homeowners

“In a bold effort to reverse his sagging fortunes after a month of dire economic news, Republican Sen.
John McCain
said Tuesday night that if he is elected president, he will order the
Treasury to buy up Americans’ bad mortgages and renegotiate new loans
that reflect their homes’ diminished value. The economic
crisis has “become so severe that we’re going to have to do something
about home values,” McCain said at the second presidential debate at
Belmont University at Nashville, Tenn. “Is it expensive? Yes,” he said.”

I don’t particularly want to see my tax dollars going to bail out the fools who overpaid for houses while simultaneously crowding me out of the market.

.

I have come 500 miles
Just to see a halo
Come from St. Petersburg
Scarlett and me
Well I open my eyes
I was blind as can be
When you give a man luck
He must fall in the sea
And she wants you
To steal and get caught
For she loves you
For all that you are not
When you’re
Falling down, falling down
When you’re falling down
Falling down, falling down

You forget all the roses
Don’t come around on Sunday
She’s not gonna choose you
For standing so tall
Go on and take a swig
Of that poison and like it

Falling Down — Scarlett Johansson

Generation — Simple Plan

Generation Y began buying starter homes in earnest during the Great Housing Bubble. Generation X is just now coming into their prime earning years, and many of them bought move-up homes at inflated bubble prices. The Baby Boomers took their equity and bought multiple properties during the bubble. They all have one thing in common: they are all part of Generation Pwned. Pwned has many definitions, but it generally refers to a state of being defeated and helpless. People who paid bubble prices or HELOCed themselves into a massive debt are pwned by their houses and the housing market. I first wrote about this in America’s Debtor Prisons. Unfortunately, I know several families who this describes. All are overburdened with debt, and they were counting on increasing income and increasing home prices to finance their lifestyles and their family’s future. It isn’t going to turn out well for them.

Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) and to qualify for the workout, the homeowner must give up half their future appreciation — if there is any. Most would be better off walking away. Anyone paying 38% of their gross income (that is gross not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition. Rapid house price appreciation leading to a HELOC dependant lifestyle is not going to happen any time soon — if ever. Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve. They are truly pwned.

Those that participated in the housing bubble (bought late or borrowed much) will end up breaking down into two groups: those that are pwned, and those that lost their houses. The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can’t decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.

Today’s featured property is in the “borrowed much” category of housing bubble participants. These people did not make the mistake of buying at peak prices. In fact, they bought at the bottom of the last cycle. However, they too drank the kool aid, and now they have lost their home and their wealth. Another casualty of the Great Housing Bubble.

Asking Price: $459,900

Income Requirement: $114,975

Downpayment Needed: $91,980

Monthly Equity Burn: $3,852

Purchase Price: $183,000

Purchase Date: 2/6/1998

Address: 131 Islington, Irvine, CA 92620

Beds:	3
Baths:	2
Sq. Ft.:	2,000
$/Sq. Ft.:	$230
Lot Size:	2,100 Sq. Ft.
Property Type:	Condominium
Style:	Contemporary
Year Built:	2000
Stories:	2 Levels
Floor:	1
Area:	Northwood
County:	Orange
MLS#:	S548626
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

When we the taxpayers foot the bill for the excesses of the bubble, we are bailing out the lenders who enabled the behavior below:

• The house was purchased on 2/6/1998 for $183,000. There was a $173,500 first mortgage and a $9,500 downpayment.
• On 8/21/2002 they refinanced the first mortgage for $165,500. They actually paid down their debt.
• On 3/12/2003 they opened a HELOC for $50,000, just in case… Their first taste of kool aid.
• On 2/13/2004 they opened a HELOC for $226,000. The kool aid is flowing now.
• On 10/22/2004 they opened an Option ARM for $492,000.
• On 5/2/2005 they opened a HELOC for $75,100.
• On 10/21/2005 they opened a HELOC for $126,000.
• On 9/28/2006 they opened a HELOC for $150,000.
• Total debt on the property, $642,000 plus accumulated negative amortization.
• Total mortgage equity withdrawal, $468,500 including their tiny downpayment.

Basically, these people put $9,500 into the property and made $459,000 in 8 years.

Do you wonder if they realized they were pwned? I suspect they did not. Each refinance probably did not increase their payment, and although their HELOC debt was growing, they had plenty of cash to make the payments. They also probably believed their house value would increase forever and the debts would be paid off when they sold. Of course, they were pwned the moment they took out the Option ARM, just like everyone else. All Option ARM holders are pwned. Some of them know it, and some of them don’t, but they are all going to lose their homes eventually.

If this property sells for its asking price, and if a 6% commission is paid, the US taxpayer is going to lose $209,694.

Maybe we are the ones who are pwned…

.

I’m sick of all this waiting
And people telling me
what I should be
What if I’m not so crazy
Maybe you’re the one
that’s wrong, not me
So what you gonna do,
what you gonna say
When we’re standing on top
and do it our way
You say we got no future
You’re living in the past
So listen up, that’s my generation

I don’t need to say I’m sorry
I do what everybody wants to do
It’s not so complicated
‘Cause I know you want
the same thing, too
So what you gonna do,
what you gonna say
When we’re standing on top
and do it our way
You say we got no future
You’re living in the past
So listen up, that’s my generation

Generation — Simple Plan