Bee Gees — Tragedy

The behavior of HELOC abusing owners during The Great Housing Bubble was tragic. They believed the fantasies of the religion of real estate, drank the kool aid, and now they are losing their homes. The classic Greek tragedy a good person experiences a reversal of fortune most often due to the decisions and mistakes they made along the way. The tragic outcome for many homeowners was not caused by some unforeseeable, random event, but rather it is the direct result of the decisions they made and the actions they took because they subscribed to the fallacies of the religion of real estate. A good tragedy or morality play leaves the audience with mixed emotions. Part of you feels sorrow for the pain and suffering the character must endure, and part of you feels they character is getting what they deserve. It brings up feelings of schadenfreude and a sense of thankfulness that you did not suffer the same fate.

You can see this mixture of emotions in the comments on the blog which often exhibit both sides of this false dichotomy. Life is seldom black and white, and the tragic outcome for homeowners caught up in The Great Housing Bubble is no different. The full range of these emotions are normal and appropriate given the events we are witnessing. Hopefully, everyone who explores these issues and the outcomes that results from the behavior sees the mistakes these people made and does not repeat them in their own life. If that occurs, the I will feel my work at the Irvine Housing Blog has been worthwhile.

Today's featured property is another HELOC abuser who lost his home. Let's explore how he did it.

Asking Price: $389,900

Income Requirement: $97,475

Downpayment Needed: $77,980

Monthly Equity Burn: $3,249

Purchase Price: $226,500

Purchase Date: 10/10/2000

Address: 9 Helena #26, Irvine, CA 92604

Beds:	3
Baths:	2
Sq. Ft.:	1,205
$/Sq. Ft.:	$324
Lot Size:	–
Property Type:	Condominium
Style:	Other
Year Built:	1977
Stories:	Split-Level
Area:	El Camino Real
County:	Orange
MLS#:	S541769
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

It isn't hard to see how people were enticed to go over to the Dark Side. If you are living paycheck to paycheck, and the house you own suddenly doubles in value, and the entire mortgage industry is encouraging you to take the free money, it is a temptation too big for many to resist, particularly since the religion of real estate has convinced you the value of your house will go up forever. So how did today's owner make the journey?

• The house was purchased for $226,500 on 10/10/2000. The owner used a $219,705 first mortgage and a $6,795 downpayment.
• On 6/29/2001 the house was refinanced for $218,431. There was no mortgage equity withdrawal.
• On 11/26/2001 he opened a HELOC for $72,400, but did not use it.
• On 9/3/2002 he refinanced again with a $218,431 through the FHA. To this point, the owner has resisted temptation.
• On 6/3/2003 he refinanced with a $303,300 first mortgage and opened a HELOC for $21,721. This was his first sip of kool aid. It was all downhill from here.
• On 10/7/2004 he refinanced with a $400,000 first mortgage.
• On 4/19/2005 he refinanced with a $475,000 first mortgage.
• The total debt on the property was $475,000.
• The total mortgage equity withdrawal was $255,295 including is $6,795 downpayment.

It really looks like this owner tried to resist temptation. There was ample opportunity to drink the kool aid before 2003, and he did not do it. He probably fell victim to the sales pitch of the mortgage industry and came to believe he could serially refinance the ever increasing debt which would be paid off by someone else when he sold. Of course, the homedebtor got in over his head and was unable to make the payments. The property went back to the lender on 3/12/2008 for $450,000. The total gain on the sale was $223,500. The are trying to dump it for $389,900. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the investor in DEUTSCHE BANK NATIONAL TRUST CO, ; NEW CENTURY HOME EQUITY LOAN TR 2005-4 will lose $108,494.

So what do you feel when you read these stories?

.

Here I lie

Goin nowhere

Bee Gees — Tragedy

Losing My Religion — REM

Wikipedia defines faith as “a belief in the trustworthiness of an idea that has not been proven.” Religious faith is a collection of beliefs based on ideas which are neither testable or provable. If you accept the core beliefs of a religion on faith, you generally get a feeling of peace and well being that serves to reinforce the “correctness” of the acceptance of faith. Most religions build on these core beliefs and assemble a series of ancillary beliefs for guiding human behavior known as religious dogma. California has a major cultural “religion” that cuts across traditional denominational lines — the religion of real estate.

Baptism into the real estate religion is a metaphorical drinking of kool aid. The fundamental belief of this religion is a belief in the “higher power” of market forces — real estate values always go up. Once you accept this fundamental belief, the dogma of real estate can take over. The dogmatic practices of real estate include buying at any price and borrowing any sum you can. Since real estate always goes up, it doesn’t matter how much you pay because you can always sell later for more money. Value has no meaning. Also, since you can pay back any borrowed sums when you sell, it doesn’t matter how much you borrow or under what terms. Fabricating income on a mortgage application to qualify for a larger loan is perfectly acceptable behavior. Debt is something to be serviced not retired. It is foolish to borrow under terms which pay down a mortgage because equity appears through appreciation. There is no need to build equity through retiring debt. Besides, paying down debt is a slow process, and building equity through appreciation is much faster and requires less sacrifice. The lure of kool aid intoxication is very strong. It appeals to our fantasies of unlimited wealth and spending power.

People who accept religious tenets often face a crisis of faith at some point in their lives. John Spong wrote a book titled “Why Christianity Must Change or Die” in which he devotes a chapter to the Jewish exile to Babylon. It was a cultural crisis of faith where many of the fundamental beliefs of Judaism were challenged. California’s religion of real estate is facing a similar crisis. The fundamental belief in endless house price appreciation is being challenged, and all the associated beliefs are similarly being called into question. Right now, most people are still in denial clinging to their faith in the forces of the housing market. Many will come to lament the Day the Market Died, many will continue to cling to Southern California’s Cultural Pathology, and many will bargain for a renewal of the The California Social Contract.

Any core religious idea that can be empirically tested will face its ultimate challenge. The collapse of The Great Housing Bubble will prove that real estate values do not always go up, and in fact, real estate values can decline significantly. All of the associated beliefs built on this fundamental premise are equally false. People will be forced to examine the beliefs which guide their purchase decisions and their relationship to debt financing. Like any other crisis of faith, the loss of comforting and secure beliefs is emotionally painful, and the cleansing process will take time. Will kool aid intoxication survive? Probably, but there will be fewer faithful until meaningful appreciation returns and the army of realtors missionaries sets out to convert a new generation.

Figuratively, today’s featured property is a church (just like all other houses in California.) The fact that it is located on Church Street is testament to the faith the buyer had in its continuing appreciation. Based on the resale history, there was reason to believe prices would always go up. Our faithful owner borrowed 100% of the money necessary to worship here.

Asking Price: $649,900

Income Requirement: $162,475

Downpayment Needed: $129,980

Monthly Equity Burn: $5,415

Purchase Price: $815,000

Purchase Date: 1/30/2007

Address: 157 Church Place, Irvine, CA 92602

It is interesting that 100% financing was still available in 2007. This is a reason the collapse was delayed until the credit crunch really took hold in August of 2007. The sales history shows a number of speculators making good money off this property. Now the bank gets to be the bagholder for the first big drop in value.

Sales History

Each day when I estimate the loss to the lender (notice they are generally the ones losing money,) I base my calculation on the original loan amount. The actual loss to the lender is usually much higher because while the property was going through foreclosure and leading up to its eventual sale, the lender was not receiving any payments, and this loss of revenue was being added to the loan balance on the lender’s books. When this lender foreclosed, they paid $715,138 at auction despite the fact that the first mortgage was originally $652,000 (the second was a total loss.) The additional $63,138 represents the outstanding loan balance on the first mortgage on the date of auction. Some of this might be negative amortization, but the majority will be missed payments and servicing fees. I will continue to calculate losses the way I have been in the past, but I want everyone to realize that the real losses may be considerably more.

If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $204,094 (plus the $63,138 in lost interest and fees.)

Californian’s may never lose their religion when it comes to real estate, but I suspect in the future the lenders will be a bit more weary when it comes to providing the baptismal kool aid.

.

Oh, life is bigger
It’s bigger than you
And you are not me
The lengths that I will go to
The distance in your eyes
Oh no, I’ve said too much
I set it up

But that was just a dream
Try, cry, why try?
That was just a dream
Just a dream, just a dream
Dream

Losing My Religion — REM

Surrender — Cheap Trick

Sometimes you just have to surrender to the absurdities in life. Despite my efforts to figure it out, the housing bubble, and the behavior of the people who participated in it, is simply unfathomable. Mommy’s alright, Daddy’s alright, they just seem a little weird.

Today’s featured property is another in our endless series on HELOC abuse. Another day, another homeowner who spent themselves out of house and home…

Asking Price: $699,900

Income Requirement: $158,750

Downpayment Needed: $174,975

Monthly Equity Burn: $5,832

Purchase Price: $279,500

Purchase Date: 11/9/1999

Address: 6 Tahoe, Irvine, CA 92612

Oustanding? The realtor couldn’t be bothered to spell the first word correctly. Hmmm…

Property
is slightly dated and needs some work? Apparently, they did not spend all the HELOC money on upgrades.

The previous owners of this property took out a bit of money:

• The property was purchased on 11/9/1999 for $279,000. They borrowed $276,500 and put a whopping $3,000 down.
• On 5/29/2002 they had their first sip of kool aid with a $330,000 refinance.
• On 8/14/2003 they refinanced again for $408,000.
• On 5/5/2004 they refinanced again for $500,000.
• On 7/25/2005 they refinanced again for $588,000 with a stand alone second for $73,500.
• Total property debt is $661,500 which explains the asking price.
• Total mortgage equity withdrawal was $385,000

Look at the pattern. First they took out about $50,000 when they got their first taste of kool aid. They must have liked it because they withdrew $100,000 a year for the next 2 years followed by a $150,000 withdrawal. They must have had a good time. How do you blow $385,000 in 4 or 5 years and have nothing to show for it? I wonder how they are doing now that they have bad credit, and they have to get used to living on their wages. Oh, the horror of it…

This property is REO, and it appears the Bank of New York Asset Backed
Pass Through Certificate is trying to get their money back. They have
priced this thing to recover all their capital. Good luck with that.
There is a reason they picked it up at auction for $524,800 — That is
all it is worth it today’s market. I guess they have their loss
mitigation procedures to follow. This one will see some serious price
reductions to find the market.

Are you starting to see just how prevalent this behavior was? Can you see now why we had such a booming economy during the bubble? For those who think our local economy will be OK, explain to me how the loss of all that consumer spending will not have a major impact.

Thus concludes another 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.

🙂

.

Mother told me, yes, she told me I’d meet girls like you.
She also told me, “Stay away, you’ll never know what you’ll catch.”
Just the other day I heard a soldier falling off some Indonesian junk that’s going round.

Away.
Away.

Surrender — Cheap Trick

The Matador — Johnny Cash

Watch out for the raging bull market! Like a matador, you will need to dodge the stampeding bulls as they put in multiple offers over the ask. The matador kills the bull in the end. The market will do the same. There is still a lot of bullishness in today’s market, despite the obvious signs of a catastrophic price collapse. The bullish behavior is a sign that we are nowhere near the bottom, for as many authors and songwriters have noted, “only fools rush in where angels fear to tread.”

Over the weekend, there was a brief discussion of contrarian thinking and investment. I will buy when market sentiment is very negative as will many who come to this blog. There is a huge difference in that kind of contrarian behavior and that being displayed by the knife catchers of today’s market. To believe that a market will suddenly change directions when fundamentals do not support prices and momentum is strongly downward is not contrarian thinking, it is just plain foolishness. When our housing market really does bottom out, market sentiment will be very bearish. Nobody will be drinking the kool aid and believe in rapid price appreciation and people who buy homes will be looked on as being foolish. Of course, when fundamentals of price and rent are in alignment, the purchase will not be foolish, it will be financially prudent not because of rapid appreciation but because it saves money versus renting. Right now, buyers really are foolish, but public opinion doesn’t realize this yet. Once public opinion embraces the foolishness of buying real estate, we will be near the bottom. Until then, expect to see each property that leads the market lower to attract multiple offers and enter escrow quickly. As Forrest Gump noted, “Stupid is as stupid does.”

Asking Price: $499,000

Income Requirement: $124,750

Downpayment Needed: $99,800

Monthly Equity Burn: $4,158

Purchase Price:
$262,000

Purchase Date: 4/11/2000

Address: 94 Almador, Irvine, CA 92614

Notice they forgot the granite when putting in the pergraniteel.

Quiet, peaceful and
convenient location!! I call BS on that one. This property is within 100 yards of the 405.

How many exclamation points can you count?

Remember when many of the properties we profiled were 100% financing deals gone bad? Those are still out there, but I have been seeing so many HELOC abuse properties lately that I can’t help but cover them. Today is another sad story of a couple who drank the kool aid and spent their house. Perhaps they will reflect on this fact while they are in their new rental…

• The property was purchased on 4/11/2000 for $262,000. They put 5% down ($13,100) and borrowed $248,900.
• On 8/1/2001 they sipped the kool aid with a $255,000 refinance.
• On 2/7/2003 they refinanced for $252,000. At this point, kool aid intoxication had not taken over.
• On 8/15/2003 they refinanced for $308,000. Yummy kool aid…
• On 12/18/2003 they opened a $20,000 HELOC.
• On 11/20/2004 they refinanced for $368,000. The kool aid was free flowing.
• On 5/3/2005 they took out a $50,000 HELOC.
• On 11/2/2006 they opened a stand-alone second for $140,000.
• On 10/4/2007 they refinanced for $545,000. That was only 8 months ago. Did they make any payments?
• The total mortgage equity withdrawal is $296,100. They only put $13,100 of their own money into the deal.

One of these days, I am going to put the cash outflows and inflows into an Excel spreadsheet and calculate the internal rate of return on their “investment.” The money was stretched out over 7 years, but the amount they got relative to the amount they invested was pretty good. Of course, their credit is trashed, but they will never again in their lives find an investment that pays like that one did. The lingering memory of all that easy money is what keeps the bulls (fools) rushing in to deals like this one.

.

The crowd is waiting for the bullfight Matador
My final fight the place is packed once more
But Anita won’t throw me a rose this fight
The one she wears is not for me tonight

She’s watching now with her new love I know
Walk proud and slow
Be strong and sure give the crowd a show
They want blood you know!
You’re still their idol as you were before
Kill just one more!
Remind Anita, you’re the greatest Matador

The Matador — Johnny Cash

Straight to the Bank — 50 Cent

I never tire of HELOC abuse stories. They are so human. Joseph Campbell said “Money is congealed energy.” Everyone wants to be powerful and have no limits to their spending. This is the fantasy of being rich; although, the rich didn’t get rich by spending, they did it by saving. This fact is ignored by those who merely wish to spend all they want and feel rich. This basic human instinct is enriching the credit card companies as the average consumer bleeds interest every month to the credit leeches. I must admit, my schadenfreude gets a fix whenever I see the lenders who enable this behavior taking a big hit.

When I first began going to blogs like this one to discuss the real estate bubble, I was amazed that people really believed the spending they were witnessing was money earned through wage income. I guess OC residents are so adept at pretending that they fool even themselves. The Emperor has no clothes. People really do not make that much money in Irvine or Orange County. Many of them in the early 00s took the money out of their house and spent it. Perhaps they did feel like they were earning it as they were brilliant enough to buy a house in a bull market. Isn’t that earning it? As everyone who did this is about to find out: no it’s not. Debt is not wealth, appreciation is not income, and credit is not saving.

Asking Price: $640,000

Income Requirement: $160,000

Downpayment Needed: $128,000

Monthly Equity Burn: $5,333

FB Purchase Price: $293,000

FB Purchase Date: 4/29/1999

Lender Purchase Price: $675,750

Lender Purchase Date: 4/2/2008

Address: 14941 Greenbrae St., Irvine, CA 92604

How do you like the mismatched wood in the kitchen?

Hurry! LOL!

So how does one manage to make nearly $380,000 on the sale of a house that is lost in foreclosure? You guessed it: by borrowing even more. Here is the bullet-point recap:

• The house was purchased on 4/29/1999 for $293,000. A first mortgage of $263,700 was used leaving a $29,300 downpayment (10%.)
• On 3/12/2002 the house was refinanced for $300,700 pulling out their downpayment plus $7,700.
• On 11/14/2002 they opened a HELOC of $86,800.
• On 7/2/2004 they opened a HELOC of $186,800.
• On 3/16/2005 they refinanced through FHA with a $475,000 first mortgage and a $77,000 second. The first mortgage was a 1% ARM.
• On 7/31/2006 the refinanced again with a $650,000 first mortgage.
• On 8/30/2006 they took out a stand-alone second for $125,000.
• On 1/11/2007 they took out a third mortgage for $65,000.
• The total debt on the property was $840,000 and the total mortgage equity withdrawal was $576,300.

Here is where the macro meets the micro: there is a reason the national Mortgage Equity Withdrawal chart looks the way it does, and there is a reason you saw the Irvine Spectrum full of people spending money they were not earning. It is because of people like today’s owners.

Mortgage Equity Withdrawal 1991-2007

If this property sells for asking price and a 6% commission is paid, the total loss to the lender will be $238,400. The borrower… They are laughing all the way to their new rental.

[Chorus:]
I’m laughin straight to the bank with this
(Ha, ha ha ha ha ha, ha, ha ha ha ha ha)
I’m laughin straight to the bank with this
(Ha, ha ha ha ha ha, ha, ha ha ha ha ha)
I’m laughin straight to the bank with this
(Ha, ha ha ha ha ha, ha, ha ha ha ha ha)
I’m laughin straight to the bank with this
(Ha, ha ha ha ha ha, ha, ha ha ha ha ha)
I’m laughin

[Verse 2:]
I see nothin but hundred dollar bills in the bank roll
I got the kind of money that the bank can’t hold
Got it off the street movin bundles and loads
Seventy Three Caprice old school when I roll
Breeze pass with the EZ Pass #@$% the toll
No more platinum I’m wearin gold
I’m internationally known as the kid with the flow
That brings enough dough it’s never enough dough
Shit I need mo’ I need $hit out the sto’
Baby ble was cold fresh out the flo’
Stashbox by the dashbox incase they want war
Make the purple bring the green in #@$% the law
I’m oh so raw, I’m hot I’m sure
I’m like the coolest mother#@$%er around the globe boy
I set the club on fire I told ya
I’m the general salute me soldier

Straight to the Bank — 50 Cent