Crumbling Down — John Mellencamp

Today we continue with our daily grind of speculators giving up. The featured property was purchased in 2005, then as much money as possible was taken out of the property, and the lender is left holding the bag.

Asking Price: $474,000

Income Requirement: $118,500

Downpayment Needed: $94,800

Monthly Equity Burn: $3,950

Purchase Price: $545,000

Purchase Date: 12/15/2005

Address: 73 Reunion, Irvine, CA 92603

Beds:	2
Baths:	2
Sq. Ft.:	1,099
$/Sq. Ft.:	$432
Lot Size:	–
Property Type:	Condominium
Style:	Mediterranean
Year Built:	2003
Stories:	Split-Level
View:	Mountain
Area:	Quail Hill
County:	Orange
MLS#:	S534044
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Do you get to the point when you read a property is “highly upgraded” you think it is complete BS? Oh wait, I guess this guy put in pergraniteel.

This flopper bought the property in late 2005. He borrowed $408,750 with an Option ARM, a HELOC for $81,750 and put $54,500 down. Of course he quickly opened another HELOC 2 months later for $110,000 and 2 days after than, another was recorded for $61,250. Assuming he paid off the first HELOC, the total debt on the property was $580,000. Basically, this guy made $35,000 in his first two months of ownership. Perhaps he spent this on pergraniteel, who knows. In any case, he has none of his own money in the deal.

Even with the short sale, this asking price at $432 / SF is ridiculous. When this sells it will be under $400/SF, and probably well under it. If this sells for asking price, the HELOC lender (Wells Fargo) is going to lose $134,440. The borrower will only lose if the lender comes after him — maybe later…

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Some people ain’t no damn good
You can’t trust ’em, you can’t love em
No good deed goes unpunished
And I don’t mind being their whipping boy
I’ve had that pleasure for years and years
No, no I never was a sinner-tell me what else can I do
Second best is what you get-till you learn to bend this rules
Time respects no person-what you lift up must fall
They’re waiting outside-to claim my crumblin’ walls

When the walls come tumblin’ down
When the walls come crumblin’ crumblin’
When the walls come tumblin’ tumblin’ down

Crumbling Down — John Mellencamp

The Apartment Story — The National

This crash is going to take a long time. Even with the record number of foreclosures and speculators giving up en masse, there are still more speculators giving up every day. It seems there is a never-ending supply of 100% financing deals gone bad. This isn’t that surprising when you think about it. Every speculator has a unique financial situation and a unique stubbornness when it comes to admitting a mistake. The combination of these factors means that some will hold on longer than others, so we will continue to see these people give up one-by-one for some time to come. They will all give up, and when they do, they add more fuel to the fire burning down our housing market. Even if some of them manage to avoid foreclosure, they will sell when they get back to breakeven to get out of the bad investment. There is no way prices will consistently rise again until all these people have been flushed out of the market. With each passing month, we get new foreclosure records, so the process is in full swing.

so worry not, all things are well, we’ll be alright, we have our looks and perfume…

Asking Price: $295,000

Income Requirement: $73,750

Downpayment Needed: $59,000

Monthly Equity Burn: $2,458

Purchase Price: $399,000

Purchase Date: 10/12/2006

Address: 205 Tarocco, Irvine, CA 92618

Like I care how much you reduced the price? Ohhhh, the lender has agreed… how nice of them.

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This is an apartment. I don’t care how they classify its ownership, it is an apartment — and not a very desirable one. The only reason you own an upstairs 2/2 with a carport is as an investment. If you are an investor who understands real estate (that excludes stupid speculators betting on appreciation,) then you will demand a positive cashflow. This probably rents for about $1,700 a month, and the dues are a very high $370, so it is probably worth $140,000 to $175,000. Some knife-catcher will pay more, and they will get burned. What does all this say about the guy who paid $399,000? Not much really: he used 100% financing and passed all the risk on to the lender, People’s Choice Home Loan, Inc. If this property sells for $295,000 and a 6% commission is paid, this lender is going to lose $121,700 plus carrying costs on a tiny 2/2 after only 18 months. What does this say about the lender?

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Be still for a second while I try and try to pin your flowers on la la la la
Can you carry my drink I have everything else
I can tie my tie all by myself
I’m getting tied, I’m forgetting why

so worry not
all things are well
we’ll be alright
we have our looks and perfume on

The Apartment Story — The National

Livin’ on a Prayer — Bon Jovi

I remember the atmosphere in the real estate market in 2004. There was excitement in the air, fortunes were to be made, and everyone had kool aid intoxication. It would have been impossible for those who drank the kool aid to even imagine they could lose money on the deal, particularly after the market continued higher for another 2 years. Fast forward to 2008, and most of these purchasers have less asset value than they paid, and prices are going lower every day. There is much denial in the market still. Everyone is livin’ on a prayer.

Asking Price: $609,000

Income Requirement: $152,250

Downpayment Needed: $121,800

Monthly Equity Burn: $5,075

Purchase Price: $679,000

Purchase Date: 6/29/2004

Address: 9 Hollyhock Dr., Irvine, CA 92602

Beds:	3
Baths:	2.5
Sq. Ft.:	1,700
$/Sq. Ft.:	$358
Lot Size:	–
Property Type:	Single Family Residence
Style:	Other
Year Built:	1998
Stories:	2 Levels
Area:	West Irvine
County:	Orange
MLS#:	S514086
Source:	SoCalMLS
Status:	Active
On Redfin:	177 days
Unsold in 90+ days

Great entertaining floorplan! Spacious open kitchen with Euro white
cabinets & center island. Roomy Master Bedroom with large walk-in
closets. Upgraded Wood Floors, Plantation Shutters. Master bathroom
with separate shower and bath tub and dual sinks. Home is light and
bright with an inviting feel…..and no HOA Dues!

They certainly know how to chase the market:

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These owners purchased the property with a $543,200 first mortgage and a 20% downpayment. They opened a HELOC for $98,000 on 8/9/2005. I hope for their sake they took the money out. If this property sells for it’s asking price, and the sellers pay a 6% commission, they stand to lose $106,540. If they took out the HELOC, then the property is a short sale.

These owners are going to eat a big loss because they did not game the system and withdraw all their equity and leave the bank holding the bag. What do you think about that? The prudent get punished while the irresponsible get away clean?

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Once upon a time
Not so long ago

Weve got to hold on ready or not
You live for the fight when its all that youve got

Livin’ on a Prayer — Bon Jovi

House of Fire — Alice Cooper

The Village of Woodbridge is a desirable Irvine Village. It is an interesting study in the collapse of the market. Woodbridge is laid out with a large loop road framed with large duplexes giving the impression of driving through a series of manor homes. Behind this pleasant veneer is a great deal of high density housing. Outside the loop has the highest concentration of attached product while inside the loop has many large, single family detached homes. As the market decline has progressed, the low end has been deteriorating more quickly than the high end, and this has created a great disparity between the prices on the outside of the loop as compared to prices on the inside of the loop. This large disparity cannot persist forever. Either prices outside the loop will rise (which isn’t very likely) or prices inside the loop will fall. People who might want to live inside the loop will find the price differential so great, that many will purchase outside the loop as a next-best substitute. It is this substitution effect that pulls down the prices in the most desirable neighborhoods. It can be seen in small scale within Woodbridge, or it can be seen in large scale between Riverside County and Orange County. As prices drop in adjacent markets, sales volumes will continue to dwindle in the higher priced neighborhoods until the price curve flattens to its natural balance. This is why the big increase in sales volumes being touted by the bulls is only happening in the most downtrodden communities. The high-end properties still suffer from anemic sales volumes and significant price pressures.

Today’s featured property is a nice 3/2 outside the loop in Woodbridge. It is a typical starter home that will likely bottom in the $375,000 to $400,000 range. A household making $90,000 to $100,000 a year should be able to comfortably afford a property like this. Right now, they can’t.

Asking Price: $515,000

Income Requirement: $128,750

Downpayment Needed: $103,000

Monthly Equity Burn: $4,291

Purchase Price: $645,000

Purchase Date: 6/30/2005

Address: 15 Woodland, Irvine, CA 92604

I am too lazy to get up off my a$$, you go ahead and show it, just leave me the commission.

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20% off and falling. This was purchased a full year before the peak, to it is priced closer to 25%-30% off the peak resale value. Of course, it was purchased with 100% financing. If this property sells for its asking price, the Alternative Financing Corporation stands to lose $160,900.

Another day, another lender getting stiffed for over $100K. I wonder if any of these lenders are wishing one of our California wildfires would burn Irvine to the ground. At least then, they could collect the losses from their insurance company.

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House of fire

We ain’t gotta pay rent now, baby
No landlord to throw us out

Take me higher

Building a house of fire, baby

We are building a house of fire every time we touch

House of Fire — Alice Cooper

Shooting Star — Bad Company

Sometimes when you see an egregious case of HELOC abuse, you have to ask, “On what did you spend the money?” On many of the properties we profile, the owners at least put some of the money into the property and outfitted it with pergraniteel. Apologists offer the possibility of health issues or investment, but it seem pretty obvious that most of these people just blew the money. It is living like a shooting star, you burn brightly, but it can’t go on forever, and when your equity has burned up, you just fade away. Today’s featured property took over $400,000 out of their home, and it is being offered for sale as a fixer upper. So I ask again, “On what did you spend the money?

Asking Price: $499,000

Income Requirement: $124,750

Downpayment Needed: $99,800

Monthly Equity Burn: $4,158

Purchase Price: $210,000

Purchase Date: 7/11/1997

Address: 5 Star Thistle, Irvine, CA 92604

Beds:	3
Baths:	2
Sq. Ft.:	1,600
$/Sq. Ft.:	$312
Lot Size:	4,365 Sq. Ft.
Property Type:	Single Family Residence
Style:	Garden Home
Year Built:	1975
Stories:	1 Level
Area:	El Camino Real
County:	Orange
MLS#:	S532383
Source:	SoCalMLS
Status:	Active
On Redfin:	7 days
Fixer-upper

Great opportunity to overpay for a moneypit.

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These people bought right at the bottom of the last bubble. The caught their shooting star and burned through about $400,000 in the 10 years that followed. The bullet-point recap is as follows:

• The property was purchased on 7/11/1997 for $210,000. There was a $189,000 first mortgage, and the owners put $21,000 down (10%).
• On 9/23/1997 they took out a stand-alone second for $25,000 taking out all their equity plus $4,000. At this point, they have no money in the property.
• On 12/1/1999 they refinanced with a $240,000 first mortgage bringing their MEW to $45,000.
• On 12/29/1999 they opened a HELOC for $45,300.
• On 3/19/2002 they refinanced with a $284,000 first mortgage.
• On 4/19/2002 they took out a stand-alone second for $50,000. Total MEW of $145,000.
• On 12/26/2003 they refinanced for $378,750. Merry Christmas.
• On 7/27/2004 they refinanced for $500,000. Total MEW of $311,000
• On 11/22/2005 they refinanced for $511,000 with an Option ARM with a 1% payment rate.
• On 1/13/2006 the opened a HELOC for $100,000 bringing their total debt to $611,000 and their total MEW to $422,000.

If this house transacts at its asking price and a 6% commission is paid, the total gain on the property will be $259,060; however, the total loss to the lenders on this property will be $141,940. Countrywide will lose $41,940, and Washington Mutual will lose the amount withdrawn on the HELOC, presumably $100,000.

I hope everyone realizes that this house should not be on the market. Distressed sales brought about by HELOC abuse leading to a short sale or foreclosure are properties that would not be for sale right now if the lenders and borrowers had not gotten into this mess. Any fantasies of a bottom or appreciation going forward is going to be crushed by the onslaught of these distressed properties. A normal market characterized by modest appreciation requires relatively affordable prices, widely available financing, and a minimum of distressed properties. We have none of those conditions. The reservoir of distressed properties is not drying up; in fact, it is being replenished faster than the market can absorb them. Defaults and foreclosures continue to set new records, and properties like this one have become our daily fare. All signs are that the number of short sales and foreclosures is going to increase as the Alt-A and prime borrowers face their resets over the next few years. Many, if not most, are not going to qualify for refinancing due to tightening standards, in particularly they will not meet the new combined-loan-to-value requirements because they are underwater or close to it. Until the homedebtors who utilized toxic mortgages and HELOC abusers are flushed from the system, they will continue to poison the market through a steady supply of REOs. This debacle is just beginning.

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Johnny was a schoolboy
When he heard his first Beatles song
Love Me Do I think it was
And from there it didn’t take him long

Don’t you know

Don’t you know
That you are a shooting star,..(don’t you know, don’t you know)
Don’t you know that you are
A Shooting Star
And all the world will love you
Just as long..as long as you are?

Don’t you know,…

Shooting Star — Bad Company

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Have you ever wondered what they do with in outer space when they have to go?