We Will Rock You — Queen

As far as HELOC abusers go, today’s sellers are just like boys playing in the street. They made a big noise, tried to take on the world, and ended up a big disgrace. The market put them back in their place.

HELOC abuse crosses all socioeconomic lines. We have profiled high end, middle class, and now small-time condo owners freebasing the kool aid and spending themselves out of house and home. Everyone has ambitions to better themselves and their station in life. However, some people hatch plans to accomplish this goal that are not completely successful. Sometimes it is just fate or bad luck that causes some people to win or lose in life. Sometimes it is bad execution, and sometimes it is just bad planning. HELOC abuse would fall in the “bad planning” category.

How was this supposed to work? Even if the kool aid dreams were true and you could perpetually borrow against your house as it increased in value. What is the end game? Is there no limit to the amount of debt you can support? What happens when you sell and the house is no longer providing income? Does the house ever retire? Or does it provide endless free money forever? In reality, there was not plan. Everyone just took the free money and spent it without regard to future consequences, and now that there are consequences, everyone is avoiding responsibility and letting the lenders deal with the fallout.

The owners of today’s featured property managed to find a lender who thought their sub $200K condo was worth over $580K and loaned them money accordingly. These owners may set the record for the greatest return on their initial investment. They put down $5,500 in 1999 and took out more than $400,000 over the 8 years that followed.

Asking Price: $450,000

Income Requirement: $112,500

Downpayment Needed: $90,000

Monthly Equity Burn: $3,750

Purchase Price: $182,000

Purchase Date: 7/29/1999

Address: 18 Queens Wreath Way, Irvine, CA 92612

What is the “3rd room currently set up as a
3rd bedroom?” Is this an illegal conversion, or just realtor BS trying to make a 2/2 sound like a 3/2?

At least some of the HELOC money went toward pergraniteel.

Excellent
location? If you like being about 100 feet from the 405. This place has to be very noisy.

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To look at the listing, you would think these people are going to make $268,000, but when you see the short sale notice, you know they got crazy with their HELOCs. Let me give you the bullet point summary:

• The property was purchased for $182,000 in July of 1999. There was a $176,500 first mortgage and a $5,500 downpayment. 3% down was probably an FHA loan.
• On 7/31/2001 the property was refinanced with a $200,000 first and a $50,000 second. They took out their $5,500 plus an additional $62,500.
• On 4/10/2003 they refinanced with a $266,500 first mortgage taking out another $16,500.
• On 2/20/2004 they opened a $100,000 HELOC.
• On 5/23/2005 they refinanced with a first mortgage for $412,000. It was a negative amortization loan with a 1% teaser rate. The HELOC was likely paid off. Total MEW of $230,000.
• On 10/6/2005 they took out a second mortgage for $50,000.
• On 6/30/2006 they took out a $121,500 HELOC. Total MEW of $341,500.
• On 4/13/2007 they refinanced their first mortgage with a $564,000 first mortgage and a $21,150 second mortgage. The total property debt totals $585,150, and total MEW equals $408,650.

If the seller gets their short-sale asking price, JP Morgan Chase stands to lose $162,150 after a 6% commission. Of course, getting this asking price may prove difficult. They are trying to get $341/SF for a 1965 condo located 100′ from the 405. There are other sellers who have consumed even more kool aid.

Do you think this is going to happen again? Will people be able to do what these borrowers did? Will prices bottom out and quickly rebound so we can all borrow and spend ourselves to prosperity at the expense of our lenders? Somehow, I don’t think we will see this again in our generation, but you never know. If the peak of the next bubble would happen to correspond to when I want to retire, that would be great…

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Buddy youre a boy make a big noise
Playin in the street gonna be a big man some day
You got mud on yo face
You big disgrace
Kickin your can all over the place

We will we will rock you
We will we will rock you

We Will Rock You — Queen

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P.S. A special bonus for all Queen fans:

I’ll Walk Away — James Hunter

Calculated Risk recently had a post Freddie Mac on Walking Away. During a recent conference call, the following exchange occurred:

Analysts: What do you see? Is it in line with historical default rates as they get underwater or does it …

Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater – you know we’re even seeing it when we try to modify and renegotiate those loans – they are walking away. They’re finding it not constructive.

In short, when people go underwater, they are walking away from the property. We now have some statistical proof this phenomenon is occurring. Statistics are great for discussing macro trends and the like, but we take a microeconomic approach here at the Irvine Housing Blog: we show you the properties the owners are walking away from. Today’s featured property is seriously underwater. It is being offered for sale at 27% under its peak purchase price.

Asking Price: $575,000

Income Requirement: $143,750

Downpayment Needed: $115,000

Monthly Equity Burn: $4,791

Purchase Price: $785,000

Purchase Date: 8/1/2006

Address: 37 Night Bloom, Irvine, CA 92602

Beds:	2
Baths:	2.5
Sq. Ft.:	1,545
$/Sq. Ft.:	$372
Lot Size:	–
Property Type	Detached, Condominium
Year Built:	2006
Stories:	2 Level
County:	Orange
MLS#:	I07181021
Source:	MRMLS
Status:	Backup Offer
On Redfin:	139 days
Unsold in 90+ days

That is a daunting wall of text, isn’t it?

Nice to see that realtors are still using multiple exclamation points.

INVESTOR’S
SPECIAL! I hope no investors are that stupid.

PROFESSIONALLY
INTERIOR DESIGNED TO MATCH YOUR EXQUISITE TASTE. Thank you for kissing my a$$.

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Can you believe someone paid $785,000 for a 2/2? WTF was he thinking? Even at 27% off, it is still overpriced. If this property transacts for its asking price, the total loss on the property will be $244,500. The seller put $78,500 down (which he is losing,) and Bear Sterns Residential (or JP Morgan Chase) is going to lose $166,000.

It is not terribly surprising this owner walked away. He needs scuba gear and an endless supply of money to survive the cashflow drain until this property gets back up above water.

Equity Curve of peak buyer using a negative amortization loan.

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I have received a few emails asking about the statistics I post ever day on the featured property, so I thought I would take this opportunity to review them.

Income Requirement: $143,750 — I base this on a four-times income standard. Most financial advisors would say a house should only cost 2.5 to 3 times income. I have my doubts prices will drop that low in Irvine. The income requirement is based on historic lending standards similar to what a borrower would encounter if they were to utilize an FHA loan (The FHA didn’t drink much kool aid.) Current FHA requirements only allow a 31% Debt-to-Income ratio for the mortgage and a 43% total DTI. This is only slightly elevated from the 28%/36% of the pre-bubble era. As lenders continue to lose money, credit will tighten until we are somewhere in near historic standards. I would not be surprised if the FHA were to tighten if defaults become a problem for them as well. The DTI ratio has an enormous impact on the total amount borrowed. As DTIs fall, so does the total amount loaned to a particular borrower. If people cannot borrow as much, they cannot bid up the price of real estate. The entire housing bubble was built on borrowed money, and as the quantity of this money decreases, prices fall. If we return to a 28%/36% standard, the four-times income I use in the calculations may not be made available. Current conditions in the market permit borrowers to obtain 5.5 times income due to the combination of low interest rates and very high DTIs being allowed. This is why there is ongoing activity at our still-inflated price levels. As the credit crunch grinds on, these numbers will fall.

The opinion of many bulls in the market right now is that FHA loans will save the market. In practice, first-time buyers utilizing these loans will stabilize the low end — at prices 40%-50% off the peak. People utilizing FHA loans are only going to be qualified to borrow 31% of their income. As you can see from the chart above, that will put us back at fundamental valuations with the same relationship between income and price witnessed during the mid 90s. One more thing to note relative to DTIs is that the debt-to-income ratio is a measure of how far buyers are “stretching” to buy real estate. Buyers have historically committed larger sums to purchase real estate when prices are rising in order to capture the appreciation of rising prices. Conversely, buyers have historically committed smaller and smaller percentages of their income toward buying real estate when prices are declining because there is little incentive to overpay. Some may look at this phenomenon as a passive effect of the rise and fall of prices, but since buying is a choice, the fluctuation in debt-to-income ratios is an active force on prices in the market.

Downpayment Needed: $115,000 — I have been using a 20% downpayment requirement because it was the standard in the past, and I believe it will be again. Think about what Freddie Mac was saying in the conference call at the beginning of this post: the rate of default increases dramatically when borrowers go underwater. Given the evidence of this effect, wouldn’t it be prudent for banks to require larger downpayments to avoid the defaults? Considering the staggering losses banks have already endured, I suspect they will begin being more prudent in the future, either that, or they will go out of business. Many people have speculated that 10% down will become the new norm. Why? Wishful thinking is not going to change the behavior of borrowers or lenders. If people default when they go underwater, lenders will do whatever is necessary to make sure they don’t. The only tool at their disposal is raising downpayment requirements. There is nothing in the behavior of lenders or borrowers to suggest that 20% downpayments will not become the standard again. If someone can present a convincing argument why 10% down will become the norm in the comments, I would love to hear it — and the fact this requirement will destroy the housing market is not an argument for why it will not happen, it is simply an observation of the result of higher downpayments.

Monthly Equity Burn: $4,791 — I have speculated that the housing market will drop 10% a year for the next 2 or 3 years (it has actually been dropping faster than that.) If prices do drop at this rate, buyers will see their equity dissappear at the rate of 10% per year. The monthly equity burn is this yearly decline converted to a monthly figure. Most people think in terms of their monthly payment or their monthly cost of housing, so converting this figure to a monthly figure demonstrates the hidden cost of ownership created by the loss of property value.

I hope these explanations clarify things a bit. If there are any other questions, I will attempt to answer them in our collection of astute observations.

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Darling if ever you refuse me
Like I know you will one day
I won’t let the change confuse me
I’ll know that my cue to walk away

When I feel my chances growing slimmer
Cause there’s nothing left to say
When the lovelight in your eyes grows dimmer
I’ll know that’s my cue to walk away

I’ll Walk Away — James Hunter

This Ole House — Stuart Hamblen

Today’s property sets a new low standard in Irvine. This is the first property I have seen below $200/SF. Granted, it is a fixer-upper, but those properties will always be the low-price leader. I really did not think we would see price levels this low in 2008.

This is the kind of property that will interest me in a couple of
years. If you find a house in need of major cosmetic surgery (but
nothing structural), you can buy it with FHA financing and take what
would have been your 20% downpayment and renovate the property to your
taste. After the renovation, you can get the property reappraised, and
hopefully, you will have added enough value to be able to stop paying
private mortgage insurance. At that point, you are in a house finished
the way you want it for equal to or less than a “normal” property in
the community. Right now, it would just be a money pit, but when we are closer to the bottom…

Asking Price: $499,000

Income Requirement: $124,750

Downpayment Needed: $99,800

Monthly Equity Burn: $2,991

Purchase Price: $760,000

Purchase Date: 10/25/2005

Address: 4361 Sandburg Way, Irvine, CA 92612

Beds:	4
Baths:	3
Sq. Ft.:	2,682
$/Sq. Ft.:	$186
Lot Size:	3,328 Sq. Ft.
Property Type:	Single Family Residence
Style:	English
Year Built:	1967
Stories:	2 Levels
Area:	University Park
County:	Orange
MLS#:	P635582
Source:	SoCalMLS
Status:	Active
On Redfin:	12 days
Fixer-upper

potencials, remodelling, deosnt?

Current owner
deosnt want to finish the work? Big surprise. We received an email from the producers of Flip This House a few days ago asking us if we knew of a flipper in trouble. Here he is.

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As you might have guessed, the lenders, Countrywide and Washington Mutual, are getting hosed on this one. The property was purchased for $760,000 in October of 2005. There was a $608,000 first mortgage, a $76,000 second mortgage, and a $76,000 downpayment. In February of 2007, the borrower opened a HELOC for $80,000 and withdrew the rest of his money from the transaction. You have to wonder if this was a precursor for walking away from the property, but there is no way to know for sure. Washington Mutual was stupid enough to give him the money.

If this seller obtains his asking price and pays a 6% commission, the total loss on the property will be $294,940. Washington Mutual will lose $80,000, Countrywide will lose $214,940 and our flipper will walk away with $4,000 of lender cash. Who needs highway robbery when they will deliver it right to your home?

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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This ole house once knew his children
This ole house once knew his wife
This ole house was home and comfort
As they fought the storms of life
This old house once rang with laughter
This old house heard many shouts
Now he trembles in the darkness
When the lightnin’ walks about

This ole house dog lies a-sleepin’
He don’t know I’m gonna leave
Else he’d wake up by the fireplace
And he’d sit there and howl and grieve
But my huntin’ days are over
Ain’t gonna hunt the coon no more
Gabriel done brought in my chariot
When the wind blew down the door
CHORUS

This Ole House — Stuart Hamblen

P.S. This guy is great: Mr Mortgage – HERE COMES THE ALT-A CRISIS

Two as One — First to Last

When your playing blackjack and the dealer has given you great cards, you have the option of taking one more card and doubling your initial bet. When the odds are in your favor, it is a smart play. Since the real estate market was a “sure thing,” and prices always go up, it makes sense that people would have doubled down in the real estate market. The more property you owned, the more money you made. Well, at least that was the idea after a few kool aids. If you made the mistake of drinking the kool aid in the summer of 2006 and buying two low-end properties right at the peak, your double-down bet was a short cut from first to last.

Asking Price: $359,000

Income Requirement: $89,750

Downpayment Needed: $71,800

Monthly Equity Burn: $2,991

Purchase Price: $500,000

Purchase Date: 8/30/2006

Address: 15 Bellevue #1, Irvine, CA 92602

Great corner lot location, quite interior with view balcony. Locate in
a gated community, direct access 2 car-attached garages. No one above
or below, plush carpet with custom paint, narrow tree line corridor
leads to the front door, a gem not to be missed. Kitchen is centrally
located with walk in pantry. New custom paint and new barber carpet.

It it just the photograph, or does the color of the “new barber carpet” clash with the “custom paint?”

Is that a St. Joseph Statue in the corner?

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Property number 1 was purchased one day before property number 2. Do you suspect this was done so neither lender would know the other just loaned this guy a great deal of money? Do you think the second lender would have extended the loan knowing they guy had just taken on another huge mortgage? I suppose those questions are rhetorical because we all know the answer.

This first property was purchased with a $400,000 first and a $50,000 second, so he did put $50,000 into this first transaction. A year later, he took out a third mortgage with a private party for an additional $25,000, most likely to cover his debt service. The private-party lender has an Asian name. Lets hope he isn’t a member of the Boryokudan (Yakuza). They have interesting methods of collection.

If the seller gets his asking price, the total loss on the property after a 6% commission will be $162,540. The seller is out his remaining $25,000, the lender is out $112,540, and our Mafioso is out $25,000 — for now.

Asking Price: $359,000

Income Requirement: $89,750

Downpayment Needed: $71,800

Monthly Equity Burn: $2,991

Purchase Price: $585,000

Purchase Date: 8/31/2006

Address: 22 Daffodil, Irvine, CA 92618

Beautiful home in Oak Creek. Home is situated in the desirable Montilla
tract. Enjoy the convinience of a carriage unit. Great model boasts no
one above or no one below. 2 large terraces are perfect for relaxing.
The open floor plan is very light & bright. Cozy fireplace in the
living room.

light & bright

convinience? Is that like connivance?

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This seller must have felt $359,000 was a lucky number to price both properties that way. Everyone take notice of the purchase date being one day after the first property. Also, what do you think of the 39% drop in two years?

This property was purchased with a $468,000 first mortgage and a $58,500 second mortgage with $58,500 down. In February of 2007, he opened a HELOC for $108,500 and likely pulled out the $58,500 he put into this property and the $50,000 he put into property number 1. I imagine the $25,000 he borrowed from the mobster (I don’t know if he is a mobster, just go with it) was used to cover his debt service. So basically, he has taken all of his money out of these transactions, and he is letting the lenders hold the bag.

If the seller gets his asking price on this unit and pays a 6% commission, the total loss on the property will be $247,540; however, his total debt exceeded the purchase price by $50,000, so the lender is going to lose $297,540 on this one.

There you have it. Two properties, $410,080 in combined losses all absorbed by lenders. NBGI, Inc. Washington Mutual, Countrywide and our Mafioso all get to lick their wounds. Unless the private lender really is a Mafioso, then out boy has some explaining to do…

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two as one, a slight addiction
are we stuck, in the routine of this
but still more nights they come and go
the world keeps spinning all i know, i know
its just you and me, two as one

for all the nights we missed
f**k if i wasn’t such a pessimist
this chapter could’ve played out differently
for all the nights we missed
f**k if i wasn’t such a pessimist
this chapter could’ve played out differently

Two as One — First to Last

Nantucket Sleighride — Mountain

Don’t cry little Robin-Marie ’cause you know you’re losing your home…

It always makes me sad when I see these foreclosures and short sales with pictures from the children’s rooms. The disruption to family life caused by the Great Housing Bubble has only one precedent in the United States: The Great Depression. Hopefully, this family will be able to move into a comfortable rental rather than a tent city or Hooverville, but they will have to move. Basically, anyone who bought late in the bubble rally is underwater, and these homedebtors will fall into one of two categories: 1. Those who are forced from their homes (or choose to leave), and 2. Those who are trapped in their homes. It is difficult to determine who is worse off. Those who are forced from their homes will have ruined credit and difficulty in obtaining a home in the future. Those who are trapped in their homes have a complete lack of mobility to take promotions and crushing debt service payments that prevent them from doing anything else. All of these problems boil down to one bad decision: they bought a house during a wild financial mania.

Most people have no concept of the risks involved in investment.
This ignorance is reinforced by the kool-aid sales pitch of the
National Association of Realtors. Prices always go up. They are running
out of land. Buy now or be priced out forever. This self-serving
bull$hit is all too familiar (and repugnant) to the regulars on this
blog. People who bought into the bubble rally believed this nonsense,
and now that the foolishness of their decision is apparent, it is all
over except the crying.

For some people, the consequences will be limited. Those who used
100% financing and did not refinance have non-recourse debt, and they
will only face a ding to their credit rating. Those who refinanced have
recourse debt, and they will likely have to deal with debt collectors
before it is all over. Those who put some of their own money into the
transaction are facing a significant loss of equity, and it the case of
most properties we profile, a total loss. These are just the financial losses. The emotional losses can be even greater.

People develop emotional attachments to their homes. There is a wall in the bedroom where little Johnny’s height has been measured for the last several years. There is the patio with the children’s names etched into the concrete. There are the neighbors with whom people have shared cookouts. All of these little things create a sense of groundedness and a feeling of community. All of these things are lost in a foreclosure.

There are also the elements of ego involved. There are feelings of failure, particularly for those who feel the duty to provide for their families. There is the disappearance of illusions of wealth and status, and adjusting to a significant reduction in buying power is very stressful. We have had many foolish bulls post on this blog and others. Bulls have smugly commented on how renters have made “bad life choices.” The arrogance of some of the bulls is only surpassed by their ignorance. The embarrassment of being so completely wrong and the shame of losing face is very difficult for many to accept.

People who were wrong about the Great Housing Bubble paid a big price…

Asking Price: $789,000

Income Requirement: $197,250

Downpayment Needed: $157,800

Monthly Equity Burn: $6,575

Purchase Price: $948,500

Purchase Date: 1/24/2007

Address: 5 Nantucket, Irvine, CA 92620

What is a newer remodel? I suppose if it was remodelled in 1970, that wouldn’t count.

Nice that they put in pergraniteel.

ALL CAPS IS ANNOYING

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First, I would like to offer my kudos to the people who bought the property in April of 2002 for $520,000 and sold it to today’s seller for $948,500. The housing bubble seems to have worked out for them. The housing bubble has enriched many who bought and sold at the right times — assuming they are renting now. Today’s seller couldn’t have timed things any worse. The peak of the broader market was summer of 2006 in Irvine, but the high end appreciated into the winter of 2007. For properties like today’s January of 2007 was the absolute peak. Not long after these people bought, the market went over a cliff, and it continues to free fall. These people paid $948,500, and they put 10% down. That $94,850 is long gone. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $206,840 — an average loss by Irvine standards (Isn’t that amazing?) The sellers will lose their $94,850, and the lender will lose $111,990. I imagine these people are not thankful for the housing bubble.

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Goodbye, little Robin-Marie
Don’t try following me
Don’t cry, little Robin-Marie
‘Cause you know I’m coming home soon

Three years sailing on bended knee
We found no whales in the sea
Don’t cry, little Robin-Marie
‘Cause we’ll be in sight of land soon

Nantucket Sleighride — Mountain

P.S. Check out Mr Mortgage April Foreclosure Report