Country House — Blur

The posts we do on over-the-top HELOC abuse are gripping because the dollar amounts are so large. However, focusing only on the extreme cases gives the impression of HELOC abuse is an unusual behavior of a few spectacular cases. HELOC abuse is not unusual or uncommon: it is widespread, and it is going to pummel the middle class.

What possesses people to borrow and spend so much money that they lose their homes? The simple answer is that they didn’t think they would lose their homes. Most believed their house values would go up forever and their house would pay off all their debts. All they had to do was continually refinance with very low interest rates and service the debt will a little of their work income. It never occurred to them that they might actually be required to pay down this debt with their wage income. But even if people drank the kool aid and believed this pathological nonsense, why did they take the money out and spend it? Why not let it accumulate and build wealth? Our song today is about being caught up in the “rat race” and leaving it all behind for a house in the country. Many people who spent their equity were caught up in the rat race trying to “keep up with the Jones’s.” It is sad really.

I received an email from a reader some time ago telling the story of what happened to his group of friends during the bubble. A few of his buddies really drank the kool aid and began separating themselves from the rest of group. They were spending beyond their means acting rich and feeling superior to the members of their old clique. The remaining group that either rented or lived within their means remained friends and watched with amazement as their former friends spent lavishly entertaining the “in” crowd and worked to increase their social status. As you might imagine, the bills are now coming due and the housing ATM has been turned off. The illusion of wealth and status these people created is disappearing as well. Not surprisingly, the fiscally responsible members of the old circle of friends are responding with a mix of sadness and schadenfreude. Stories like this are more the rule than the exception.

Today’s featured property is a typical, middle-class Irvine house. Perhaps a little above median, but certainly the kind of home a family making $125,000 a year (middle class in Irvine) should be able to afford. It is another sad and common story of HELOC abuse on a middle-class scale.

Asking Price: $675,000

Income Requirement: $168,750

Downpayment Needed: $135,000

Monthly Equity Burn: $5,625

Total Property Debt: $688,750

Purchase Price: $298,409

Purchase Date: 8/27/1999

Address: 6 Cabot, Irvine, CA 92620

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Like many stories of this type, it started during a time of fiscal responsibility and sane lending practices. The property was purchased in 1999 for $298,409 with 20% down. These people did not take their first sip of kool aid until 2003 when their refinanced their first mortgage and took out about $20,000. It must have tasted good because two months later they opened a HELOC for $85,750. Then in December of 2003 they opened two HELOCs for $137,000 and $10,000 respectively. In 2004, they succumbed to the full effects of kool aid intoxication and refinanced their first mortgage for $440,000. It is unclear whether or not this paid off the HELOCs. In 2005 they took out an Option ARM for $475,000, and three months later opened a HELOC for $100,000. Finally, In January of 2007, they took out a $580,000 Option ARM with a $108,750 stand-alone second. When they were done with these refinancings, the total debt on the property was $688,750, and the total mortgage equity withdrawal was $449,950 ($688,750 – $238,800 = $449,950.)

When you look at the photos if this property, I don’t think a reasonable argument can be made that these people spend nearly $450,000 on property improvements. With the frequency and size of the withdrawals, I think we can rule out investment or family catastrophe. It certainly looks like these people spent themselves out of their home.

So how widespread is this phenomenon? I don’t have any statistics. Perhaps someone can find out how many short sales or foreclosures actually sold for a profit. I do know that I have no trouble finding examples of these properties here in Irvine. I could profile one every day. Most of them are the ordinary HELOC abuse patterns like today’s sellers. It is widespread enough to force many distressed properties on the market and drive prices lower, and as prices fall, the problem will get worse as more and more properties become distressed by the falling values.

Do any of you have acquaintances, friends or relatives who have spent themselves into financial oblivion? What is their story?

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(so the story begins)
City dweller
Successful fella
Thought to himself:
oops, Ive got a lot of money
Caught in a rat race
Terminally
Im a professional cynic
But my hearts not in it
Im paying the price of living life at the limit
Caught up in the centurys anxiety

He lives in a house
A very big house
In the country
Watching afternoon repeats
And the food he eats
In the country
He takes all manner of pills
And piles up analyst bills
In the country
Oh, its like an animal farm
Thats the rural charm
In the country

Hes got morning glory and lifes a different story
Everythings going jackanory
Touched with his own mortality
Hes reading balzac, knocking back prozac
Its a helping hand that makes you feel wonderfully bland
Oh, its a centurys remedy
For the faint at heart
A new start
(try the simple life)

Country House — Blur

Ship of Fools — Robert Plant

Today we are breaking with our tradition of profiling a $250,000 loss, and we are going big time — $500,000 lost on one property. This flip is sunk. These flippers are so far underwater, they are not on a ship of fools; they are on a submarine.

Asking Price: $799,000

Income Requirement: $199,750

Downpayment Needed: $159,800

Monthly Equity Burn: $6,658

Purchase Price: $1,299,000

Purchase Date: 6/8/2007

Address: 20 Silver Cres, Irvine, CA 92603

Beds:	4
Baths:	2
Sq. Ft.:	2,128
$/Sq. Ft.:	$376
Lot Size:	6,741 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1977
Stories:	1 Level
View:	Hills
Area:	Turtle Rock
County:	Orange
MLS#:	S529152
Source:	SoCalMLS
Status:	Active
On Redfin:	17 days
Fixer-upper

hughe?

Someone paid $1,299,000 for a property needing a complete remodel?

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The transactions surrounding this property smell fishy to me. It was purchased by a guy for $1,299,000 in March of 2007 who put 25% down. 3 months later, the property was sold to a couple for the exact same price who used 100% financing. Now, 10 months later, it is being offered for sale for $500,000 off the purchase price. What gives? Did the original buyer find a straw buyer to bail him out? Why would someone sell it 3 months later for the same price, and why did the second buyers use 100% financing and try to sell it 10 months later for a $500,000 loss? It looks suspiciously like a bank “put” that bailed out the first buyer. I don’t know. The bottom line is this: JP Morgan Chase Bank is going to lose $547,940 after a 6% commission less than 10 months after originating the loan. That is a huge loss, particularly for such a short ownership period. It is possible that some contractor will bid more than asking and minimize the lenders loss, but I rather doubt it. This place must be trashed inside if they won’t show any pictures.

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On waves of love my heart is breaking
And stranger still my self control I can’t rely on anymore
New tides surprise – my world it’s changing
Within this frame an ocean swells – behind this smile I know it well

Who claims that no man is an island
While I land up in jeopardy – more distant from you by degrees
I walk this shore in isolation
And at my feet eternity draws ever sweeter plans for me
I know why – I know why
Crazy on a ship of fools
Crazy on a ship of fools
Turn this boat around – back to my loving ground
Oh no, oh no – ship of fools —

Ship of Fools — Robert Plant

Silent Scream — Slayer

It doesn’t look like we are going to have a bear rally this spring. The rate of price decline is accelerating, credit is still tightening, foreclosures are still increasing, job losses are mounting, mortgage interest rates are rising, inflation is rising, the economy is sputtering, and sales are still anemic. Did I forget anything?

Rachel Carson wrote Silent Spring in 1962 about the death of eagles caused by DDT. Who will write about our silent spring? Oh yeah, I did.

Asking Price: $670,000

Income Requirement: $167,500

Downpayment Needed: $134,000

Monthly Equity Burn: $7,166

Purchase Price: $860,000 (via Sitex)

Purchase Date: 5/19/2006

Address: 36 New Hampshire, Irvine, CA 92606

Desirable parkside
location. I call BS on this one. It is far from the park, but immediately adjacent to the 5. I hope it has triple-pane glass and air purifiers.

That kitchen is the original cheap white tile.

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Since this house is not currently lived in, we can assume our flipper gave up. They do have $43,000 of their own money in the deal, but values have long since put them underwater. Apparently they are not readers of the IHB, or perhaps not believers, as they purchased this property in February of 2007 as a flip. Lenders put up $817,000, so we are looking at another lender bloodbath. If this property sells for asking price and a 6% commission is paid, the resulting loss on the property will be $230,200. The seller will lose their $43,000 downpayment, and the lender will lose $187,200. You know, I don’t feel very bad when flippers lose money.

Another day, another quarter million dollar loss….

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Have you noticed how the position of the market bulls has been evolving? Awgee has. He went on a rant in our forums making fun of the bulls arguments. I will quote him here:

At first, it was, “Prices will continue to appreciate at this rate.”

Then it was, “Prices may not continue to appreciate at the same double
digit rate that they have, and it will be healthy for the market if it
slows down to single digit appreciation.”

Then, “Prices will level off, but they will never decline in Irvine, (Newport), (take your pick).”

Then, “The market is experiencing a small. temporary correction.”

Next, “Prices have fallen, but interest rates are low and inventory has never been better. It is a great time to buy.”

Now, “We realtors are seeing greater market activity. The bottom is
in. Serious buyers are making offers. You may be surprised by multiple
offers on the home you are interested in. If you plan to live in a
home for ten years, it does not matter when you buy.”

Next month, “This latest decline is just the final blow-off before
prices start to rise again.” or “You can’t lose in this market.”

or ( Tell us what the next Kool-Aid sales pitch will be ).

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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Nightmare, the persecution
A childs dream of death
Torment, ill forgotten
A soul that will never rest

Scattered, remnants of life
Murder a time to die
Pain, suffrage toyed
Lifes little fragments destroyed

Silent Scream — Slayer

Short People — Randy Newman

Short sellers got no reason to hope. They got little houses, little pets, they go round borrowing great big debts. They got little kitchens, little stoves, granite counters; they are selling in droves. Don’t want no short sales, don’t want no short sales round here.

Today’s featured property is a typical 100% financing deal gone bad. There are two types of distressed properties that have caused the 20%+ declines we have seen in the last year: 100% financing deals and HELOC abusers. We have profiled many of each type. They have set the stage for the next wave of foreclosures when all the ARMs begin to explode. We haven’t begun to see the fallout from that problem yet.

Asking Price: $780,000

Income Requirement: $195,000

Downpayment Needed: $156,000

Monthly Equity Burn: $6,500

Purchase Price: $960,000

Purchase Date: 5/19/2006

Address: 26 Midsummer #1, Irvine, CA 92620

HARDWOOD FLOORS, ckeck.

STAINLESS STEEL
APPLIANCES, check.

GRANITE COUNTER TOPS, check.

Pergraniteel.

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This seller demonstrates very poor market timing. This property was purchased very near the peak with 100% financing. It has been a cashflow drain, and with the market heading south, the owner is bailing out. What a surprise. If this seller gets full asking price, the lender who is going to eat the loss will lose $226,800 after a 6% commission.

Have you gotten bored of $250,000 loses? They are so common now that you forget what $250,000 could buy, and what it really means. We are documenting about $1,000,000 a week in losses here in Irvine, and that is only because we run 5 posts a week. There is actually much more being lost in the market each day, and that is just in our little piece of America. Is it any wonder the banks are taking multi-billion dollar write offs?

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Short People got no reason
Short People got no reason
Short People got no reason
To live

They got little baby legs
And they stand so low
You got to pick ’em up
Just to say hello
They got little cars
That go beep, beep, beep
They got little voices
Goin’ peep, peep, peep
They got grubby little fingers
And dirty little minds
They’re gonna get you every time
Well, I don’t want no Short People
Don’t want no Short People
Don’t want no Short People
‘Round here

Short People — Randy Newman

Silently Craving — Michael Kiske

The Second Noble Truth of the Buddha is that all suffering is caused by craving. People who took out HELOCs to fuel consumer spending gave in to craving, and they are about to endure a period of extreme suffering in their lives. People crave for just about everything they believe money can buy: cars, boats, vacations, status, lovers, self-esteem, and many other things or states of mind. HELOCs enabled people to obtain things that would have been denied to them under ordinary circumstances. When people obtain objects of their desire, it leads to a temporary state of satiation followed by an even more intense wanting. It is like drinking salt water: you think it helps, but drinking it makes you even more dehydrated and causes you to crave water even more. Those that drank the kool aid of the Great Housing Bubble took out HELOCS and tried to satisfy the craving beast inside. It didn’t work. What is worse for them is that they are now accustomed to feeding this craving beast a steady diet of whatever it wants. Once this beast learns to feed regularly, it causes even more suffering when it is not fed. The HELOCs which bought the food to feed the craving beast are drying up. The housing ATM is broken.

It is my hope that profiling these stories of HELOC abuse does more than satisfy the beast of schadenfreude within all of us (that leads to suffering through separateness.) I hope these stories serve as a lasting lesson to people. It is common for people to react with envy to the rampant consumer spending these stories contain, but take a moment to consider the pain the hangover must be causing. These HELOC abusers are losing their houses, their lifestyles, their illusions of wealth, and their real money. Each of us must struggle between the unskillful desire to revel in their pain and skillful practice of feeling empathy for their plight. I know I do. It is important to move beyond schadenfreude lest we become trapped in the same feedback loop always needing another fix of someone else’s pain to make us feel whole and happy.

In the meantime, enjoy today’s post about another HELOC abuser who took out $600,000 over a 4 year period. Where do you think they will be finding that $150,000 a year supplemental income in this recession? 😉

Asking Price: $715,000

Income Requirement: $178,750

Downpayment Needed: $143,000

Monthly Equity Burn: $5,958

Purchase Price: $312,000

Purchase Date: 4/9/2002

Address: 1 Spring Buck, Irvine, CA 92614

Beds:	5
Baths:	5
Sq. Ft.:	2,200
$/Sq. Ft.:	$325
Lot Size:	3,024 Sq. Ft.
Property Type:	Single Family Residence
Style:	Traditional
Year Built:	1980
Stories:	2 Levels
Area:	Woodbridge
County:	Orange
MLS#:	S509664
Status:	Active
On Redfin:	194 days
Unsold in 90+ days

Gourmet Kitchen with pergraniteel.

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These homeowners did particularly well during the bubble rally. The bought the house in April 2002 for $312,000 putting a paltry $15,600 down. In March of 2005, they refinanced with a $446,200 first mortgage and a $100,000 second. This pulled out their initial $15,600 “investment” and put an additional $234,800 in their pocket. Then in October of 2005, they refinanced again and got a $711,200 loan pulling out an additional $165,000. Then, as if that wasn’t enough, they opened a HELOC for $150,000 in November of 2005. This was a hard working house, but it wasn’t done quite yet. In November of 2006, they took out a stand-alone second mortgage for $200,000 and probably paid off the HELOC. That is a total of $599,800 in mortgage equity withdrawal in 4 1/2 years. They put in $15,600 and took out $599,800. That is a good return on your investment, and it would have been if they had sold it at the peak. Of course, they probably thought the house would go on providing them with an additional $150,000 a year in income for perpetuity, and there was no sense in firing such a stellar performer. Since they didn’t sell and only “put” it to the lender, they will now have to deal with bad credit and the loss of that $150,000 a year income.

The Law of Karma states, “For every event that occurs, there will follow another event
whose existence was caused by the first, and this second event will be
pleasant or unpleasant according as its cause was skillful or
unskillful.” Taking out all that HELOC money might have been fun, but it wasn’t particularly skillful. If the Law of Karma holds true, these people will experience unpleasant times ahead. Personally, when the knowledge of their suffering only makes me feel sad, I will know I will have moved beyond my suffering caused by my own, unskillful reaction to the Great Housing Bubble. I am not there yet.

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The biggest fires are burning
And I will try to get back, I’m returning
You keep your head down singing
And all you get is over-pressure-craving

Let me try a word once known
Let me try a different tone
Touch me; do not drift with the flow
Silently it’s creeping in
Silently with no warning
Suddenly we meet the other shore
And there’s no more – to try!

Silently Craving — Michael Kiske