Monthly Archives: January 2009

Open Thread 1-31-2009

Talk about whatever is on your mind.

Super Bowl Shuffle — 1985 Chicago Bears

Who is going to win the Super Bowl? The only important real estate is the gridiron in Tampa on Sunday.

Seriously though, if Pittsburgh loses this game, they should be
embarrassed. Phoenix may be the worst team to ever make the super bowl,
but this wouldn’t be the first Cinderella story for Kurt Warner.

So far more than 200 people have signed up for the free ecourse on
The Great Housing Bubble. If you haven’t done so yet, I encourage you
to do so.

Now that I have signed up for this automated email service and have
some interested subscribers, the next logical step is to produce a
newsletter. I would like some suggestions from IHB readers as to what
you would like to see.

First, some limitations: this is a hobby and not my profession, so
anything too time consuming is probably not going to happen. Also,
since I give away all the site content for nothing, and since I don’t
want to start withholding, I don’t see having a great deal of special
or unique content in the newsletter. This also means I probably cannot
charge for it (Unless you think people will pay for what they could
obtain for free on the site).

The easiest thing for me to produce would be a recap of the 20+ blog
posts I do each month. I could put the post title, hyperlinked back to
the original post, and a one sentence description of the post’s
contents. It would look similar to the Analysis tab on the IHB (which we updated, BTW). With this brief rundown of the
monthly posts, any of the readers who are not daily addicts can scan
the headlines and see if any of the last month’s posts might be of
interest to them. I envision this newsletter as an aid to the less
frequent readers.

I could also add a fresh monthly recap of the major news items and
links to other great stories and blog posts I come across each month.
This would be unique to the newsletter, and it would not take too much
time.

This is where I run out of ideas. Any other suggestions for items
you might find interesting will be greatly appreciated. I can’t promise
I will provide everything asked for, but I will certainly consider
every suggestion.

{book}

For those of you looking for some entertaining reading this weekend, I suggest you check out this delightful rant from Shevy Akason. I love realtors who plead with politicians not to keep prices artificially inflated. Some realtors do get it.

We are also considering some changes to the blogroll. We want to
keep our emphasis on non-commercial housing sites with frequent
updates, although we will link to particularly good commercial sites.
Does anyone have any suggestions for more sites to add?

Here is a press release some may find interesting:

FOR IMMEDIATE RELEASE

Media Contact:
Carrie Bay
Phone: (214)
525-6788
E-mail: carrie.bay@dsnews.com

Wednesday, January 28, 2009

Five Star Institute Hosts West
Coast Conference for REO Agent and Broker Education

ORANGE COUNTY, CALIFORNIA – The Five Star
Institute, an education provider that offers professional guidance and a
specialization in working with defaulted real estate, will host its first West
Coast Educational Conference in Garden Grove, California, from March 18-21. The
event will be held at the Hyatt Regency Orange County, and provide professional
education for real estate agents and brokers in the area of real estate-owned
(REO), or bank-owned, properties. DS News, the only news source dedicated
entirely to the mortgage default servicing industry, is the media sponsor for
the event.

Markets and communities along the nation’s West
Coast have been some of the hardest hit by the subprime and housing crises, and
many analysts warn not to expect a housing recovery – or even stabilization
within the overall U.S. financial sector– until we see improvements in the West
Coast housing markets, in particular in California.

There is a growing need within these markets for
trained professionals to manage and sell billions of dollars worth of REO
properties that have resulted from foreclosures by lenders, servicers, and
government agencies. The Five Star Institute enables agents and brokers to make
the most of this opportunity by educating them on how to successfully list,
market, and sell these REOs.

The West Coast conference offers in-depth training
by instructors who are recognized leaders in their respective fields. Courses
cover such areas as building an REO business, short sales, broker price opinions
(BPOs), marketing REOs, property preservation, and real estate and the
government, as well as a RES.NET certification course to help attendees
effectively utilize the RES.NET workflow management system for liquidating real
estate assets.

Derived from the educational component of the Five
Star Default Servicing Conference and Expo, the Five Star Institute was founded
in 2005 as an independent service provider that exists to address an
industry-wide need for standardization and education within mortgage default
servicing.

To learn more about the Five Star Institute and
its West Coast Educational Conference, go to www.fivestarinstitute.com. For more
information about DS News,
including
its coverage of steps the mortgage default servicing industry
is taking to advance a housing recovery, visit www.dsnews.com.


Carrie Bay | DS News

2603 Oak Lawn Avenue
Suite 500,
LB 11
Dallas, TX 75219
T: 214.525.6788 | F:
214.525.6794

www.dsnews.com

Curb Demand or Limit Supply?

How can we prevent future housing bubbles? Do we try to curb demand through draconian taxes? or do we try to limit supply by regulating lenders?

Today’s featured property is a 2003 rollback that recently sold at auction for 40% off its peak purchase price.

Asking Price: $330,000

Address: 125 Greenfield #118, Irvine, CA 92614

{book}

The Saints Are Coming — Green Day & U2

A drowning sorrow floods the deepest grief,
how long now?
Until the weather change condemns belief,
how long now?
When the night watchman lets in the thief
Whats wrong now?

Ever since the post Tax Policy and Housing, I have been carrying on an email conversation with Bill McKim, author of a pamphlet titled The Financial Crisis of 2008.
We have been discussing methods of preventing future housing bubbles.
With as painful as the deflation of this bubble is, we both hope that
as a society we recognize the importance of stopping this from
happening again, and through our politicians, we can do something to
prevent its recurrence.

My proposal for Preventing the Next Housing Bubble (PDF) focuses on limiting the supply of lender money that enables people to
borrow excessive amounts which inflates housing bubbles. Mr. McKim’s
proposal is to curb the demand for borrowing and for speculative real
estate in general by taxing the profits out of existence. If people
can’t make money beyond adjustments for inflation, they will not
speculate in real estate. If implemented, his proposal would be very
effective; however, I don’t think it could be successfully implemented.
Real estate is religion in California. If you try to tax away
everyone’s profits, it is as if you were telling them they could not
worship their God. It is a false God, and it is one they should not
worship, but telling them they cannot would be a very difficult sell.
Perhaps I overestimate the resistance to the idea.

I want to share with you a snippet of our conversation as Mr. McKim
does a great job of laying out the case for taxing the gains on housing
due to irrational exuberance at 100%:

Me: “Personally, I think the controls on irrational exuberance going
forward is going to come from the lender side. The banking industry is
going bankrupt due to their stupidity. They are going to lose more than
a trillion dollars by the time it is all added up. Congress is going to
step in to regulate them to death in order to prevent it from happening
again, particularly since they ended up picking up the tab. Of course,
regulations need enforcement, and over time there is always pressure to
relax or repeal regulations.

For as much as I would like to see demand-side regulation or
borrowers like taxation would create, I think it far more likely that
Congress will focus on supply. It is easier. It will be much, much
easier if we end up nationalizing our banks (which seems likely at some
point).”

{book}

The following is Mr. McKim’s response. The [italics] in brackets are my comments.

Mr. McKim: “You
say “The banking industry is going
bankrupt due to their stupidity. They are going to lose more than a trillion
dollars by the time it is all added up”
. I posit that they are not currently
short a trillion dollars because of their stupidity, but because they were the
ultimate losers in the 2003 to 2006 housing bubble.

During the
bubble all segments of society, government, and media were entranced by the
marvelous opportunities to make money in the residential housing market. Buyers were eager to buy houses that had
increased in value 20% in the past year because they assumed that the houses
would increase 20% during the next year. Sellers were eager to sell because they had made far more on their house
during the Exuberance than they had made in the prior five or ten years. Lenders were eager to lend far more than
was currently owed on the house because its price (and, they thought, the
security value) was going up like crazy.

The media, and
therefore the government, were eager to extend this tremendous opportunity for
riches to all segments of society instead of its only being available to those
who could repay the money borrowed to buy the house out of the buyers’ income.
(After all, everyone knew that you could refinance after the buyer had been in
the house a few months or a year and take out enough money to make mortgage
payments.)

Then, as all
bubbles must, this one burst. The
winners were all those sellers who had sold during the bubble. The losers were those who had bought
late, and their mortgage lenders.

Who was
stupid? Who wasn’t stupid? Who was most stupid? What would have happened to a loan
officer of a lender if he had refused to make a loan to someone merely on the
basis that the borrower didn’t make enough money to be able to pay back the
loan? The answer to that one is
that the loan officer would have been fired from his job.

What would have
happened if some diligent regulator had told a lender that he couldn’t make a
loan to a buyer who didn’t make enough money to pay the loan back? The regulator might have been fired, or
the media would have castigated the lender for discrimination and having a black
soul, or a Congressman would have pushed through legislation making it possible
for the lender to make the loan.

That was the
then that was then. What is so
evident to us now was not evident to anyone then. [It was evident to some, and they were not listened to]

Therefore, the
late buyers that were losers have had to get second or third jobs to make the
payments, or give up the house. The
losers that were lenders are missing, as you said, a trillion dollars.

As long as the
lenders don’t have that trillion dollars they can’t lend that trillion dollars
to businesses to make payroll, order goods, or finance expansion even if their
business is booming. Without credit
there is no cash flow in today’s world.

As long as
lenders don’t have that trillion dollars they can’t lend consumers money to buy
cars, TVs, or cruises.

Obviously, an
economy that was productive and prosperous before the bill came due on the
housing bubble is not now inefficient, unproductive, and without customers
wanting to buy this short time later.

The “economy” is
not in the tank. Only the financial
system is broken.

So, if the
banking industry is given back the trillion dollars it loaned on real estate
that was worth a trillion dollars less than everyone thought, then the wheels
will start to turn and everything will be fine in the economy, with only our
grandchildren suffering, right?

Apparently not,
quite. That would seem to be what
Henry Paulsen thought when he asked for 700
billion dollars. The problem was
that no one had sat down and figured all this out, and no one could explain
where the 700 billion was going, and why it was going there. Without any understanding, pain in the
auto industry (which was caused by the lack of credit to buy cars) looked just
as serious and important as pain in the lending industry.

In order to fix
the current crisis two things are needed. The trillion dollars, and a comprehensive understanding of what went
wrong, how we are going to fix it, and that no one was more to blame than anyone
else. That what happened, happened
to all of us because we didn’t know as much in the past as we do now.

Right now
bankers, given money, are loathe to lend it, because they clearly realize that
they don’t always get it repaid. If
they, the government, the media, the economists, and, to as great an extent as
possible, the public know that the money that was lost by the lenders was
because of a specific and isolated event, then they will be able to just go back
to lending the way they always have. [I
don’t believe banks would lend right now even if they knew what they
did wrong because asset prices are too high relative to cashflow.
Prices must fall.]

Now (as though
this wasn’t too long already), you say that you think that Congress is going to
try to solve the problem by regulation or nationalization, because it is
easier. Left to their own devices,
I’ve no doubt that you are right. Certainly Congress will think that that is easier because that is what
Congress does. To them, it will be
easier to set up a severe new regulation scheme, and hire people to implement it
than to actually “change”.

Change would be
to think about the root cause of the problem and come to the conclusion that you
and I share: that irrational exuberance caused the problem, and that taxing it
out of existence would stop it in its tracks. Having done that much thinking, they
would then have to tackle the only really difficult part of the solution, which
is determination of the true value of property when it is sold. [I think this is actually the easy part. Index gains to the CPI plus 1%]

Once that very
difficult solving of the problem has been accomplished by Congress though the
implementation and enforcement of it will be hundreds of times easier and less
expensive than a new regulatory scheme or nationalization of the banks.

The saints are coming, the saints are coming.
I say no matter how I try, I realise there’s no reply.

At some point, Congress will tackle the issue of what to do about
the housing bubble. Hopefully, it will be a carefully considered debate
rather than part of some emergency measure. One fundamental question
Congress must consider is whether to try to curb demand or limit
supply. I favor limiting supply because I believe they could accomplish
it. It will be a difficult argument for an insolvent banking industry
to oppose any regulations from the government considering the
government is the only entity keeping them afloat. I believe Mr.
McKim’s proposal is interesting because it would be very effective. If
Congress wanted to tackle this problem through tax policy, specifically
by taxing capital gains on property sales, it could go that route as
well. Whatever approach they take, I hope they come up with a workable
solution to the problem. Since this is the US Congress we are talking
about, I have my doubts they will get it right.

{book}

Today’s featured property is a 2003 rollback that recently sold at auction for 40% off its peak purchase price.

Asking Price: $330,000IrvineRenter

Income Requirement: $82,500

Downpayment Needed: $66,000

Monthly Equity Burn: $2,750

Purchase Price: $465,000

Purchase Date: 6/19/2006

Address: 125 Greenfield #118, Irvine, CA 92614

Beds: 2
Baths: 2
Sq. Ft.: 1,159
$/Sq. Ft.: $285
Lot Size:
Property Type: Condominium
Style: Contemporary
Year Built: 1982
Stories: 1
Floor: 2
Area: Woodbridge
County: Orange
MLS#: S561392
Source: SoCalMLS
Status: Active
On Redfin: 2 days

Second level 2 bedrooms 2 baths offers open floorplan. Spacious living
room, open to dining area. Large master suite separate from 2nd
bedroom.

Do you get the sense that the bank can’t think of any reason why someone would want to buy this place?

This property was purchased on 6/19/2006, right at the peak. The owner paid $465,000 (LOL) by using a $372,000 first mortgage, a $46,035 second mortgage, and a $46,965 downpayment (ouch). Downey Savings had the first mortgage, and Washington Mutual has the second. Two brilliant lenders with solid balance sheets… The property was purchased by Downey at auction on 9/2/2008 for $277,500. That is 40% off its peak purchase price. The amazing thing is that they were willing to take a $100,000 loss on their first mortgage position on the courthouse steps, and no flipper stepped forward to take it.

If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $154,800.

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.

🙂

{book}

There is a house in New Orleans, they call the Rising Sun
It’s been the ruin of many a poor boy, and God, I know I’m one.

I cried to my daddy on the telephone,
how long now?
Until the clouds unroll and you come home,
the line went.
But the shadows still remain since your descent,
your descent.

I cried to my daddy on the telephone,
how long now?
Until the clouds unroll and you come home,
the line went.
But the shadows still remain since your descent,
your descent.

The saints are coming, the saints are coming.
I say no matter how I try, I realise there’s no reply.
The saints are coming, the saints are coming.
I say no matter how I try, I realise there’s no reply.

A drowning sorrow floods the deepest grief,
how long now?
Until the weather change condemns belief,
how long now?
When the night watchman lets in the thief
Whats wrong now?

The saints are coming, the saints are coming
I say no matter how I try, I realise there’s no reply.
The saints are coming, the saints are coming
I say no matter how I try, I realise there’s no reply.

The Saints Are Coming — Green Day & U2

How Did You Spend Your HELOC?

Are you curious how people spent their HELOCs? I am. Let’s see if anyone will share their experiences.

Since this is turning into HELOC abuse week here at the IHB, I
thought I would share yet another one (They are not difficult to find). It is a high-end property in Turtle Ridge with a WTF asking price.

Asking Price: $1,250,000

Address: 53 Sweet Bay, Irvine, CA 92603

Sweet Surrender — Sarah McLachlan

It doesn’t mean much
it doesn’t mean anything at all
the life I’ve left behind me
is a cold room
I’ve crossed the last line
from where I can’t return
where every step I took in faith
betrayed me
and led me from my home

The lure of free money led many people astray. They all had faith in
the Gods of market pricing and credit availability. There was an
absolute certainty among most people that real estate could only go up,
and opportunities to serial refinance large debts would always be
there. Each refinancing added to their troubles until they reached a
point of no return where they could not possibly pay back the money
they borrowed. Every step they took down this road was met with
betrayal, and it led them away from their homes. Now these people sit
in their rental pondering the life they left behind wondering if they
will ever see that free-money lifestyle again. They won’t.

One of the great things about an anonymous blog is that people can
tell the truth if they want without fear of embarrassment. I would like
to take advantage of that today and ask people to admit to some of the
items they spent HELOC money on.

Earlier this week in the comments, I mentioned that I have been
contemplating writing another book. I am tentatively titling it House
Spenders: Mortgage Fraud, Predatory Borrowing, Refinance Abuse and
other Cautionary Tales from The Great Housing Bubble. I think the title
and tag line describes what I want to accomplish. I will recycle some
of the material from The Great Housing Bubble, but I plan to add a
discussion on the morality of walking away from debt, an analysis of
personal Ponzi Scheme financing, and up to 100 HELOC abuse posts from
the IHB (I feel I need a lot of them to people do not think it is a
rare and isolated occurrence).

I have been discussing my idea for my next book with my wife, and
she suggested that I get some interviews or comments from people who
really did spend money they got from their house. We speculate a lot on
the blog about what people spent it on, but we have few first-hand
accounts. With that preamble, I ask you,

On what did you spend your HELOC money?

You take me in
no questions asked
you strip away the ugliness
that surrounds me
(who are you?)

{book}

Since this is turning into HELOC abuse week here at the IHB, I
thought I would share yet another one (They are not difficult to find).

Asking Price: $1,250,000IrvineRenter

Income Requirement: $312,500

Downpayment Needed: $250,000

Monthly Equity Burn: $10,416

Purchase Price: $1,025,000

Purchase Date: 8/27/2004

Address: 53 Sweet Bay, Irvine, CA 92603

Beds: 3
Baths: 2.5
Sq. Ft.: 2,500
$/Sq. Ft.: $500
Lot Size: 6,128

Sq. Ft.

Property Type: Detached, Single Family Residence
Year Built: 2004
Stories: 2
View: City Lights, Hills, Trees/Woods
Area: Turtle Ridge
County: Orange
MLS#: S09010246
Source: MRMLS
Status: Active
On Redfin: 2 days

Gourmet Kitchen Award

Romantic, Tuscan villa with panoramic views. Over $500,000 in upgrades.
Best location on quiet cul-de-sac. Gourmet kitchen w. granite counters
and Viking appliances. Dramatic Cathedral beamed ceilings in entry and
formal living room. Master is large with gorgeous marble master bath.
Stunning back yard with more spectacular views, stone bar with BBQ,
refridge, side burner and sink. Great for outdoor entertaining.
Exclusive guard gated Turtle Ridge.

Note the feeble attempt to justify this asking price by pointing out the amount spent on upgrades. Upgrades from what? Did this woman spend over a million to buy the property and then spend $500,000 improving it? You could tear the house down and rebuild it for that.

  • This property was purchased on 8/27/2004 for $1,025,000. (Does this look like a million dollar property to you?) The owner used a $575,648 first mortgage, a $346,000 second mortgage, and a $103,352 downpayment.
  • On 12/7/2004, barely two months later, the property was refinanced with a $942,000 first mortgage pulling out about $20,000 of the downpayment money.
  • On 1/31/2005, the owner opened a HELOC for $228,000. She did not take out much of it.
  • On 8/24/2005, she refinanced with a $1,000,000 first mortgage.
  • On 10/3/2006 she opened a HELOC for $440,000. She must have taken out a significant amount because this property is listed as a short sale.
  • Total property debt is $1,440,000
  • Total mortgage equity withdrawal is $518,352 including her $103,352 downpayment.

So now we have another Turtle Ridge dreamer thinking her house has appreciated by 10% since 2004. I guess Turtle Ridge is different because the rest of Irvine is at or below 2004 pricing. Wells Fargo is hoping that is the case. This “conservative” lender is the brilliant party behind the $440,000 HELOC on this property. If it sells for its asking price (not a chance), and if a 6% commission is paid, the total loss to Wells Fargo will be $265,000.

As a reminder, our question of the day is:

On what did you spend your HELOC money?

{book}

It doesn’t mean much
it doesn’t mean anything at all
the life I’ve left behind me
is a cold room
I’ve crossed the last line
from where I can’t return
where every step I took in faith
betrayed me
and led me from my home

And sweet surrender
is all that I have to give

You take me in
no questions asked
you strip away the ugliness
that surrounds me
(who are you?)
are you an angel?
am I already that gone?
I only hope
that I won’t disappoint you
when I’m down here
on my knees
(who are you?)
And sweet surrender
is all that I have to give

Sweet Surrender — Sarah McLachlan

Spenders and Pretenders

I have written many times on this blog about the upcoming foreclosure problem due to ARM resets.
I have posted the available statistics and presented all the
data-driven arguments about why this is going to be a problem. However,
today I am going to ask you to think about this issue more intuitively.
Based on what you know about human nature, I think you can see how big
this problem is.

Today’s featured property is a median-sized 3/3 condo where the onwer managed to extract almost $300,000 in HELOC money.

38 Daisy kitchen

Asking Price: $499,900

Address: 38 Daisy, Irvine, CA 92618

{book}

The Pretender — Jackson Browne

Im going to be a happy idiot
And struggle for the legal tender
Where the ads take aim and lay their claim
To the heart and the soul of the spender

I have written many times on this blog about the upcoming foreclosure problem due to ARM resets.
I have posted the available statistics and presented all the
data-driven arguments about why this is going to be a problem. However,
today I am going to ask you to think about this issue more intuitively.
Based on what you know about human nature, I think you can see how big
this problem is.

In the short run, prices in any market are purely driven by supply
and demand. Right now, the available inventory in Irvine is low, so
despite the decline in demand caused by tighter lending standards and
job losses, prices have not dropped as much as they should. Supply and
demand are still in balance. If the inventory were to increase (which
it will) this does not necessarily cause prices to drop. If the sellers
are unmotivated, large inventories will cap any appreciation, but it
does not force prices lower. It is when sellers become very motivated
that prices really start to drop.

Lenders and builders are motivated sellers. They must sell their inventory. The builders have pulled back construction to record low levels,
so this leaves the lenders as the main source of must-sell inventory.
Therefore, the real question for future pricing is how much
lender-owned inventory will we have?

{book}

Lender inventory is created by the foreclosure process. When a house
is auctioned at a foreclosure, the lender will bid the price up to a
pre-determined level according to its loss mitigation procedures. They
hope not to buy the property at auction. Unfortunately, since prices
are so inflated, and since the first mortgages are so large, lenders
end up buying the bulk of foreclosures at auction.

The sources of these foreclosures are borrowers who default on their
mortgages. We have discussed many of the motivating factors behind
borrower defaults, but these mostly boil down to the fact that these
borrowers have more debt than they can either service or pay off. Those
borrowers who are likely to default can be broken down into two
categories: 1. Those who bought at the peak and paid too much. 2. Those
who borrowed at the peak and owe too much. It is this latter category
that gets so much attention at the IHB: HELOC abusers.

I have posted profiles of HELOC abuse day after day here on the IHB.
It has been eye-opening to many that this practice was so widespread.
At first many people were incredulous that anyone would behave that
way. Then many people wrote it off as an extreme example of an isolated
behavior. Now I think most realize that many, many people were doing
this. Based on what I see in the property records, I believe this was
the rule rather than the exception.

This is where I ask you to think about human nature to get a feel
for how large the problem is. Yesterday I wrote about the natural
feelings of jealousy people have when they see others spending so much
money. There is a widespread desire to “keep up with the Jones’s”.
During the bubble when everyone was buying houses and feeling rich,
there was enormous peer pressure to enjoy the good life. This was fed
into by the marketing machine of lenders touting the great lifestyle
one could obtain through HELOCs and refinancing. Couple all these
pressures with the widespread belief that this money was free because
house prices would go up forever, and there is little to stop people
from taking this money.

Think about your own experience and emotions. It takes an iron will and self-discipline to stop from taking this money, and that is only if you believe you shouldn’t.
When you really think about what occurred, it is more surprising that
everyone did not do this. It is not logical to think that only a few
people got caught up in this. It is far more likely that only a few
people did not get caught up in it. Based on what I see in my
daily search for properties to profile, if it is for sale now, there is
an 80% chance that the seller either bought at the peak or added to
their mortgage. I am not exaggerating.

So when you think about how big the foreclosure problem is going to be (it is currently understated), think about basic human nature. Do you think many people borrowed themselves into oblivion? I do.

Im going to rent myself a house
In the shade of the freeway
Im going to pack my lunch in the morning
And go to work each day
And when the evening rolls around
Ill go on home and lay my body down
And when the morning light comes streaming in
Ill get up and do it again
Amen
Say it again
Amen

38 Daisy kitchen

Asking Price: $499,900IrvineRenter

Income Requirement: $124,975

Downpayment Needed: $99,980

Monthly Equity Burn: $4,165

Purchase Price: $313,000

Purchase Date: 12/13/2000

Address: 38 Daisy, Irvine, CA 92618

Beds: 3
Baths: 3
Sq. Ft.: 1,712
$/Sq. Ft.: $292
Lot Size:
Property Type: Condominium
Style: Contemporary
Year Built: 2000
Stories: 2
Floor: 1
Area: Oak Creek
County: Orange
MLS#: S560978
Source: SoCalMLS
Status: Active
On Redfin: 4 days

Super spacious 3 bedrom 2.5 bath unit boasts over 1,700 square feet.
Direct access two car garage with brand new garage door installed.
Inside laundry conveniently located on 2nd Floor. Beautiful marble
flooring throughout first floor. Nicely tiled fireplace. Kitchen is
nice and bright with ceramic tile. Close to great shopping and
Excellent School District!

IMO, this is probably within $50,000 to $75,000 of its bottom value. It would probably rent for $2,500.

As you might have guessed, today’s featured property is a case of HELOC abuse.

  • The property was purchased on 12/13/200 for $313,000. The owners used a $234,700 first mortage, a $62,550 second mortgage, and a $15,750 downpayment.
  • On 12/21/2001, they refinanced with a $346,500 first mortgage. I imagine that extra $50,000 made for a Merry Christmas…
  • On 9/11/2202, they opened a stand-alone second for $45,000.
  • On 11/15/2002, they refinanced with a $375,000 first mortgage.
  • On 10/7/2003, they opened a stand-alone second for $20,000 and a HELOC for $50,000.
  • On 1/10/2005 they opened a HELOC for $25,000.
  • On 2/11/2005, they refinanced with a $590,000 first mortgage.
  • Total property debt was $590,000.
  • Total mortgage equity withdrawal was $292,750 including their tiny downpayment.

These people put $15,750 into a property for about 1 year, and they took out $292,750 over the next 5 years. Pretty good return on investment, wouldn’t you say? It is not hard to see why houses in California are so desirable.

This property was taken back by the lender on 9/24/2008 for $508,500. Three months later, it is now on the market. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $120,094. Not to worry though, the borrowers still made almost $300,000 on the deal…

{book}

Im going to rent myself a house
In the shade of the freeway
Im going to pack my lunch in the morning
And go to work each day
And when the evening rolls around
Ill go on home and lay my body down
And when the morning light comes streaming in
Ill get up and do it again

Amen
Say it again
Amen

Caught between the longing for love
And the struggle for the legal tender
Where the sirens sing and the church bells ring
And the junk man pounds his fender
Where the veterans dream of the fight
Fast asleep at the traffic light
And the children solemnly wait
For the ice cream vendor
Out into the cool of the evening
Strolls the pretender
He knows that all his hopes and dreams
Begin and end there

Im going to be a happy idiot
And struggle for the legal tender
Where the ads take aim and lay their claim
To the heart and the soul of the spender
And believe in whatever may lie
In those things that money can buy
Thought true love could have been a contender
Are you there?
Say a prayer for the pretender
Who started out so young and strong
Only to surrender

The Pretender — Jackson Browne

More Free Money

HELOC abusers really had a good time during the bubble. The economic stimulus they provide becomes apparent now that it is gone.

Today’s featured property is a small condo in Deerfield that was drained of all its equity by the owner. The ATM is now closed.

329 Deerfield Ave kitchen 1 329 Deerfield Ave kitchen 2

Asking Price: $349,900

Address: 329 Deerfield, Ave #15, Irvine, CA 92606

Free Money — Patti Smith

Find a ticket, win a lottery,
Scoop the pearls up from the sea
Cash them in and buy you all the things you need.

I had a moment of jealousy this weekend, albeit a bit delayed. Let me explain.

On Saturday, my family and I went to the entertainment center on
Crown Valley Parkway and the 5. We were going to have a family lunch
there, but when we went up to El Torrito Grill,
it was a vacant shell. The restaurant had closed its doors. I looked
across the promenade, and the Versace Italian Restaurant was reduced to
a ghostly imprint on the wall where its signage used to be. We walked
past a number of vacant stores on our way out. The signs of the
recession were unmistakable.

Gross Domestic Product with and without the effect of Mortgage Equity Withdrawal

GDP with and without MEW

On Sunday, we all went to South Coast Plaza. It was a ghost town. I
had to remind myself that it was a weekend. As I reflected on what I
had seen at these two commercial districts, I thought back to how
crowded these same venues were during the housing bubble. I also
thought about all the HELOC abuse posts I have done on the IHB. The
connection between the borrowed money these people were spending and
the reduced economic activity seemed more tangible. I was witnessing an
economy without mortgage equity withdrawal, and it was not very
vibrant. In fact it was dead.

As I contemplated the strength of the connection between borrowed
money and our local economic prosperity, I began to think about all the
HELOC abusers who got to spend this free money. They are not paying any
of this money back. They are all walking from their responsibilities or
praying they can pass them off to someone else. It really was a party
on free money: a party I missed because I did not buy a home during the
frenzy.

Something crept in to my awareness. Something dark that I held deep
inside. There was a little voice in me who was crying out, “I WANT MY
FREE MONEY!” At that moment I felt jealousy toward all the HELOC
abusing spenders I had seen during the bubble. It was something that I
did not feel (or did not acknowledge) when the bubble was inflating.
Perhaps it was my ignorance to where the money was coming from, perhaps
it was my own spiritual training to feel joy for another’s good
fortune, or perhaps I simply suppressed my feelings. No matter the
reason for my lack of jealousy at the time, in that one instant on
Sunday, I realized that some part of me wanted that free money too.

Mortgage Equity Withdrawal 1991-2007

Mortgage Equity Withdrawal 1991-2006

The logical adult in me recognizes that this money was not free.
These people are paying with lowered credit scores, the emotional
fallout of losing their homes, and most difficult of all, the
adjustment to a lifestyle not fueled by free-money spending. I
certainly do not envy any of those circumstances, and anyone who took
out this free money and spent it has to deal with these realities.
However, the emotional child in me wants what he wants when he wants
it; he wants free money. I know because I heard this voice clearly on
Sunday.

I certainly have no regrets about not playing the free money game. I
would not trade places with any of those people who were spending
during the bubble who were conspicuously absent from the stores this
weekend. The hangover from their house party is quite debilitating.

{book}

One interesting phenomenon concerning people’s perception of real
estate is this ongoing connection to free money. In my opinion, there
is a widespread belief in our local culture that house prices are
temporarily depressed due to the economy, and as soon as the economy
recovers so will house prices. This is a faulty perception.

The reality is that house prices were temporarily inflated, and the
falling house prices are a return to value. True value was not the
pricing seen at the top of the bubble. We are not experiencing a
downward departure from value. When the economy recovers, it will serve
to stabilize prices at fundamental valuations, but the likelihood of a
quick rally back to bubble levels is pretty low — unless of course
lenders and investors want to give away a trillion dollars again.

Kool Aid Man

That is exactly what people either want to have happen or believe
will happen: lenders and investors are going to give away more free
money.

Psychology does not change overnight. The crashing house prices have
changed the psychology somewhat, but there are still enough kool-aid
intoxicated people out there to absorb the current inventory and keep
prices elevated far above fundamentals. There is only one real reason
anyone is buying right now: they believe prices have bottomed, and they
do not want to miss their chance at ownership — they want to make sure
they get access to that free money coming in the future.

There are always some people who buy because they want to provide
shelter for their family, but these are not the people dominating the
market. The declining prices have kept away the buyers looking for
quick appreciation, but it has not kept away the kool aid intoxicated
with a somewhat longer timeframe for ownership.

The psychology of buyers will change slowly as prices continue to
fall, but the lure of free money is very strong. Until those lingering
memories fade away, people will continue to buy to obtain it. Will the
lenders be willing to give out this free money again? Will the
government allow them to? I believe the answer on both counts is “no”.
Our banking system is insolvent because of this practice, so they will
be hesitant to do the stupid things that lost them so much money, and
now that the US taxpayer is on the hook for much of the losses, it
seems likely that politicians will regulate many of these practices out
of existence.

I have no doubt that California buyers would create a new bubble
full of free money handouts if given the chance. Let’s hope the lenders
and our government prevents it — at least until I buy a house, and I
can get some of that free money…

Today’s featured property was this owner’s personal piggy bank. She
would raid it periodically, and now that the piggy bank is empty, she
is unloading the property.

329 Deerfield Ave kitchen 1 329 Deerfield Ave kitchen 2

Asking Price: $349,900IrvineRenter

Income Requirement: $87,475

Downpayment Needed: $69,980

Monthly Equity Burn: $2,915

Purchase Price: $161,000

Purchase Date: 11/20/1989

Address: 329 Deerfield, Ave #15, Irvine, CA 92606

Beds: 2
Baths: 1
Sq. Ft.: 952
$/Sq. Ft.: $368
Lot Size:
Property Type: Condominium
Style: Cape Cod
Year Built: 1984
Stories: 1
Floor: 2
Area: Walnut
County: Orange
MLS#: P671994
Source: SoCalMLS
Status: Active
On Redfin: 9 days

You might find a REO or Short Sale for less, but you will not find a
home as meticulously maintained and with as many upgrades as this home
-at this price!! Some of the upgrades done within the last two and half
years are: Paint and carpet, energy efficient plantation shutters,
porcelain tile in the kitchen and bathroom, dishwasher and faucet in
kitchen, sinks and faucets in the bathroom, ac/heat unit and 50 gal.
water heater. You’ll also be happy to have a garden window in the
kitchen, washer/dryer hookup in closet, ceiling fan in dining area,
smooth ceilings, professionally installed alarm and fire system and a
garage. Off the master bedroom you will find a separate sink and vanity
in addition to the one full bath. All this plus a ‘pet friendly’
community. Who could ask for anything more?

At least they didn’t call this a gourmet kitchen. It looks more like an airplane galley.

Notice the $900 greed indicator in the asking price.

Redfin calls this a short sale, but based on what I see in the property records it isn’t. After years of HELOC abuse, it is close, and it may yet be a short sale, but as of today, it doesn’t appear to be one.

  • This property was purchased in the last bubble on 11/20/1989 for $161,000. The owner’s financing details on the original purchase are not available.
  • On 11/9/1999, there was a first mortgage for $158,150. This was probably a refinance once the property was no longer underwater from the first bubble.
  • On 4/8/2003, the first mortgage was refinanced for $216,000.
  • On 8/27/2004, the first mortgage was refinanced for $235,000.
  • On 8/2/2006, the first mortgage was refinanced for $280,000.
  • On 12/27/2006, the first mortgage was refinanced for $314,500.
  • On 1/22/2008, the first mortgage was refinanced for $317,500.

We can all speculate as to why this person needed the money or what she spent it on. Perhaps she developed a chronic illness as prices began to rise that required periodic visits to the housing ATM. Who knows? The fact is she took out the money because she could. It was made available to her, and she did not see any downside to spending it. Worst case scenario, she would just sell the property — which is what she is doing now. Hopefully, for her, someone will come along and pay her asking price and pay off her debts. It is too bad the ATM has shut off for her. I imagine her buyer thinks the ATM will start working for them soon enough.

{book}

Every night before I go to sleep
Find a ticket, win a lottery,
Scoop the pearls up from the sea
Cash them in and buy you all the things you need.

Every night before I rest my head
See those dollar bills go swirling ’round my bed.
I know they’re stolen, but I don’t feel bad.
I take that money, buy you things you never had.

Oh, baby, it would mean so much to me,
Oh, baby, to buy you all the things you need for free.
I’ll buy you a jet plane, baby,
Get you on a higher plane to a jet stream
And take you through the stratosphere
And check out the planets there and then take you down
Deep where it’s hot, hot in Arabia, babia, then cool, cold fields of snow
And we’ll roll, dream, roll, dream, roll, roll, dream, dream.
When we dream it, when we dream it, when we dream it,
We’ll dream it, dream it for free, free money,
Free money, free money, free money, free money, free money, free money.

Every night before I go to sleep
Find a ticket, win a lottery.
Every night before I rest my head
See those dollar bills go swirling ’round my bed.

Oh, baby, it would mean so much to me,
Baby, I know our troubles will be gone.
Oh, I know our troubles will be gone, goin’ gone
If we dream, dream, dream for free.
And when we dream it, when we dream it, when we dream it,
Let’s dream it, we’ll dream it for free, free money,
Free money, free money, free money,
Free money, free money, free money, free.


Free Money
— Patti Smith