HELOC Abuse Newport Coast Style

Our popular tour to surrounding communities in search of HELOC abuse has turned up a gem in Newport Coast. I admit, I cherry picked this one, but I suspected I could top the $3,367,500 HELOC Abuse from Hollywood and even the $5,000,000 HELOC abuse from Laguna Beach last week, and I was right.

Newport Coast sets the new HELOC Abuse record: $7,000,000. Congratulations Newport Coast!

28 Shoreridge inside

Asking Price: $6,500,000

Address: 28 Shoreridge, Newport Coast, CA 92657

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I’m Too Sexy — Right Said Fred I’m too sexy

I’m too sexy for my shirt too sexy for my shirt
So sexy it hurts
And I’m too sexy for Milan too sexy for Milan
New York and Japan

Newport Coast is where all the beautiful people live. Newport Coast residents have big fancy homes, and they are so rich and sexy that the rest of us can only watch and be envious–at least that’s what many there believe. A number of very wealthy people do live there. As I looked through the property records, there were many properties owned with no debt. As a percentage of listings, it is higher than what I have seen in other places. Of course, with our highly leveraged society, that doesn’t take much. Unfortunately, like everywhere else in California, it has been invaded by the pretenders too.

Today’s featured property started with no debt, but from 2001 through
2006 the debt went from zero to $7,000,000 in that telltale sign of slow
accumulation through persistent HELOC abuse.

It must be nice to make a million dollars a year off your house. You get to live in a beautiful mansion, you don’t have to do anything, and the house gives you a million dollars a year to spend. Who wouldn’t want that? (Remember The California Social Contract?)

Ponder that lifestyle for a moment…

If you could just get in to a house like that, you get a beautiful home and practically unlimited spending money…

I could see where that would be a very desirable set of circumstances. Do you think they can reinflate the housing bubble after I get one of these houses?

With houses being so desirable, it is no wonder prices went up a great deal, and despite the falling prices all around, the kool aid is still freely flowing, particularly in these high end neighborhoods. They are simply refusing to let the party end; too bad the lenders are not longer helping them out.

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Back in the day, the bulls used to claim “it is different this time.” In some ways, it is. What really makes this recession different is the debt levels of Americans. This recession was caused by debt and the collapse of debt structures. This recession will continue until this excess debt is flushed from the system. There are no short cuts.

In past recessions people would borrow from credit cards or other sources and maintaining their lifestyles until the economy picked up and they could either pay off some debt or be issued more credit. That is not working this time because we already have too much debt. The credit card companies already see this coming, and many of them are cutting back on credit lines because they know unemployed borrowers will max out their credit lines before going under. Lenders know debt is the problem, and more debt is not going to bridge the divide. According to our own government, even the lenders need to raise money, and they cannot borrow to do it.

All the pretenders who have been living off their homes are awaiting the re-inflation of the housing bubble. Rising home prices and the resultant HELOC income is the only way their lifestyles can be maintained. This is not going to happen. We hit the ultimate limit of our ability to borrow as a society. We are going to be forced to live within our means, after an enormous amount of painful debt restructuring.

When I look around these neighborhoods of hopelessly overextended HELOC dependent homeowners, I keep coming to the same conclusion; there must be a massive purging of personal debt. We are already seeing this in Riverside County. Entire neighborhoods of homes are turning over, and household debts are being cut in half. It is a painful process characterized by waves of foreclosures and personal bankruptcies, but it is a necessary one. The people in Orange County, and in particular in the beach communities, are in complete denial that this same purging must happen in their neighborhoods. It must, and it will.

Think about it. These people have more debt than they can afford. This problem requires someone who can afford these debt levels to buy them out and pay off their debts. That is the Ponzi Scheme. But what happens when there are not enough people making the incomes necessary to take out the previous debt? Someone is going to be left with debts they cannot afford and nobody to bail them out. The music stops and they don’t have a chair. Right now in Newport Coast, there are hundreds of homeowners dancing and very few chairs.

28 Shoreridge inside

Asking Price: $6,500,000

Income Requirement: $1,625,000

Downpayment Needed: $1,300,000

Monthly Equity Burn: $54,166

Purchase Price: $1,341,000

Purchase Date: 4/18/2001

Address: 28 Shoreridge, Newport Coast, CA 92657

Beds: 5
Baths: 5
Sq. Ft.: 7,300
$/Sq. Ft.: $890
Lot Size: 0.39

Acres

Property Type: Single Family Residence
Style: Tuscan
Stories: 2
View: City Lights, Hills, Ocean, Panoramic, Water
Year Built: 2001
Community: Newport Coast
County: Orange
MLS#: P668947
Source: SoCalMLS
Status: Active
On Redfin: 139 days

Property shows really well with beautiful views of the CC hills and the ocean & City Lights.

Judging by the description, even the agent doesn’t give a crap. What chance do you see of this selling?

Unfortunately, a nicer house next door on Shoreridge went into escrow based on a $4.5 million asking price, and 50 Shoreridge (which may have a peek ocean view) sold in January for $4.9 million. A couple of chairs were filled, and this owner is still dancing…

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So how did these people do it?

  • The property was purchased on 4/18/2001 for $1,341,000. It appears the buyers paid cash. I guess having that kind of cash is a barrier to getting started…
  • On 3/5/2002 they took out a first mortgage for $1,000,001 and opened a HELOC for $1,050,000 which they did not use.
  • On 7/25/2002 they refinanced with a $1,285,000 first mortgage.
  • On 4/21/2003 they refinanced with a $1,500,000 first mortgage.
  • On 11/19/2003 they refinanced with a $2,500,000 first mortgage and opened a $750,000 HELOC.
  • On 3/11/2005 they refinanced with a $4,750,000 first mortgage.
  • On 5/5/2005 they opened a HELOC for $975,000.
  • On 3/21/2006 they refinanced with a $6,000,000 first mortgage and opened a $1,000,000 HELOC.
  • Total property debt is $7,000,000.
  • Total mortgage equity withdrawal is $7,000,000 including their $1,341,000 downpayment which is now gone.

It was less than 5 years between the first mortgage and the final refinance. That is $1,400,000 a year from the house. If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $890,000.

Last week, a couple of the astute observers argued that this shouldn’t be our concern; it is a problem between a borrower and a lender. Bullshit. The moment we all became liable for these losses through our tax dollars, it becomes very much our business. I think the MSM is missing a big story by not telling the tale of these people. I imagine Joe SixPack would love to see where his tax dollars are going.

I have documented larger losses in Irvine than the loss on this property, but this one is unique because the sale would actually be recording a $5,000,000 gain for the owners. I wonder if the IRS will give them capital gains tax relief? It is a bit over the exempt amount. You don’t mind subsidizing this behavior with your tax dollars, do you?

{book5}

I’m too sexy for my shirt too sexy for my shirtI’m too sexy for my shirt
So sexy it hurts
And I’m too sexy for Milan too sexy for Milan
New York and Japan

And I’m too sexy for your party
Too sexy for your party
No way I’m disco dancing


I’m too sexy for my car too sexy for my car
I’m too sexy
Too sexy by far
And I’m too sexy for my hat
Too sexy for my hat what do you think about that

I’m Too Sexy — Right Said Fred

44 thoughts on “HELOC Abuse Newport Coast Style

  1. Freetrader

    It’s actually surprising difficult to figure out what the taxable gain to the sellers would be — I think you have roughly $5.1 million in gross gain on the sale of the property ($6.5 million sales price less $1.4 million basis), PLUS, because the sale price isn’t enough to pay off the debt, an additional $500k ($7 million – $6.5 million) of relief of debt income. I think you end up in a strange situation — no matter what the sales price is, as long as it is less than $7 million, the gain is always going to be about $5.6 million.

    1. Chuck Ponzi

      What’s crazy is knowing that this was bought for 1.3 just 8 short years ago. And, the expectation is for a quadruple in that time.

      Does anyone, and I mean anyone know of another asset that has had this kind of rock-solid performance? Only gold which was at generational lows at that time (fiat was king back then) was even close.

      Many of the lower-end properties are back to 2001 prices. Imagine the paradigm shift required for high-end properties to find their own bottom. I suspect that the high end will just languish and languish some more until we reinflate our entire economy.

      For the price of this house, one can buy some medium-sized businesses that provide 1M+ in cash flow (legally without robbing a bank). Why would someone want to buy a depreciating asset that they wouldn’t be able to escape for 10, 15, or 20 years for the same price? Cachet? You gotta be one serious poser for that kind of abuse.

      Chuck Ponzi

      1. Lee in Irvine

        Does anyone, and I mean anyone know of another asset that has had this kind of rock-solid performance?

        Paradigm shifting corporations. For instance, Apple Electronics and their iPod, and iPhone. But unlike real estate (which I consider a commodity), Apple has changed communication and the distribution of media forever.

        Paradigm Shift

        AAPL 2001 = $10-$15
        AAPL 2009 = $129.19 < --Fridays Close Ponzi Scheme

        Newport Villa 2001 = $1,341,000
        Newport Villa 2009 = $6,500,000 <--Asking Price

  2. Ron

    If you are referring to my comment last week about my friend doing the buy-and-bail shuffle, let it be clear that I didn’t say it was none of our business. I said that it is not immoral for someone to walk on a purchase money loan and allow the bank to take the home back. This is the contract. However, now that our government has decided that it is going to step in and give your money and mine to the banks to pay for their stupidity we should all be very angry… at our government first, the banks second and also at those who committed fraud. I don’t have room in my black heart for anger at the people who simply overpaid for a home. They didn’t get to buy Hummers and BMWs, they just got the pleasure of paying 3x the equivalent rent to live in a house.

    People like those profiled today are a completely different story. HELOC abusers gave up their non-recourse status and the banks should go after them for this money. These people got hard cash from these loans and spent it how they saw fit; now it is time to pay it back.

    1. IrvineRenter

      I wasn’t picking on any particular comment. There were several, and each had their own justifying argument. A couple of people were rather indignant that I was characterizing the behavior of an entrepreneur trying to save his business as HELOC abuse, as if that makes everything OK.

      The buy-and-bail was common in the 90s, but the banks recognized this early this time and made it much more difficult to do. They did this buy making it necessary for the buyer to be able to prove they could support both payments, which of course, nobody can. The effect has been to stop people from buying a home before selling their first one which has effectively frozen the market for current homeowners; only renters can buy.

  3. OC Progressive

    I guess if you teach your house how to generate a million a year for you, you don’t mind $575 a month HOA payment to pay for the round-the-clock mall cops manning the gate or the extra property taxes, including money for building a toll road that they have to pay to use.

    I guess what ticks me off most about the people in Newport Coast is that the toll road users from Riverside coming in on the Eastern and Foothill toll roads have to pay higher tolls to subsidize these high-rollers in Newport Coast as they take their Hummers onto the 73.

    1. i boycott toll roads

      you don’t have to take the toll road if you don’t mind sitting though some insanely long lights on Bonita Canyon and having to deal with church traffic on sundays or take a detour through UCI.

      What ticks me off is that it costs $.75 to go a quarter of a mile on the toll road if I forget to exit on Bison especially when that road used to be free.

  4. Woodbury Renter

    I spent all week in NY and I am even more depressed about the unfolding of the bank bail-out. This stress test was an open joke that only the MSM and the people who get all their facts from the MSM don’t get. The personal fortune at-all-costs traders on all the bank desks get it, they are once again making personal millions making no-risk, sure-thing trades manipulating the various gov’t programs. Did you know that the bond traders at Citi, Goldman and BoA bought up billions of mortgage loans at depressed prices after the gov’t promised billions of guarantees on the same crap assets that they already own? It is mind-boggling that this is legal. If the MSM ever explained this to the public the mob would march into these banks and carry the traders and executives out on rails.

    Back to this fascinating post today I have to say that I love visiting friends in Newport Coast, especially those that have a view down to the sunset over the coast. Of course I knew that many of these people were pretending to be wealthy. At the same time I don’t feel that the ‘non-pretenders’ who begot the money to buy these homes by trading bonds at PIMCO are realy any less ethically challenged. If they had to pay back their ill-gotten gains they would have to sell their wonder homes fast.

    IR, I am really impressed by these weekend posts. I hope that they bring more well-deserved attention to your blog.

    1. Lee in Irvine

      The stress test was a media event, orchestrated by the big banks … literally.

      Per the WSJ after Friday’s close in the markets:

      Banks Won Concessions on Tests

      Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flare at Wells

      The Federal Reserve at the last minute significantly scaled back the size of the capital hole facing some of the nation’s biggest banks, following days of intense bargaining over the stringency of the stress tests.

      When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed’s exaggerated capital holes.

  5. Skipper

    You’re nuts if you think this home sold for $1.3 in 2001. Back in 2001, when Ocean Ridge came online, tract homes up to 5,000 square feet were going for $1.5m to $2.5m. This is a 7,300 square foot custom home. The land alone was probably $1.3m.

    1. wintstongator

      Since the home is listed built in 2001, the 1.3M could have been a land buy?

      How much would the 10 mortgages, 1sts + helocs, have generated in fees? Those were profits booked by banks that will not be coming back. Banks generated huge mortgage volume because people were refi’ing to extract equity, and now they’re locking in low GSE rates.

      With sales down, and everyone happy with their home, sitting on a low-rate Fannie securitized mortgage, where will the origination volume come from? I don’t think that point was acknowledged in the stress tests.

    2. Modguy

      Not to ruin the underlying premise of this post, I too think the purchase price must have been land-only. I remember smaller Taylor Woodrow tract homes in this area being 2-3 million back then… A 7000 custom home would have been even more. Maybe they paid cash to build to, then took out loans to get the money back (plus some)?

    3. IrvineRenter

      I did not say the house was free. A certain amount of the $7,000,000 went toward the land and improvements. Let’s be generous and say $3,000,000 went toward the house, that still leaves $4,000,000 that went somewhere else.

      Don’t lose sight of the obvious fact that there was an enormous amount of real HELOC abuse happening at this property.

      1. tonyE

        Yeah…. but the fact that the cost of the house and land was likely $3M makes the $7M sale price a bit less outlandish. It’s likely that the first two rounds of mortgages were to finance the construction of the house and the wrap up the whole affair.

        I mean, the owners want a 130% profit over what the house would have been worth when new back in ’03.

        So, those other houses going for just under 5MIL are pretty much getting close to 03 prices.

        Given the economy, this home should sell just below 5MIL not 7MIL. And someone will take a financial bath.

  6. newbie2008

    “I think the MSM is missing a big story by not telling the tale of these people. I imagine Joe SixPack would love to see where his tax dollars are going.”
    Are the main stream media just dumb or lazy on the lack of follow through on the borrower and what happened to the money? Or is there more to the story? The loan looks like a recourse loan. Is the borrower able to pay back or is a DT style cramdown taking place? Is the loss on the special cramdown going to be paid by the taxpayer and bank and borrow pocketing the money? Lots of questions but no answers from the media or govt. Looks like another bailout for bonus’ with taxpayer money (smoke and yelling on how it was going to be blocked, but quietly was done anyways). Overall the loss doesn’t look that bad ($7MM loan – 6.5MM asking = 0.5MM loss, likely 1.7MM loss for the bank or taxpayer)
    More things change, the more they remain the same. IMHO

    1. Chris

      “Are the main stream media just dumb or lazy on the lack of follow through on the borrower and what happened to the money?”

      You forgot the speed of Fast Money with the talent of a box of parrots can get you nowadays.

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  7. Surfing in Newport

    My guess is that the 2001 sale was the purchase of the lot, although it seems a little low. Probably because it overlooks Newport Coast Drive and doesn’t have an ocean view. That would also explain the all cash purchase followed by a large first mortgage (construction loan). Anyway, at 7K sq. ft. you are probably talking way over 2 million in construction costs for a custom home. They could easily have $4 million in the property.

  8. Skipper

    Same for 5 Shoreridge, no veiw and 1,000 square feet smaller and it sold for $4m in 2002.

    1. IrvineRenter

      The purchase price of the property in this post seems to be very important to you. Why?

      Take a look at the mortgage records. You can speculate on what was land and what was improvements. It doesn’t really matter.

      These owners took out a huge amount of HELOC money and spent it, and now the taxpayers are going to eat the bill.

  9. bill shoe

    I can’t really wrap my mind around the $5 million haul. When IR profiled the first $1 million HELOC abuse in Irvine, AZDavid posted the great Austin Powers graphic with the “One MILLION Dollars” quote. The picture was perfect because it was simultaneously accurate and over-the-top. Now the same picture would simply be trivial. I don’t really have a feel for what $5 million dollars is, but if AZDavid has no corresponding picture then it must be pretty big.

    Hey, has anybody considered that maybe this homeowner simply has a lot of medical bills?

    1. IrvineRenter

      People used to float the medical bill meme, but when I started posting these day after day, it became obvious to everyone that there are not that many catastrophic medical conditions not covered by insurance to explain the spending.

      Can you think of a chronic medical condition not covered by insurance that requires $7,000,000 worth of periodic treatments?

      1. Alan

        “Can you think of a chronic medical condition not covered by insurance that requires $7,000,000 worth of periodic treatments?”

        Shopaholicism?
        Egomania?

    2. Geotpf

      I think we have established that at least some of the money from the loans have gone into improving the property (that is, there was absolutely no house at the beginning and now there’s a 7,300 square foot one). That is, they didn’t actually walk away with $5.6 million and change; there were construction costs (of an unknown amount) spent here as well. Of course, I doubt they spent much more than a million on construction, so they did still make quite a haul.

      The only thing that doesn’t jive with that theory is that the house is listed as being built in 2001, but the first mortgage wasn’t issued until 2002. Maybe the buyers originally paid cash to build the house as well? If you can drop $1.3 million in cash on a lot, you might be able to pay for the construction costs out of pocket as well.

      1. JoeF

        If you doubt that they spent much more than a million on construction, you simply don’t know anything about custom home construction. $137 a sq. ft. won’t build much of a starter tract home in Visalia, much less a home like this.
        My guess is about $350 to $400 per sq, in 2001, so 2.5 mil plus to build.

        1. lunatic fringe

          $137 a sq. ft. won’t build much of a starter tract home in Visalia

          That is simply bullshit. I’ve actually built tract homes near Visalia and construction costs run about $60 per SF for a tract builder. However, custom is a different ball game entirely and I could see $200-$300 per SF fairly easily. Unfortunately there isn’t much in the way of pictures for this home so it’s hard to guesstimate a cost per SF.

    3. Craig

      $5 million dollars is about 45 seconds worth of spending under Obama’s proposed budget.

  10. tlc8386

    I wouldn’t be surprised if this house didn’t belong to someone in the business–RE or a banker ect.
    There was an old saying for every one person here in the OC two were licensed RE agents—lol

  11. CA

    Hahah…holy cow, I know those two real estate agents on the right. I used to work with the guy in the middle and met his wife (on the right). They’re pretty nice people, and he obviously was doing better in his RE job since he left his well paying pharmacy job to do this full time back in ’06.

  12. norcal

    OK, who ARE those people in the PRE-TEND RE ad mockup? If you were Jim the Realtor you’d name names. Not that you have to be Jim….

    1. IrvineRenter

      I don’t know who they are. Their image popped up on a Google Search for Newport Coast. I thought it was too good to pass up.

  13. Mike G

    The people in Orange County, and in particular in the beach communities, are in complete denial that this same purging must happen in their neighborhoods.

    Foreclosure — it’s not just for Moreno Valley anymore!

  14. alan

    IMHO I don’t think this was a pretender, the MO is most consistent with small company or individual builder/land speculator. They are a higher form of flipper since they buy the raw land, put a custom home on it, live there for a year or two then sell at a huge profit. In this case, since the builder was unable to sell for a profit they hocked the property to the hilt and gave it back to the bank. I know someone who tried this Palos Verdes back in the early 90’s and when real estate busted back then he had to declare BK. Of course, you couldn’t get 100% cash out financing back then, otherwise he would have made out OK as these builder/land speculators will.

  15. Phil

    Is not so hard to figure out who owns the property and speculate their story after using “the google” on “the internets”.
    The husband is in the IT industry and the company he founded at one time was very successful but then started to go downhill and ended up selling it to a big competitor in 2005.

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