Shooting Star — Bad Company
Sometimes when you see an egregious case of HELOC abuse, you have to ask, “On what did you spend the money?” On many of the properties we profile, the owners at least put some of the money into the property and outfitted it with pergraniteel. Apologists offer the possibility of health issues or investment, but it seem pretty obvious that most of these people just blew the money. It is living like a shooting star, you burn brightly, but it can’t go on forever, and when your equity has burned up, you just fade away. Today’s featured property took over $400,000 out of their home, and it is being offered for sale as a fixer upper. So I ask again, “On what did you spend the money?
Asking Price: $499,000
Income Requirement: $124,750
Downpayment Needed: $99,800
Monthly Equity Burn: $4,158
Purchase Price: $210,000
Purchase Date: 7/11/1997
Address: 5 Star Thistle, Irvine, CA 92604
| Beds: | 3 |
| Baths: | 2 |
| Sq. Ft.: | 1,600 |
| $/Sq. Ft.: | $312 |
| Lot Size: | 4,365
Sq. Ft. |
| Property Type: | Single Family Residence |
| Style: | Garden Home |
| Year Built: | 1975 |
| Stories: | 1 Level |
| Area: | El Camino Real |
| County: | Orange |
| MLS#: | S532383 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 7 days |
 Fixer-upper
|
|
Located on cul de sac street next to greenbelt. Property needs TLC, but
has a lot of potential. Atrium can be converted to more room. Few steps
to award winning Elem.& Middle school. Great association amenities
include pool,park,tennis court. Low HOA & tax.
Great opportunity to overpay for a moneypit.
.
.
These people bought right at the bottom of the last bubble. The caught their shooting star and burned through about $400,000 in the 10 years that followed. The bullet-point recap is as follows:
- The property was purchased on 7/11/1997 for $210,000. There was a $189,000 first mortgage, and the owners put $21,000 down (10%).
- On 9/23/1997 they took out a stand-alone second for $25,000 taking out all their equity plus $4,000. At this point, they have no money in the property.
- On 12/1/1999 they refinanced with a $240,000 first mortgage bringing their MEW to $45,000.
- On 12/29/1999 they opened a HELOC for $45,300.
- On 3/19/2002 they refinanced with a $284,000 first mortgage.
- On 4/19/2002 they took out a stand-alone second for $50,000. Total MEW of $145,000.
- On 12/26/2003 they refinanced for $378,750. Merry Christmas.
- On 7/27/2004 they refinanced for $500,000. Total MEW of $311,000
- On 11/22/2005 they refinanced for $511,000 with an Option ARM with a 1% payment rate.
- On 1/13/2006 the opened a HELOC for $100,000 bringing their total debt to $611,000 and their total MEW to $422,000.
If this house transacts at its asking price and a 6% commission is paid, the total gain on the property will be $259,060; however, the total loss to the lenders on this property will be $141,940. Countrywide will lose $41,940, and Washington Mutual will lose the amount withdrawn on the HELOC, presumably $100,000.
I hope everyone realizes that this house should not be on the market. Distressed sales brought about by HELOC abuse leading to a short sale or foreclosure are properties that would not be for sale right now if the lenders and borrowers had not gotten into this mess. Any fantasies of a bottom or appreciation going forward is going to be crushed by the onslaught of these distressed properties. A normal market characterized by modest appreciation requires relatively affordable prices, widely available financing, and a minimum of distressed properties. We have none of those conditions. The reservoir of distressed properties is not drying up; in fact, it is being replenished faster than the market can absorb them. Defaults and foreclosures continue to set new records, and properties like this one have become our daily fare. All signs are that the number of short sales and foreclosures is going to increase as the Alt-A and prime borrowers face their resets over the next few years. Many, if not most, are not going to qualify for refinancing due to tightening standards, in particularly they will not meet the new combined-loan-to-value requirements because they are underwater or close to it. Until the homedebtors who utilized toxic mortgages and HELOC abusers are flushed from the system, they will continue to poison the market through a steady supply of REOs. This debacle is just beginning.
.
Johnny was a schoolboy
When he heard his first Beatles song
Love Me Do I think it was
And from there it didn’t take him long
Got himself a guitar
Used to play every night
Now he’s in a rock and roll outfit
and everything’s all right
Don’t ya know
Johnny told his mama
Hey, Mama, I’m going away
I’m gonna hit the big time
Gonna be a big star someday
Momma came to the door
With a teardrop in her eye
Johnny said “Don’t cry Momma,
Smile and wave goodbye.”
Don’t you know
Don’t you know
That you are a shooting star,..(don’t you know, don’t you know)
Don’t you know that you are
A Shooting Star
And all the world will love you
Just as long..as long as you are?
Johnny made a record
Went straight up to number one
Suddenly everyone loved to hear him sing his song
Watching the world go by
Surprising it goes so fast
Johnny looked around him
And said “Well I made the big time at last.”
a shooting star.,….
Johnny died one night
Died in his bed
Bottle of whiskey, sleeping tablets
By his head
Johnny’s life passed him
by like a warm summer day
If you listen to the wind
You can still hear him play
Don’t you know,…
Shooting Star — Bad Company
.
Have you ever wondered what they do with in outer space when they have to go?
It probably will take min. $100k to fix this unit up. So, how much is it to buy to make sense?
That’s in one of the most discounted neighborhoods in Irvine, as far as desirablity goes. It has no business trying to get that much per square foot.
Maybe a frustrated “flip that house” viewer/zealot will take the bait.
My bad, I just looked more carefully and it is in Deerfield. Pretty good neighborhood for the age of the properties.
I thought it was Willows/California homes. Those are the bottom of Irvine, imo.
You say this is just the beginning, and you have been saying that for quite some time already.
Sadly I tend to agree with you. Despite big price cuts from last year’s highs, we’re still only at the beginning of this mess. Just take a look at how many tax delinquencies there are – those homes are in trouble, yet they skew the data by not appearing anywhere.
Interesting comments this morning on CNBC this morning.
Whitney Tilson of T2 Partners (author and manager of Tilson Mutual Funds (value investing)) layed out the case for the second round of tumult coming in the now collapsing credit bubble. Just as IR has explained many times, he explained that Alt-A, Option ARMS, and HELOCs to a lesser extent are going to reset with huge payment shocks though 2012 and 2013 – rising steadily to a top in late 2011. Hi “value investing” funds are getting short financial services again as he expects them to decline to new lows as we move out of the eye of the storm and back into the second phase of the mortgage crisis.
It seems to me that these macro credit forces coupled with rates which must rise in response to inflation will put significant pressure on housing for the next 3-5 years or more. BTW, we are also seeing rent rises slowing and reversing in many communities.
Did y’all see this morning that Moody’s rating calculator that gave the sub-prime MBS’s their needed second AAA rating had a bug in the code? It was on NPR and the financial times or calculated risk.
Guess the reason no one found the bug was because standard and poor’s already had found them to be sound, so the AAA rating on this obviously absurdly risky investment vehicle didn’t signal the normal red flags to the code’s human watchers.
That smells more like passing the buck than anything else. A bunch of high dollar loans to people with no history of paying back their debts goes into the FraudTron5000 and out comes these beautifully packaged AAA investments. Nobody called BS on that ? As we say in the business: garbage in, garbage out.
IR – you speculated about what these people were doing with the money. Obviously this is just one example, but I know someone who:
-Bought a timeshare (that they can’t afford to buy airfare to now)
-Took numerous other vacations (one of them resulting in purchase of said timeshare)
-Weekends at remote bed and breakfasts
-Buying spree of all kinds of junk from Motorcycles to paintball guns
-Bought their dog an uber expensive collar
-Concerts
-New Cars
-Electronic toys of the latest kind
Basically spent it like it was found money. You were the first blogger I remember to coin the idea of a house as another income earner, and I’d like to think that some of these goofballs treated the extra ‘income’ with respect and made mostly responsible choices. But there are certainly some who became the living embodiment of what most people loathe about the notion of living in southern california and blew it all in the above fashion.
These folks are my virtual namesake.
HELOC abusers like this property and the individual you mentioned almost made me move out of California because I couldn’t stand the superficiality and materialism permeating the socal lifestyle. Although I don’t believe it will ever completely go away, the broken housing ATM and credit crisis should help bring a lot of people back down to earth.
HELOC abusers like this property and the individual you mentioned almost made me move out of California because I couldn’t stand the superficiality and materialism permeating the socal lifestyle.
that is EXACTLY why I split Cali. Lovely place… but the extreme emphasis on materialism as defining who you are to the exclusion of anything else, drove me nuts. I am hardly a ascetic but I also have a healthy perspective on money and material things.
Where did you split to?
We’re going to find out how much of the rest of the economy has been propped up by this spending. It ain’t gonna be pretty.
Gross Domestic Product with and without the effect of Mortgage Equity Withdrawal
https://www.irvinehousingblog.com/wp-content/uploads/2008/02/gdp-with-and-without-mew.jpg
IR –
…this data is “Federal”? These are their numbers? OMG. Withouth the staggering MEW we’ve basically had flat growth since 911. With it now gone and our economy growing at close to zero, we could see a decade of ‘real growth’ with MEW of 1% or less and with inflation-adjusted negative.
This may help explain why so many families feel like they are moving backwards despite a “growing” economy.
What do you think?
BD
Yes, the only people experience a prosperous economy were those households that borrowed a lot of money.
…and those whose businesses did well thanks to consumers spending borrowed money.
Now, the double-whammy: the spigot of easy money is shut off and even the ‘honestly-come-by’ disposable income of those folks is eaten up by debt service.
I found it rather remarkable and difficult to believe that the economy rebounded so well after 9/11 and the dot-com bust. The tax cuts could not explain it all.
Now we know how it happened. The next administration is going to have a hell of a hangover to deal with.
during Bush’s two terms, the real income growth was -1%
Yes, and the Prez is always 100% responsible for the economy when it sours, and 100% responsible for the economy when it booms.
Seems fair enough – or at least, if the Prez is going to claim credit for the booms, he should be blamed for the busts.
Actually there was growth, for the top 0.01% of the households. What type of taxes do the top 0.01% pay? Capital Gains…you don’t get paid that much for working a day job. What’s the max capital gain? 15%
The rich get richer and those that work get screwed.
Excuse me but I have a few personal friends at or near the top 0.01% and they actually have jobs…jobs that required 10-14 hr days and weekends to complete. They have homes and capital gains indeed, but their primary income is their JOBS (salary/bonus/options) which they get REAMED to death on with taxes up to 50% and more.
Take your jealous obama/clinton rheteric back to riverside where it belongs!
I’m above the 1% point, so what’s your point? I get reamed too. But Bush didn’t help me out. Options are taxed as ordinary income, so he didn’t help your friends out either. All Bush did was help people that sit on their fat A$$.
Yes, there’s a BIG difference between being wealthy/rich and being a high-earner. If you believe the tax code should be at least mildly progressive, then passive income should be taxed near earned income so as to tax “the rich” because a high income does not make you “rich.”
I see a few thousand tax returns every year and my experience is that capital gains are NOT the large portion of income of high income earners. The largest portion of income of high income earners comes from the exercise and sale of non-qualified stock options and that income is taxed at the taxpayers marginal tax rate. High income earners in this country pay way more than the majority of income tax.
Great! It should be taxed as ordinary income at the taxpayers marginal tax rate. If all capital gains were taxed as ordinary income, the amount of income being taxed would increase, resulting in a decline in the rates of taxation. This was the underlying thesis of the 1986 tax reform — broader income taxed at lower rates. This resulted in lower rates across the board without loss on revenue. This tax reform affected the little guy, as opposed to the current “reforms” that benefit the top 1-2%.
Oh. Did we offend the high income guy who “knows someone” with high income that works hard. Pity them.
Right. Excuse you and your “hardworking” pals, my heart truly bleeds for them.
Since you took the first shot, I’ll happily retort, do us all a favor and slam your head in a car door, maybe that will knock some sense in.
How anyone can possibly defend the current administration on ANYTHING it’s done demonstrates either staggering ignorance or blubbering stupidity. Have you been paying attention the last eight years? This country is facing some truly frightening and massive problems for the foreseeable future and all you can come up with is some dim-witted ethnocentric crack about Riverside?
As for your “rich” pals … good for them. Glad to hear they’ve enjoyed their seat at the table of good fortune. I shouldn’t have to point out that no one held a gun to their head and made them work 10-14 hours a day, clearly it was their choice. How do their kids feel about it? One last thing, I’ll gladly compare 1040’s with any of them. Uncle Sam gets a damn sizable portion of my family’s income too but you don’t hear me bitching about it nor will you see me voting against my own best interests because the boogey-man might be just around the corner. Grow up.
Interesting anecdote. One observation, it’s my personal experience that a majority of stock options are grants and not necessarily purchase options. In other words, it’s found money … frankly it’s my opinion that taxes on free money are the best kind of taxes.
wow.
I have a client (whose business is strongly dependent on discretionary income) who INSISTS that the media is at fault for ‘talking down the economy’ and if only the media would STFU or people would stop listening, everything would be OK.
By the way, they are kool-aid guzzling Bush-loving right-wingers who get their news from Fox News Channel. I’m pretty sure there’s a very strong correlation between that and the desire to stick one’s head in a very dark place and avoid inconvenient bad news, especially if it might reflect badly on Emperor C+ Augustus.
(I have no doubt that beginning promptly on 1/20/09 they will be blaming the economy’s continuing woes on the Democratic occupant of the White House as well)
I’ve tried politely and diplomatically pointing out exactly what the chart above shows; but in the interest of being able to pay my bills, now I just politely nod and inwardly roll my eyes at this willful ignorance.
Right. It’s always the media’s fault.
As long as the message the MSM is parroting is the “right” message then they’re patriots. As soon as the message doesn’t match the talking points or the perception these folks want to be reality then the MSM is ruining the country and the economy. Wow, I wonder if the 5th estate knows they’ve got such power? 😉
It really is “1984”.
Whoops. It’s late. Meant Fourth Estate, not Fifth Estate. Sorry.
IR, could you provide a link to this chart or the underlying data at the Fed? Thanks.
I got it from Calculated Risk. You could email him, and he can tell you exactly how he calculates it and possible share the data.
The post with that graph is here:
http://calculatedrisk.blogspot.com/2005/12/gdp-growth-with-and-without-mortgage.html
The author is referencing the 2005 “Flow of Funds Report” from the Federal Reserve. The data behind the graph assumes that 2/3 of MEW is used for personal consumption.
The current report can be downloaded here:
http://www.federalreserve.gov/releases/z1/current/default.htm
The data from 2005-2007 can be downloaded here:
http://www.federalreserve.gov/releases/z1/current/annuals/a2005-2007.pdf
Fed: Sources and Uses of Equity Extracted from Homes
http://www.federalreserve.gov/pubs/feds/2007/200720/200720pap.pdf
On the subject of HELOCs; Fleck was writing yesterday about the next implosion – HELOCS. It seems most of the larger HELOC lenders have stopped making HELOC type loans and have curtailed the further borrowing from present HELOC borrowers. And it seems many of these borrowers were using their HELOCs to not only buy stuff, but also to make their mortgage payment and their HELOC payment.
Lenders are required by law to write off HELOCs six months after the first non-payment, which means that in about five more months the lenders will be facing another huge number of write downs and losses realized. And all the asset backed securities with HELOCs as their collateral will be worth less or worthless.
Yeah, the bottom for the credit crisis is in … the bottom of the second inning.
“…And it seems many of these borrowers were using their HELOCs to not only buy stuff, but also to make their mortgage payment and their HELOC payment…”
That would answer some of the questions IR poses about HEW. If you don’t see home improvements and the Benz or Hummer out front, maybe a good portion of the HEW went to mtg debt service? That explains how a NINJA loan mortgagor really earning $50k could service $900k in debt for more than a year (even with negam).
I’ll confess that we sipped the Kool Aid back in 2002 (in Colorado). We refinanced for about $50K more than the original mortgage, intending to build an addition. After several months and $2000 in architect payments, the city rejected the plans. This coincided with a midlife crisis where I decided to quit my job and go to cooking school. Tuition came out of that $50K (and the remainder helped cushion the sudden drop in income).
But since then, our income has gone back to a higher level and we’re not having to stretch to make the mortgage payment. We’re on a 30-year fixed with no HELOC. And even with the distressed housing market, if we had to sell, we’d see a reasonable amount of equity come back to us.
Still, that first sip of Kool Aid was sweet, and I can see how easy it was for people to get addicted to the Magic Money from Nowhere.
yeah, I suppose… if you don’t think about the future and having to pay it back eventually. If only more people understood the concept of ‘debt slavery’, that sip of HELOC magic money kool-aid (or credit card kool-aid for that matter) might not taste so sweet.
Roberticus, that doesn’t sound like Kool-Aid, it sounds like an investment.
If you could use your house’s equity to change jobs, gain education, AND get a higher salary after all is said and done – I’d call that a wise use of money.
That’s what equity loans are for – to help take some of the (real) equity from our house, possibly temporaily, in order to make a wise investment.
I am using mine to finish out a full basement renovation that will add a bedroom and a bathroom and livable sqft to our house. I don’t consider that Kool-Aid since I expect the cost to be less than the additional amount I could sell my for (in five years or so, not now.)
Yours is a story of HELOC USE, not abuse. And its nice to hear about good stories these days.
And if you live somewhere like Irvine where it doesn’t rain, that’s great. But in most areas of the country the HELOC paid finished basements just mean there are fewer houses I’m willing to buy. Places where basements flood and need sump-pumps, bedrooms in basements are not bedrooms, they’re just a waste of money and a money sink to replace after every minor flood. I’ll still buy a place with a finished basement if it’s tile, but I still don’t want to pay for something I never would have wanted in the first place. If however you live in a desert or desert-like place, then this does not apply to your house, and my apologies that your HELOC investment set off my personal pet peeve against finished basements as a “plus”.
No worries, Cara, to each his/her own.
We will be putting in tile or fake hardwood, just in case…
But I’ve been in our house three years now and we’ve gotten a lot of rain in that time. So far, so good.
I’m not in the desert, but Atlanta, where it rains a lot – or at least it did historically, not last year though. Many houses here have finished basements and all the agents here will say it does bring value.
We don’t quote square footage here, so a lot times price level is determined by # of bedrooms.
I know of someone in one of the older neighborhoods in Irvine who heloc’ed so he could have his top-of-the-line Mercedes Benz while at the same time not finding enough resources for after-school day care for his 4th grade latchkey child. Priorities got way out of whack during this season of greed, and trying to keep up with the Joneses. It boggles my mind.
[b]My Offer[/b]
After giving this property a thorough look, my offer today is [b]$213,600.00[/b]. I believe this is what this property is worth.
Only deranged knifecatcher would pay $213,600.00 for this dump.
My Offer
After giving this property a thorough look, my offer today is $27,399.99. I believe this is what this property is worth.
That’s way too low. After three months won’t even notice the sound of the freight, Amtrak and MetroLink trains blasting by every few minutes. The brain cancer from the high voltage power lines will have eaten through your auditory center.
Hey I took out one of those heloc thingies for $40K just last December. Spent $30K of it along with $20K in savings on a new foundation, downspout drains, french drains, sump and pump, and roof repairs. Spent $50K and received no tangible benefit indoors, other than the door latches will now actually latch. Bonus: The construction folks turned the yard into quite the quagmire.
I will spend my tax rebate on mulch.
FWIW, I prefer bourbon to kool-aid.
:o)
The easy money is still out there. Check the charts on the financial stocks and ‘put’ some money on the table. You can leverage on the way down too.
The fact that this house is $500k, half of a mil ticket, tells me that the ground is still way below our feet.
So given $210k in 97, and a bit above inflation, it should be worth $280k or so today.
But, they didn’t do much maintainance, and it is now a 33 year old house.
How much is it really worth?
See my offer above. 🙂
I am just going to remind everyone of what a bubble cycle consists. In particular, the last phase, after the bubble explodes, when the price stays low for a long, long time, and never goes back to the bubble highs.
Are banks monitering HELOC withdraws now that the market is down? If I’d opened a HELOC a year ago and had equity at that time, would I be able to take money out now even if Im under water? I would suspect (and hope) that banks would be watching for this activity now, but with all the poor decisions made throughout this bubble time I’m beggining to doubt that financial institutions had the foresight to plan for this market depression.
Does anyone know if people are withdrawing “equity” from their house today with the intention of walking away?
If the govt starts using tax payers money to bail folks out (I guess they already have with the feds rescuing Bear Stearns), there should be a revolution…
Banks began a couple months ago lowering HELOC credit lines in distressed markets.
Thank God. I guess the billions in write downs instilled a little common sense.
Banks are freezing HELOCS, even with borrowers that still have 30% equity. Lending standards are far stricter than what people think. Just because a lender advertises that you can purchase a home for 5% down, good luck with that. It’s hard to get into a home with less than 20% down right now, lenders will pick you to peices.
Here is a good one, an e-mail I got from John Laing:
May 17th and 18th – Open House Weekend
It’s Time to Make Your Move
Dear gman,
If you’ve been waiting to make a decision on buying a new home, now is the time to act. This weekend, May 17th and 18th, John Laing Homes will host open houses at all our Southern California neighborhoods. For details about a community near you, click here. Stop in for a cup of hot coffee and refreshments, and enjoy a tour of our model homes.
This is your chance to learn about some of the best Southern California real estate values in recent memory. If affordability has been your issue, today’s market could be the window of opportunity you’ve been waiting for. See what the Orange County Register has to say about the growing housing demand.
Special Financing Opportunities
There are fantastic financing opportunities and programs available to qualified John Laing home buyers. For example, through the Federal Housing Administration loan program, down payments can be as low as 3% to 5% based on the home price. Zero down payment FHA loans are also available to qualified buyers through John Laing Homes, in partnership with Nehemiah, the nation’s largest privately funded down payment assistance program. This is a true gift that you never have to repay, and it is never added to the cost of your home. Additionally, John Laing Homes is offering special finance programs with below market interest rates in participating neighborhoods.
Invest in Your Future
Whether you’re a first-time buyer, move-up home buyer, looking for your dream vacation home, or interested in an investment property*, this truly is a buyer’s market.
Don’t miss our open house weekend on May 17th and 18th, and be sure to ask your home counselor how we can help meet your needs. Right now just might be the perfect time to make your move into a new John Laing home.
Best Wishes,
John Laing Homes
I wonder how many of these equity extractors have been ‘trained’ to be bad economic actors. Are they casting about today, looking for their next ‘fix’, their next run at Easy Money?
I think the answer is yes.
Gman,
Thanks for sharing the letter with us. I am sure that all of the folks at John Liang are starting to get sick of looking at empty oatmeal bowls in the morning.
It is amazing that these developers are not going bankrupt at a faster pace…….they must be running their companies on vapors at this point.
Wasn’t there a Bizmarkee song where the hook used the words “the vapors”? Maybe IR can use that in his next blog post with a mention of John Liang.
There was also a band called The Vapors — 80’s New Wave stuff. They did that song called Turning Japanese. That was a great song. If can figure out a way to work that one in IR, you are a music god.
If we’re headed towards zero percent 50 year “mortgages”, I’d say “Hai!”, we’ve almost made it!
I check this site religously! I had my mortgage adjust in Dec. from 5.95 to 9.35 I had pretty much given up on trying to deal with Countrywide after 5 months in loan negotiations. My friend reffered me to this company that negotiated with Countrywide who had my 1st and 2nd. They got results for me in 5 weeks getting my 1st fixed at 5.375 I/O for 10 years and they also got Countrywide to forgive $45k of the 2nd mortgage and locking in the rate for 7.75%… Also got past due payments forgiven!! Please call them if you need help.. 1-800-650-1160 They are Newport Lending Corp.
Congratulations Dweis!
I say, stick it to the lenders! Make them think twice next time before they lend to pricks like you who buy what they can’t afford.
Listen I drank the Kool Aid and HELOC’d the h*ll out of two properties.
It’s been the ride of a lifetime!
It is ending though and the Porsche will get repoed in a couple of months.
You guys just wish you’d thought of it.
So I ask again, “On what did you spend the money?
The new blinged-out Hummer? Or Prius?
The European Cruise?
The Boob Job?