Monthly Archives: October 2008

The Harvest

The boy began to sigh, looked up in the sky,
And told the moon his little tale of woe.

People have harvested all the money they are going to get out of their houses for quite some time. From 2001-2006, the median home price in Irvine rose each year by an amount equal to the median income. Every homeowner had another breadwinner in the family: the house itself. People proceeded to harvest this free money. A few resisted the temptation. Some took it out slowly, and some took it out as fast as it accumulated. From what I am seeing in my daily searches through the property records, the majority took out something, many took out a great deal, and some took out all of it.

There are those readers who believe I make too much of this issue; it can’t really be that bad. Well, when I start running out of new properties where the sellers took out all their equity, I will start to believe those that did this are already purged from the system. As it stands today, I have a steady stream of new properties with HELOC abuse, and there are many more that I don’t write about. I am able to be choosy. I can pick the most egregious cases or the ones with the most interesting storylines. There is no shortage of these borrowers out there.

I have written before about Mortgage Equity Withdrawal, and Calculated Risk has been tracking MEW for quite a while. Just as he predicted, MEW has fallen off a cliff.

Today’s featured property is an interesting case study in how owner’s managed their debts, and how lenders enabled this insanity. The lenders are now reaping the harvest they were sowing during the bubble years. The toxic loans they planted have grown to poison our entire financial system.

82 Orchard Front 82 Orchard Kitchen

Asking Price: $415,000

Income Requirement: $103,750

Downpayment Needed: $83,000

Monthly Equity Burn: $3,458

Purchase Price: $550,000

Purchase Date: 12/23/2005

Address: 82 Orchard, Irvine, CA 92618

Beds:	3
Baths:	2
Sq. Ft.:	1,300
$/Sq. Ft.:	$319
Lot Size:	3,780 Sq. Ft.
Property Type:	Single Family Residence
Style:	Other
Year Built:	1977
Stories:	1 Level
Floor:	1
View:	Park or Green Belt
Area:	Orangetree
County:	Orange
MLS#:	S551599
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Completely Detached Single Family Home, No Common Walls! This Home Has
Been Beautifully Customized. Remodeled – New Kitchen, New Gas Stove
Appliance, New Baths, New Baseboards. Master Bedroom with Private Bath.
Smooth ceiling, indirect lighting, ‘Hardwood’ Parquet floors. Sliding
Glass Doors From Living Room To Enclosed Yard and Private Patio, Great
for Pets and Entertaining. 2 Car Attached Garage with Washer and Dryer
Hook-ups. Great Location at End of Cul De Sac and Room for Extra Cars.
Can Add Second Story for Lots of Square Footage. Walking Distance to
Irvine community college. 2 City Parks and Dog Park Nearby. RV Access
From Back Driveway area. Association Fees Include: Neighborhood
Greenbelt Maintenance, Pools, Spas, Tennis Courts, Clubhouse, Tot Lot
and Weight Room. No Mello Roos, Low Tax Rate, Large Side Yard with
Cement Walkway, Cul De Sac quiet street, Best location in the tract!!

No Common Walls! I guess that is the big selling point for this property…

Why Is This Description Written In Title Case?

This property is interesting because it has so many subplots. Let’s start with the previous owners…

Previous Owners

This property was purchased by a couple on 5/1/2001 for $246,000. They used a $242,065 first mortgage, a $7,375, and if those numbers are correct, they cashed out $3,440 at the closing. On 5/29/2003 they refinanced with a $245,600 first mortgage and a $30,700 second. On 5/3/2004 they refinanced with a $322,000 first mortgage. Their total mortgage equity withdrawal was $76,000.

So was this behavior punished or rewarded? Well, they sold the property to the bagholders for $550,000, so they paid off the bill the ran up and still made almost $200,000. Like many people during the bubble, these people behaved irresponsibly, and they got away with it. One has to suspect that these people and those like them continued this behavior when the moved to their next property. Unfortunately, I could not find them in the property records to verify.

Bagholder Owners

The greater fools in our story today was another couple who bought this property on 12/23/2005 for $550,000. I imagine they were very excited that Christmas to be in their new home. Visions of sugar-plums danced in their heads… They bought the property with 100% financing, and it appears as if they either couldn’t or wouldn’t make the payments. The property went to foreclosure auction on 10/1/2008, and the bank did not bid the property up to its $440,000 first mortgage. In fact, it doesn’t look like the bank bid at all. The property went to a flipper from Laguna Beach for $306,000. Encore Credit managed to lose almost $250,000 on this property. Yikes!

New Flipper

Here enters our bottom feeder who picked up this “bargain” property at auction for far less than the mortgage note amount. Of course, he immediately adds $109,000 to the purchase price hoping for a quick sale and a huge profit. He will probably be successful. It pays to have cash during a credit crunch.

HELOC abusing owners, late buying bagholders and greedy flippers: this property has it all.

{book}

The night was mighty dark so you could hardly see,
And the moon refused to shine;
Couple sittin’ underneath the willow tree; for love they pined.
The little maid was kinda ‘fraid of darkness, so
She said, “I guess I’ll go.”
The boy began to sigh, looked up in the sky,
And told the moon his little tale of woe.

(Refrain:)

“Shine on, shine on, harvest moon up in the sky;
I ain’t had no lovin’ since January, February, June or July.
Snow time ain’t no time to stay outdoors and spoon,
So shine on, shine on, harvest moon, for me and my gal.”

I can’t see why a boy should cry when by his side
Is a girl he loves so true;
All he has to say is, “Won’t you be my bride, for I love you.”
But why should I be telling you this secret when
I know that you can guess?
Harvest moon will smile, shine on all the while,
If the little girl should answer “Yes”!

Shine On, Harvest Moon — Leon Redbone

Let It Ride

Let It Ride — Bachman-Turner Overdrive

You can see the mornin’, but I can see the light
Try, Try, Try, to let it ride

Speculating in an inflated market is much like shooting craps. In the game of craps, if your number comes up, you can choose to let your winnings ride in the hopes that your number will come up again. At some point, you need to take your chips off the table because if you don’t, you will lose it all when a 7 is rolled. Many people during the bubble took the equity from one property and bought more. Many would-be Donald Trumps built substantial financial empires. They were playing monopoly with real properties and funny money being given out by the banks as if the borrowers were passing “go”. With money that was easy to come by and properties appreciating at double-digit rates, it is obvious why so many people played this little game. Unfortunately, not many of them took their chips off the table in time.

Today’s featured property is a typical 100% financing walkaway, but the real story is with the previous owners. They were HELOCing themselves into a great lifestyle and multiple properties right at the peak of the bubble. I imagine they are somewhere between fear and denial as their empire falls apart.

11 Iroquois Front 11 Iroquois Kitchen

Asking Price: $634,900

Income Requirement: $158,725

Downpayment Needed: $126,980

Monthly Equity Burn: $5,290

Purchase Price: $825,000

Purchase Date: 5/17/2007

Address: 11 Iroquois Ct., Irvine, CA 92602

Beds:	5
Baths:	3
Sq. Ft.:	2,268
$/Sq. Ft.:	$280
Lot Size:	3,743 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary
Year Built:	1998
Stories:	2 Levels
Area:	West Irvine
County:	Orange
MLS#:	S551556
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

Beautiful corner lot in West Irvine. 5 bedrooms, 3 full baths. One
bedroom & bath downstairs is perfect for a guest room. Second
bedroom upstairs could be used as a bonus/media room. Downstairs with
ceramic tile flooring throughout. All windows have plantation shutters.
Honey Maple cabinetry and Eat-in area in Kitchen. Huge back yard with
fire pit, beautiful landscape and rose garden. No Home Owner
Association. Close to Irvine and Tustin Market place shopping and
Entertainment.

The bagholder for the drop bought this property for $825,000 on 5/17/2007. The news of subprime’s implosion was a month old by then, but since they were still giving out 100% financing to people with decent credit, our bagholder bet on the subprime-containment theory and lost with the lender’s money. If this property sells for its asking price, the lender stands to lose $228,194 after a 6% commission.

As I mentioned in the prologue, the more interesting story here is with the previous owners.

They purchased this property on 12/15/1998 for $290,000. They used a $232,000 first mortgage and a $58,000 downpayment.

On 7/31/2001 they opened a HELOC for $77,000 and took out their downpayment.

On 6/17/2003 they took out a stand-alone second for $40,000.

On 9/12/2003 they refinanced for $405,000.

On 10/6/2004 they took out a stand-alone second for $60,000.

On 12/17/2004 they took out a stand-alone second for $120,000.

On 6/16/2005 they refinanced with an Option ARM with a 1% teaser rate for $640,000.

On 10/30/2006 they refinanced with a $660,000 first mortgage.

Total property debt was $660,000

Total mortgage equity withdrawal was $428,000 including their downpayment.

These people got away with it. They sold to our bagholder for $825,000 and actually made another $115,500 after a 6% commission. As you can see, this behavior was not punished, and in fact, it was reinforced by the market. Given that fact, do you think they might do it again?

While these people were milking this property, they were buying two others in Orange County:

On 12/20/2004 they bought a property in Tustin for $650,500. According to the recent comp list, this property is worth somewhere around $500,000 today.

On 6/13/2007, right after they sold today’s featured property, this couple bought another property in Irvine for $880,000. The borrowed $616,000 and put down $164,000 — most of which was the profit from the previous sale. According to the comps, this property is worth about $700,000 now.

These people likely spent most of the $428,000 they extracted from the first property. Some of the profits from the sale and some of the MEW went into buying two other properties which are now a combined $320,000 underwater… and still falling.

Some people who timed the market well undoubtedly reaped a windfall, and they are enjoying their gains. However, most people took what they did not spend and put it into another property, or multiple properties, and now they are underwater. Absent the mortgage equity withdrawal, these people would probably be OK, but since they spent so much of their appreciation, and since they “doubled down” with multiple properties, now they are going to crap out.

{book}

Good bye, I lied
Don’t cry, would you let it ride?
(repeat)

You can see the mornin’, but I can see the light
Try, Try, Try, to let it ride
While you’ve been out runnin’ I’ve been waitin’ half the night
Try, Try, Try, to let it ride

(Chorus)
And would you cry if I told you that I lied?
And would you say goodbye or would you let it ride?
Good bye, hard life, don’t cry, would you let it ride?

Babe, my life is not complete, I never see you smile
Try, Try, Try, to let it ride
Baby you want the forgivin’ kind, and that’s just not my style
Try, Try, Try, to let it ride

Chorus

I’ve been doin’ things worthwhile, and You’ve been bookin’ time
Try, Try, Try, to let it ride
Runnin’ with the crazy crowd, ooh, ain’t no friends o’ mine
Try, Try, Try, to let it ride

Let It Ride — Bachman-Turner Overdrive

Remember Flipper?

Flipper — Vars and Dunham

No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,

Do you remember the extreme arrogance and smugness of flippers and other kool-aid intoxicated people during the bubble? Isn’t everyone who buys in a bull market a genius? They were all so sure the market could only go up, and every property was a gold mine. They were all living in their private wonderland.

And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!

And of course, now they are under water, drowning in debt and sinking to the bottom. When it comes to flippers, my schadenfreude overfloweth…

Today’s featured property has been profiled before. It has been on and off the market for about a year and a half. This is the third listing we have documented here. It takes a great deal of courage to flip a $2,000,000 property. Either that or a great deal of ignorance and kool aid.

Asking Price: $1,880,000

Income Requirement: $470,000

Downpayment Needed: $376,000

Monthly Equity Burn: $16,666

Purchase Price: $2,050,000

Purchase Date: 5/23/2006

Address: 29 Mahogany, Irvine, CA 92620

Beds:	6
Baths:	7
Sq. Ft.:	4,200
$/Sq. Ft.:	$448
Lot Size:	0.27 Acres
Property Type:	Single Family Residence
Style:	Spanish
Year Built:	1996
Stories:	3+ Levels
Area:	Northwood
County:	Orange
MLS#:	S551434
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

This home has it all!!! An Entertainer’s Home in a Guard Gated
community in Irvine. A MUST see luxurious 7 bedroom (office or optional
7th bedroom) 6.5 bathroom home available in Irvine. Home has it’s OWN
private gate with intercom and video surveillance. Heated waterfall
Jacuzzi, BBQ with Gazebo on a 12,000sqft lot makes this an
entertainer’s home. Home has everything you would expect and more, such
as granite counter tops and marble tile flooring.

These owners managed to perfectly time the top of the market. They paid $2,050,000 on 5/23/2006. They used a $1,500,000 first mortgage, a $400,000 second, and a $100,000 downpayment (don’t expect to see that kind of leverage on a $2,000,000 property again in your lifetime). Can you imagine this couple’s mortgage payment? Anyway, they first listed this property in early 2007 for $2,299,500. They wanted the $300,000 profit they were entitled to for owning less than a year. When it didn’t sell the first time, they relisted in September 2007 for the same amount. As I noted at the time, “The same house; the same price. Still no chance…” Well, here we are just over a year later, and the owners have begrudgingly admitted that they paid too much. They are now asking $1,880,000.

Wow! A whole 5% off the peak. I guess the high end hasn’t dropped much, right? What we are seeing here is classic denial pricing. This owner will likely chase the market all the way into foreclosure.

Their downpayment is gone, they are over the market, and they are putting wishing prices out in the market. Perhaps they will get lucky and some knife catcher will perceive this as a bargain. I doubt it.

{book}

They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!

Everyone loves the king of the sea,
Ever so kind and gentle is he,
Tricks he will do when children appear,
And how they laugh when he’s near!

They call him Flipper, Flipper, faster than lightning,
No-one you see, is smarter than he,
And we know Flipper, lives in a world full of wonder,
Flying there-under, under the sea!

Flipper — Vars and Dunham

Over My Head

Over My Head — Fleetwood Mac

I’m over my head,
But it sure feels nice.

Isn’t that the reason everyone panders to their sense of entitlement and buys too much home? We all know that emotional longing to live well and have the very best. I am certainly not immune. Like many in my industry, I have had to live with a reduction in my income during the housing crash (I am lucky to have a job at all). The place I rent now used to be easily affordable, but now I am stretched to maintain my standard of living. Am I entitled to the life I had during the bubble? I certainly do not want to downsize and lower the quality of the place I live because I enjoy it. I am over my head, but it sure feels nice.

Everyone feels these desires to have more. Some people have less discipline than others when it comes to resisting these urges. During the bubble, lenders removed all external resistance, and the most irresponsible among us were given access to as much money as they wanted to buy a home. It shouldn’t be terribly surprising that we are having a lot of foreclosures now.

Of course, the assurances of realtors like Suzanne convince people they deserve it and they can do it. Well, sometimes they don’t deserve it, and they can’t do it. If you don’t fully understand what “pandering to a sense of entitlement” means, watch the Suzanne Researched This video above. It demonstrates the concept better than I could explain it.

Today’s featured property was owned by someone who overbought and simply could not afford the place they had. The property was purchased in 2004 with an Option ARM and a significant downpayment. The Option ARM consumed much of their equity, and the market took the rest. Now the bank owns it, and they are asking 15% off the 2004 purchase price.

9 Hollyhock Kitchen

Asking Price: $567,000

Income Requirement: $141,750

Downpayment Needed: $113,400

Monthly Equity Burn: $4,725

Purchase Price: $679,000

Purchase Date: 6/29/2004

Address: 9 Hollyhock, Irvine, CA 92602

Beds:	3
Baths:	3
Sq. Ft.:	1,700
$/Sq. Ft.:	$334
Lot Size:	4,027 Sq. Ft.
Property Type:	Single Family Residence
Style:	Other
Year Built:	1998
Stories:	2 Levels
Area:	West Irvine
County:	Orange
MLS#:	P661034
Source:	SoCalMLS
Status:	Active
On Redfin:	2 days

Great entertaining floorplan! Spacious open kitchen with Euro white
cabinets & center island. Roomy Master Bedroom with large walk-in
closets. Upgraded Wood Floors, Plantation Shutters. Master bathroom
with separate shower and bath tub and dual sinks. Home is light and
bright with an inviting feel…..and no HOA Dues!

This property was purchased on 6/29/2004 for $679,000. The owner used an Option ARM with a 3.67% teaser rate with an initial balance of $543,200. The remaining $135,800 was a cash downpayment. On 8/9/2005 the owner opened a HELOC for $98,000, but it isn’t clear whether or not they took the money. By 7/2/2008 the negative amortization and missed payments had ballooned to $600,555 which is how much WAMU paid at auction for the property. It looks as if the new JP Morgan Chase / WAMU isn’t messing around with their foreclosures. This property is priced to move.

I feel bad for owners like this one. They were likely moved by an emotional appeal for this property. The realtor told them they could have it, the mortgage brokers gave them a loan, and they sunk a great deal of their own money into the transaction. In the end, they lost the house, lost their money, and lost their credit. That must really suck.

{book}

You can take me to paradise,
And then again you can be cold as ice
Im over my head,
But it sure feels nice.

You can take me anytime you like,
Ill be around if you think you might love me baby,
And hold me tight.

Your mood is like a circus wheel,
Youre changing all the time,
Sometimes I cant help but feel,
That Im wasting all of my time.

Think Im looking on the dark side,
But everyday you hurt my pride,
Im over my head,
But it sure feels nice,
Im over my head,
But it sure feels nice.

Over My Head — Fleetwood Mac

The Great Housing Bubble

It has been a year-and-a-half of foreplay here on the Irvine Housing Blog. It has been a long time coming, but the book, The Great Housing Bubble, is finally here.

And yes, the mystery of my identity is gone.

The book is available for download as an ebook, or as a paperback on Amazon.com.

I am pleased to announce we will be having an Irvine Housing Blog party and book signing at 6:30 on Wednesday, November 12, 2008, at JT Schmids at the District. This is your chance to meet the people behind the screen names.

You have plenty of time to order and receive a copy of the book from Amazon. I will also have a large but limited number of books available at the signing. These will be available for a $15 “donation” to the IHB. You are under no pressure or obligation to buy a book or have it signed. All who wish to be a part of the IHB community and meet others in the community are encouraged to attend.

I hope to see you all there.

{book}

Its been such a long time
I think I should be goin, yeah
And time doesnt wait for me, it keeps on rollin
Sail on, on a distant highway
Ive got to keep on chasin a dream
Ive gotta be on my way
Wish there was something I could say.

Well Im takin my time, Im just movin on
Youll forget about me after Ive been gone
And I take what I find, I dont want no more
Its just outside of your front door.

Its been such a long time. its been such a long time.

Foreplay/Long Time — Boston

BTW, We have a private room, and although this is publically announced, it is a private party. Agitators will be asked to leave.