Purple Kool Aid — Incubus

But then they’re not crazy they’re just high on kool-aid

Evidence of kool aid intoxication can be found in nearly every property I examine. Everyone in the ownership chain began extracting home equity starting in 2000-2001 and continuing up through 2007 when the lenders cut everyone off. Our society in California has become completely dependent upon ever-increasing home prices to permit mortgage equity withdrawal to fuel our economy. This borrowed money flowed into cars, boats, trips, home remodels, and many consumer goods, but it also flowed into business start ups, commercial rents, computers, phone systems, employee salaries and many beneficial uses as well. Unfortunately, none of it was sustainable. It was all built on a Ponzi scheme of debt structures and false insurance which has now come crashing down.

At this point, the residents of California are as addicted as any opium addict. In fact, OPM, or other people’s money, is the drug everyone craves. The conventional wisdom, if there is such a thing, in California right now is that house prices will go up again because demand is high, but people just can’t get loans. There is a certain truth to this as people proved during the bubble that they are kool aid intoxicated enough to take on any loan offered to them; however, the lenders are not going to make these loans available again. Making toxic loans at extreme property valuations is what caused them to lose so much money. The days of lenders enabling this behavior are over.

Today’s featured property shows the pattern of mortgage equity withdrawal and ever-increasing loan balances with previous owners of the property. The final owner was the bagholder who used 100% financing and passed the losses on to the lender (who incidentally is Fannie Mae/Freddie Mac which is now us).

Asking Price: $587,900

Income Requirement: $146,975

Downpayment Needed: $117,580

Monthly Equity Burn: $4,899

Purchase Price: $775,000

Purchase Date: 4/21/2006

Address: 15 Liliano, Irvine, CA 92614

The first owner my records show in the chain of ownership purchased on 3/20/1996 for $224,000. The owners used a $179,200 first mortgage and a $44,800 downpayment. This was typical at the time. In 1998, they refinanced for $182,000, and in 2001, they opened a $23,000 HELOC. When they sold the property, they had more debt than when they started.

The second owner purchased on 4/3/2002 for $395,000. She used a $315,500 first mortgage, a $40,000 second mortgage, a $40,000 HELOC, and a $10,000 downpayment. As you can see, downpayment requirements were already dropping by 2002. This owner sold in less than one year.

The third owner purchased on 1/29/2003 for $457,500. He used a $366,000 first mortgage, a $91,500 second mortgage, and a $0 downpayment. It is early 2003, and downpayments are already a thing of the past. About a year later, the owner refinanced for $445,000, and opened a HELOC for $35,000 taking out $22,500 in spending money.

The fourth owner purchased on 4/21/2006 for $775,000. She used a $620,000 first mortgage, a $155,000 second mortgage, and a $0 downpayment. Since this was the peak of the market, she let the property go into foreclosure, and it was auctioned for $634,800 on 9/9/2008.

Of the four owners shown in the property records going back to 1996, none of them paid down their mortgages by any amount. Two of the four added to the mortgage, one of the four didn’t own the property long enough to do so, and the final owner never had any equity to withdrawal. These patterns of behavior are very widespread, and deeply engrained into the society. As I have said before, mortgage equity withdrawal was the rule not the exception.

The lender who now owns the property is not even trying to get their money back. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $222,374. The Fannie/Freddie second mortgage of $155,000 is already gone, and the holder of the first mortgage is going to lose the rest.

This property is being offered for 24% off its peak sale price.

{book}

The purple kool-aid cult is back, I’m paranoid again
Would someone please appease all the stress of my

I’m being…
I’m being chased by seven kids high on kool-aid
But then they’re not crazy cause they’re high on kool-aid
But then they’re not crazy they’re just high on kool-aid

Purple Kool Aid — Incubus