Will HELOC Abuse Doom the Housing Market?

Before the IHB began publicizing HELOC abuse, few realized how widespread the phenomenon really was. Now that we all know, I ask you “Will all the short sales and foreclosures caused by HELOC abuse doom the housing market?”

Today’s property is, of course, a HELOC abuse case. They are easy to find, just pick a listing at random, and it is either a 100% financing deal or HELOC abuse…

65 Olivehurst Kitchen

Asking Price: $415,000

Address: 65 Olivehurst, Irvine, CA 92602


Another Brick in the Wall — Pink Floyd

All in all you’re just another brick in the wall.
All in all you’re just another brick in the wall.

People making their regular mortgage payments is the critical element that keeps money flowing into residential mortgages. Once people stop making payments according to the terms of their agreements, lenders and investors stop loaning money, and you have a colossal credit crunch. Everyone who borrows money needs to behave like another brick in the wall, or the wall will crumble. So it is with our housing market.

Many people got in over their heads because they bought too late in the rally and paid too much. Most were motivated by greed to capture appreciation, but some were honest borrowers whose life’s circumstances lead them to buy at the worst possible time. There is another group that is also in trouble, those that bought early but borrowed too much later on. This is the group that fascinates me. Why did they spend their houses?


Many people who extracted their home equity lost their homes for lack of ability to refinance or make their new payments after their loans recast. After so many people lost their homes due to their own reckless borrowing, it is natural to wonder why these people did it. Why did they risk their home for a little spending money?

First, it was not just a little money. Many markets saw home values increase at a rate equal to the local median income. It was as if their home was another breadwinner. The lure of this easy money was too much for many to resist. The rampant, in-your-face, marketing of these loans in every available media outlet touting the glossy “lifestyle” of over-the-top consumerism was a drug to many spending addicts.

Also, during the bubble rally people really believed their house values would go up forever, and they would always have the ability to refinance enormous debts at low interest rates and maintain very low debt service costs. Most people did not think it possible they would end up in circumstances where they would lose their homes; however, they were mistaken.

Given these beliefs, the equity accumulating in their house was “free money” they just needed to access in order to live and to spend like rich people. Even though they were consuming their net worth, and making themselves poor, they believed they were rich, and they wanted to spend accordingly.

Mortgage Equity Withdrawal 1991-2007

Mortgage Equity Withdrawal 1991-2006

Charts are always interesting, but what do they really mean? When you look at the chart of mortgage equity withdrawal, you can see that people took out a lot of money as house prices went up, and they spent it. It is an interesting macroeconomic phenomenon that is fascinating to economists, but it’s just another statistic of the great housing bubble. Or is it?

Here at the IHB, I document the far more interesting microeconomic consequences of mortgage equity withdrawal: people lose their homes. You can translate the big macroeconomic chart with the plethora of individual borrowers we profile here that made the bars on the chart grow so tall.

In many ways Irvine is the epicenter of the housing bubble. We were the home of subprime, and our market saw some of the greatest price changes of any local market. And as we see daily here at the IHB, Irvine residents were also major contributors to the mortgage equity withdrawal statistics.


So my big-picture question you today is “will mortgage equity withdrawal be the straw that breaks the market’s back?”

Of course, the question assumes that the market might not have collapsed without mortgage equity withdrawal. A compelling argument can be made that the additional foreclosures caused by mortgage equity withdrawal are unnecessary to cause a market collapse. The diminishing bids caused by tighter credit are enough to lower prices. The foreclosures merely speed the process along. However, if you do not accept this argument, and if you believe the foreclosures are an essential element for the market to collapse, then mortgage equity withdrawal and the foreclosures it creates play an important part in the future of Irvine home prices.

So are the additional foreclosures caused by mortgage equity withdrawal sufficient in number to facilitate the collapse in local home prices?

65 Olivehurst Kitchen

Asking Price: $415,000


Income Requirement: $103,750

Downpayment Needed: $83,000

Monthly Equity Burn: $3,458

Purchase Price: $539,000

Purchase Date: 3/29/2004

Address: 65 Olivehurst, Irvine, CA 92602

Beds: 2
Baths: 2
Sq. Ft.: 1,550
$/Sq. Ft.: $268
Lot Size:
Property Type: Attached, Townhouse
Style: Mediterranean
Year Built: 2001
Stories: 3+
View: Courtyard, Mountain
Area: North Park
County: Orange
MLS#: I09021936
Source: MRMLS
Status: Active
On Redfin: 2 days


THIS IS A SHORT SALE!!! Congratulations!!! And thank you for the three exclamation points.

Why does this realtor use “W/” in this description? Is is critical to save the two additional characters it would require to write the word “with?”


I find this description painful to my eyes. I had to force myself to read it. The sacrifices I make for the IHB…


  • This house was purchased on 3/29/2004 for $539,000. The owner used a $431,200 first mortgage, and a $107,800 downpayment.
  • On 12/10/2004 they opened a HELOC for $147,000.
  • On 11/2/2006 they refinanced with a $520,000 Option ARM, and opened a new HELOC for $65,000.
  • Total debt is $585,000.
  • Total Mortgage Equity Withdrawal is $153,800 including their downpayment. Mostly they got their downpayment back.

If this house sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $194,900.

Another day, another future foreclosure caused my mortgage equity withdrawal.


We don’t need no education
We don’t need no thought control
No dark sarcasm in the classroom
Teachers leave those kids alone
Hey! teachers! leave those kids alone!
All in all you’re just another brick in the wall.
All in all you’re just another brick in the wall.

We don’t need no education
We don’t need no thought control
No dark sarcasm in the classroom
Teachers leave those kids alone
Hey! teacher! leave us kids alone!
All in all you’re just another brick in the wall.
All in all you’re just another brick in the wall.

“wrong, do it again!”
“wrong, do it again!”
“if you don’t eat yer meat, you can’t have any pudding. how can you
Have any pudding if you don’t eat yer meat?”
“you! yes, you behind the bikesheds, stand still laddy!”

Another Brick in the Wall — Pink Floyd

70 thoughts on “Will HELOC Abuse Doom the Housing Market?

  1. Gindy

    Looking through the photos at the listing, they certainly didn’t up grade anything nor do they look to have purchased lots of fancy toys. No cars in the garage either. Maybe they’ve already pulled most of their goodies out of the place. It’s rather a sad looking place.

  2. AbroadThankGod

    Sorry, I refuse to believe that a two bedroom apartment is worth 415,000 dollars and requires considerably more than the median income to purchase. We are still far from the bottom. This kind of B.S. proves it. And, no. I don’t care what neighborhood it is in.

    BTW – I just want to thank IR for his continued diligence. What you do is important and appreciated. There’s a handful of people doing a hell of a lot of valuable work on the net. They should be commended and encouraged.

    Keep it up, IR!

    1. Lee in Irvine

      Per Melissa Data, avg adjusted gross HH income for 92602:

      $99,408 – 2000
      $87,362 – 2001
      $84,535 – 2002
      $84,668 – 2003
      $87,537 – 2004
      $91,823 – 2005
      $98,138 – 2006

      Notice how incomes dropped $15,000 after the tech bubble. This was common in all parts of white collar Orange County, not only due a drop in capital gains, but also due to our employment reliance in finance.

      JMHO ~ This bubble will likely drop incomes $25,000 or more in 92602.

      1. tlc8386

        Even at these levels of income no way does this justify the prices for the average home in the OC–Even if you double the income the tax rate comes in around 60k to 80k which brings your income at 120k–and you still can’t afford the homes here–OC has been on a massive Bubble that has to POP!!

        1. Lee in Irvine

          I personally think we’re at the beginning stages of paradigm shift in evaulating Orange County real estate.

          A lot of people think fundamental support will form at 4-5 times household income. I think we’ll drop lower unless Wall Street starts pooling debt again. And even if do venture in that business again, it’ll look very different from the last 10-15 years.

          With that said — do I think OC real estate will drop to the level of Texas at 1.5 to 2.5 times HH income? NO. But I do think OC real estate could settle in the low to mid 3’s.

    2. ignorantoutsider.

      Exactly my thoughts – a crummy walk-up apartment with cheesy cabinets and nothing special. $268 a square foot starter home for a ?$70,000 earner should go for ~ $210,000. What am I missing here? UNless its Irvine and theres magic in the air.

  3. fasthomeauction

    Great advice!

    Very nice read. Thank you for the information. Will apply this information and wait to see the results.

    1. scott

      lol…you need to add ‘funding for this special program was provided in large part by the Peoples Republic of China”

  4. Fromthe East

    This is just pathetic. No one, least of all the realtor, cared a whit about this place. If someone was really interested in selling this place why would they post those photos? I especially like the wastebaskets featured in several photos that the realtor couldn’t take 10 seconds to move. This won’t sell because the price is way off and, obviously, the realtor is going to put no effort into it (couldn’t even bother to work the shift key).

  5. granite

    “There’s a boat in your bedroom” said the (Bank of the West) billboard along the 55 freeway. I struggled for awhile to comprehend the meaning of it in 2001. Little did I realize it was already prevalent.

    I believe that the ocean of Kool Aid in Irvine would keep prices elevated well above parity for years without a “nudge over the cliff”. Forced selling will be the nudge. And HELOC abuse apparently is the biggest cause of that.

  6. scott

    “Renters lose edge on homeowners…cost gap is narrowing”


    The WSJ article is more balanced and nuanced than the headline, and notes in many markets it is still cheaper to rent but the gap is narrowing.

    More importantly I take it as a positive sign that the MSM is at least starting to look at price/income and price/rent metrics that tell you alot more about home prices than the usual garbage that is fed to the MSM by the home building or Realtor industries. Imagine if back in 2005/06 more in the MSM had been saying maybe you should really check your math on the own vs rent decision?

    1. maliburenter

      They have another classic error. A similar one was in the National City model, and we know what happened to them.

      It’s pretty much agreed that there was a bubble. Including the bubble years to try to guess what equilibrium is or where the markets will settle is a bad idea. Looking at the low of the prior cycle is probably more informative. That low was at about ownership cost 110% of rent. Still, that ratio means either tax policy brings the two in balance aftertax, or part of the reason owners paid more was expected appreciation. If it’s expected appreciation, the ratio will go far below 100 in the next few years.

      I see that in my models. The academics are missing an arbitrage condition, and it shows considerably more downward potential.

    2. newbie

      The WSJ article didn’t take additional expense such as opportunity cost, taxes, HOA, insurance and repairs into their Irvine, CA condo buy vs. rent calculation. The rents should start filling, soon with higher unemployment and salary roll-backs. The high vacancy rate for new apartments and new construction aren’t helping keeping rates up.
      I think the agric areas are near rent vs. owner occupied equilibrium, but not for investors. If unemployment continues, then rent should go down.

  7. jumpcut

    I really like that this home features a “WALK-IN MASTER BATH!” I hate homes where you can’t actually walk into the bathroom.

    1. Texas Triffid Ranch

      I’m reminded of an episode of the old Britcom Blackadder II, where Edmund Blackadder is forced to sell his house. With one particularly difficult customer, who won’t stop going on about the privies, he finally explains that the house comes with a open-air facility with a large catchbasin below.

      “You mean you crap out the window?”


      1. Scrawny Kayaker

        Can’t you hear Lawrence Yun reciting “I have a cunning plan” in his Elmer Fuddish voice?

  8. SoOCOwner

    I’ve watched a couple of interviews where the soon-to-be foreclosed homeowners didn’t seem to fully understand that HELOC money needed to be payed back in full. They seemed to think that they had a “right” to “withdraw” this money since their home had appreciated in value. Can people really be so ignorant?

    1. IrvineRenter

      I share your astonishment.

      Yes, people really believed this was free money, and they were entitled to spend it in any way they saw fit. There was little or no mental connection between this money and debt. When you take on a credit card debt, you realize it is debt because you know you have to pay it back out of your wage income. When you take on housing debt, it does not feel like debt because you have no intention of paying it back from wage income. The payback comes when you sell the home after it appreciates.

    2. maliburenter

      Well, you don’t have to pay it back directly, if you can sell the house for enough to cover the mortgage and the HELOC.

      You also don’t have to pay it back if it’s CA and the HELOC was purchase money.

      As a practical matter, if your first mortgage is being foreclosed, the HELOC lender is pretty unlikely to pursue you. If it’s the HELOC lender foreclosing, they won’t be able to pursue you. However, HELOC lenders generally will only be foreclosing if they think the home will sell for enough for them to get some money.

    3. Perspective

      “…homeowners didn’t seem to fully understand that HELOC money needed to be payed back in full…”

      I still don’t understand how many people didn’t think ANY mortgage debt mattered – whether it was a HELOC, purchase, or cash-out refi. I don’t understand the end-game? You cash-out all your equity to upgrade your standard of living sacrificing your future income.

      I guess it’s the same as people with credit card debt, who I’ll never understand.

    4. LC

      They are going to be even more surprised to find out that they are recourse loans, and they will be expected to repay them, even after they lose the house to foreclosure.

        1. newbie2008

          Even it the loans are recourse, what are the chances that the banks will go after them, strike a deal or kick the debt to a collection agency which will only get peanuts back? If the second loan was not used for the purchase, then it’s a recourse loan? Will it be forgiven with bankruptcy?

          If large defaults are not forgiven, then the US will be back to indentured servitude and mortgage slavery.

  9. maliburenter

    “Will HELOC abuse doom the housing market?”

    Actually, I think it may doom the RV industry. While a lot of HELOC money went to home improvement, other real estate, travel and pure consumption, much of it went to durable goods like autos and clothes. If you purchased earlier or spent more because of the HELOCs, you will probably still keep the cars and clothes even if you are bankrupt and foreclosed.

    A lot of people who will not have major financial difficulties have a HELOC car which they will wait longer to replace. Even worse, ATVs, RVs, and other items you don’t really need to replace.

    Because RVs aren’t essential (unless you want to live in it while your finances recover), tons of people are trying to sell RVs now. It is similar to the housing bubble. Massive supply overhang. However, even in good times there are a lot of excess RVs sitting around. Now, there are less than half as many buyers.

    1. Kelja

      I’m not sure, but I don’t think ‘cloths’ would be considered a durable.

      I agree with your assessment about RVs and other toys bought with HELOC money. You’ll see more and more people try to offload those possessions. Especially, if they still owe on them. Another thought: as people are forced out of their McMansions into smaller digs, they won’t have the space to store such toys.

        1. ockurt

          cloths! That’s hot. I hate when I type something incorrectly and I catch it right as I “submit”.

          Speaking of folks offloading their possessions, have you seen how many Mercedes/BMWs are listed for sale in the paper?

          1. Chuck

            I have also seen a TON of really nice furniture for sale on Craigslist in the last several months. I bought a $3,200 Restoration hardware sleigh bed for $300 from a lady in Coto whose house had been on the market for the better part of a year…..

          2. ockurt

            Must’ve been great to low-ball those Coto SOB’s.

            P.S. Slade Smiley was arrested the other day for not making child support payments. What a tool.

    2. LC

      If an RV has a bathroom, you can write off the interest as a mortgage. I suppose you could even get a HELOC on your RV!

      Yes, what else but a massive government subsidy would explain people driving around these monsters that get 9 mpg?

  10. Sue in Irvine

    Thanks IR guy for your daily blog. I’ve been reading it for about a month now and have learned a lot about Irvine RE. The people commenting are also great. I’m an older adult and hopefully this isn’t too dumb of a question. I know HELOC means Homeownwers Equity Line of Credit. But in simple terms please tell me how it works for the owner. We never took out a HELOC (and won’t). We did refinance once from a 30 yr fixed to a 15 year (or 20, I can’t remember right now) fixed and took out some money for some fixups and some college money for the kid. We bought back in 1993.

    1. Orcian

      Sue in Irvine,
      I would suggest you talk to a lender. Just be sensitive to Irvinerenter. He has a full-time job in addition to this blog.

    2. LC

      Don’t talk to a lender unless you want to become his new best friend for life.

      A HELOC is just like a second mortgage, but they give you a line of credit rather than a big check. You get a credit card or drafts. You also make monthly payments. Terms vary. Interest rates are usually higher than a first mortgage.

    3. IrvineRenter


      The easiest way to envision a HELOC is just like a credit card. The only difference is the initial paperwork and the fact that it is secured by your house. Most people do not pay off HELOCs unless they sell their house. In fact, most people expect their house to pay for it at the closing.

    4. nowwaat

      HELOC is a loan to be paid back with interest. The borrower can take all the loan money when the credit line is started or opened; or he/she can take it in smaller chunks’ on as needed basis. Usually, the term (to pay it back) is 10 years, but could be 5 years or 30 years…etc. Usually it’s taken as a second TD (trust deed) but could be first TD if house is paid off. The interest rate on it is usually variable – tied to some kind of index (usually the prime rate) plus a pre-determined margin. There are other requirements. A borrower should talk to a lender about specific terms because terms can and do vary.

  11. camsavem

    As this entire mess unfolds I still cant believe the ignorance of all the parties involved. I still hear experts saying things like “for the economy to improve we need to stabalize home prices” Really? Since when?

    When has the cost of a home had anything to do with the economy? Never, except in this bubble. What people dont seem to want to understand is that it is everyones “discretionary” spending that keeps the economy moving. In other words, if your total debt is low, then you have more money to save and spend on clothes, cars, entertainment etc.

    Linking percieved “home equity” to wealth and discretionary spending is just flat out wrong and extremely dangerous to the general society. I have always understood that equity is “percieved” wealth because it changes based on many different factors, however, as soon as you “extract” it the debt is very, very reel.

    When are the experts going to say, “houses are too damn expensive and it is eating away at the average families disposible income which is causing this recession and the shrinking of the economy”?

    I kind of understood the mentality when the kool-aid was flowing and everyone was rich, but now? Why keep up the mantra now?

    Fricken morons, every last one of them.

    1. maliburenter

      I am wondering when we will hear them saying “Home price declines are great. Young families can buy again. Businesses will move to this area because employees can afford to buy here.”

      The current drop is a massive realignment. The bursting of the bubble is actually what will save many of the bubble housing markets’ real economies. If prices had stayed at 2006 levels, the only employers expanding in SoCal would have had renters as employees.

        1. djd

          IMHO, it all boils down to the assumptions that (1) renters have lower incomes and (2) renters are temporary (thus won’t invest in a community). It follows that renters reduce quality of life and property values.

          1 and 2 are in fact more true of renters than of homeowners on the average. Unfortunately the comparason that tends to get made is of an above-median homeowner to a below-median renter, in both categories. There are highly visible examples and few visible counterexamples.

          Recall too that although IHB features near-daily discussion of doomed speculators and HELOC abusers, outside this blogospherical sector they are not common knowledge. So it remains “obvious” that these features of undesirable renters could not possibly apply to homeowners as well.

    2. nowwaat

      To new homebuyers, if home prices drop, then the new buyers can make their mortgage, and still have money to spend or save. This is one upside to falling home prices. Why are so many people ignoring this fact? Falling oil prices can put money in our pockets, the same with interest rates. Why not consider the same with home prices?

    3. Major Schadenfreude

      “I still hear experts saying things like ‘for the economy to improve we need to stabalize home prices.’ Really? Since when?”

      Exactly. Home prices weren’t “stable” during the bubble expansion, but no one was complaining then.

  12. Miami Beach condos

    Interesting numbers on mortgage equity withdraw, it seems to be very relevant to the problems we’re having now.

  13. freedomCM

    Where is the refrigerator?

    Is all that crap in the photos reflective of the “owners” having fled in the dead of the night?

    Or is it now being rented out to people living without cold food?

    I want to say that this is a POS, but really it is a nice 2/2 rental, with a 2c garage. But is is way out there, 15 min minimum from anything.

    Current rent maybe $1500, -$250 HOA X 160 is $200k for an owner, $125k for an investor.

    But who thinks that this rent level will hold?

    Or that a potential owner will want to make a 7 or so year commitment to living small, far away?

    1. Alan

      My guess is that it is being loaned to a friend or family as “indoor camping”, or is a short-term very cheap rental. It looks like there is a mini-fridge on the floor where the real refrigerator would go.

    2. Aquagirl

      Even though this is a 2/2, it is 1500 sq. feet and located in Northpark. Right now it would rent for about $2,200 vs. a year ago when it would have rented for about $2,400.

  14. Orcian

    Gee, just when I thought it was getting closer to being a buyer’s market here in Irvine, this guy posts on Craigslist and insists that it is a seller’s market in Irvine, and posts stats as proof: http://orangecounty.craigslist.org/reb/1049537009.html

    Why are people still paying sky-high prices for Irvine properties? Some friends of ours just paid around $650K for a 4-bedroom in Irvine, down from about $775K at the peak. I guess they were convinced by their realtors that that’s as low as it will get here in Irvine.

    1. ockurt

      Or it could be that they have a family and need a bigger place and figured they’d be in it for a long time. But you’d know their story better than me.

      1. bigmoneysalsa

        Orcian’s guess is almost certainly right. If they knew how much further prices are going to fall, they would continue to put up with renting.

        1. ockurt

          How do you know? We can all agree there’s definitely downward pressure on prices but to say you know for sure is slim and none. No one has a crystal ball and if we did we’d all be billionaires.

          Now, your name is “bigmoneysalsa” so maybe you are one of those fortunate few…

      1. bigmoneysalsa

        99% of the time when someone buys and says “I don’t care if the value goes down” what they really mean is “I don’t think the value will go down very much more.”

    2. nowwaat

      Well, the demand is certainly there for DETACHED homes in Irvine – at RELATIVELY affordable prices. However, to say it’s a seller’s market is a stretch, especially since prices ARE actually falling, regardless of whether homes sell for more or less than an arbitrary asking price. But I have to admit that we have not seen the capitulation in Irvine that is seen in other nearby OC cities… whether that will happen or not is anybody’s guess.

  15. Gemina13


    “Seperate” is considered an acceptable spelling. You can use “separate” or “seperate.”

    That said, ye gods, Dr. Housing Bubble would have a field day with this property. The Trash Can/Dumpster School of Photography must have helped out with the staging. And is that a camp refrigerator? A full wastebasket by the toilet? The place looks like it was furnished by a couple of college freshmen; except for the fact that it’s nicer and much more expensive, it could have been my first apartment.

      1. IrvineRenter

        I am starting to wonder myself. At some point common usage makes it acceptable. I find that word misspelled in almost every post I write. It is clearly wrong, but if everyone does it, it becomes right at some point. Language is funny that way.

      2. Gemina13

        After examining the current Webster’s, I’m going to have to offer a mea culpa. I’ve always spelled it as “separate,” but had a teacher who taught my class that either spelling was appropriate. ::shrugs::

    1. Jennifer

      Yes, $415K (twice as much as my 3 bedroom house in Colorado with a really nice view of the mountains, but no Starbucks nearby) and the kitchen doesn’t even have room for a trashcan under the sink? Come on!

      Thanks IR. I started reading this blog when my dad’s house was on the market in Hemet last year, to watch the decline of the market and fret about his mortgage (conservative). It finally sold in Oct./Nov. and I felt like following the buyers around, kowtowing and saying “Thank you, thank you, for taking it off our hands.”

      Now I just do a reality check-in once in a while.

  16. NOT

    Last night I saw a sign up for a place I was interested in renting. I called up the realtor and asked “When was this unit purchased”, the response was “I don’t see what that has to do with anything but I will tell you anyway: I sold this unit to the owner a few years ago.” The tone on the realtor was one of disgust or loathing.

    I went home and checked online for the sale. It turns out it was purchased in 2006 at a mid bubble price. The rent does NOT cover the mortgage unless it is a teaser rate. Since the last place just sold for about 10% less than the purchase price of this unit, the teaser rates are gone.

    This is obviously a foreclosure in waiting. What will the realtor say when I am about to get evicted? “Sorry you have to move your family because I lied to you”?

    1. Kitty

      If you were renting a property in this instance, and found it was a foreclosure in waiting, do you have any legal recourse? I’ve heard that renters don’t have many options if the home is foreclosed on, so is there anything that can be done to negate any problems?

  17. newbie2008

    I don’t see the HELOC and loan abusers lossing their property. The loan can be viewed as shorting the property (as with a stock) to the bank. The bank gives the money to the homeowner. Now after years of low interest and a few months of free rent, it time to cover the short. If the borrowers sheltered the borrowed money and can walk away, the loan is really selling short and the short sale or foreclosure is really the short being settled.

  18. Jane

    I think that it would be smart to legallize pot. More people smoke it then you could imagine. School teachers, business people it is not just the low life druggies that are smoking it. It relaxes you and helps you concentrate better. Just slows down everything so you can have a moment. Plus think about how much money the government would make on it. billions!!!

Comments are closed.