HELOC Abuse Laguna Beach Style

Since last Saturday's post on HELOC Abuse Hollywood Style was so popular, I thought I would explore some other high-end cities and see what I could find. After looking through several $1M to $2M HELOC abusers, I decided on one typical $1.6M abuser and a beachfront property where the owners took out $5M in just a few years. I want one of those houses…

24 Lagunita Dr kitchen

Asking Price: $8,995,000

Address: 24 Lagunita Dr., Laguna Beach, CA 92651

1435 Cerritos Dr front 1435 Cerritos Dr kitchen

Asking Price: $1,999,900

Address: 1435 Cerritos Dr., Laguna Beach, CA 92651

Don't Go Near the Water — The Beach Boys

Don't go near the water…

Don't you think it's sad,

What's happened to the water?

What happened near the water? An enormous amount of HELOC abuse is what happened. HELOC abuse knows no socioeconomic boundaries. The lowliest condo in Irvine managed to extract $100,000, and the poshest beachfront home in Laguna managed to extract $5,000,000.

Let that sink in a moment…


That is five million dollars.

(cue the sharks with FRICKIN LASER BEAMS attached to the heads.)

This isn't one of those deals where the owner put a huge amount down and might have taken the money out for other reasons. This was a highly leveraged transaction, and the HELOC abuse paralleled the increase in phantom equity. My brief search turned this up all over Laguna Beach. The high end is going to get flattened.

Markets like Laguna Beach where cash buyers are common show how a few cash buyers can create a windfall for an entire neighborhood. Let's look at a simplified hypothetical example:

Assume you have a neighborhood of 10 homes each valued at $100,000. The total real estate value of the entire neighborhood is $1,000,000. Imagine some truly wealthy buyer falls in love with a property there and pays $1,000,000 for one of them (the truly rich can do that because they are not subject to financing limitations). The $1,000,000 sale becomes a new comp, and the entire neighborhood can justify $1,000,000 valuations on the properties, the entire neighborhood just became "worth" $10,000,000.

Since lenders lost their minds during the bubble, they would agree that the houses in the neighborhood are now worth $1,000,000 each, so they would offer each of the other homeowners HELOCs up to $1,000,000 based on the new value of their properties. Many of these people will borrow this money and do what they wish with it. Some will go out and buy other properties (who wouldn't after such a huge windfall). This buying will drive up prices in other neighborhoods which provides this same HELOC money to others, and property values go crazy. (Does this sound like fractional reserve lending?) The resulting economic stimulus would create an economic boom as everyone became more wealthy, and everyone was given access to a huge supply of new spending money (see Our HELOC Economy and California Personal Finance: Ponzi Style).

This process doesn't happen overnight with a single new comp, but the cumulative impact of many transactions with increasing values fueled by loose lending certainly does have this effect over time–and it happens relatively quickly. As you will see from the examples today, this is exactly what was going on in our real estate market.

There is only one problem with this little arrangement: IT IS A PONZI SCHEME! It cannot be sustained. The illusion of wealth created by aggressive lending disappears the moment people start to default and the crazy lending stops. Prices must fall back to equilibrium levels sustainable by the new lending standards. In these high-end neighborhoods, I believe we will see 65%-70% declines across the board. Stable price levels are going to be determined by people's real incomes applied to conventional mortgage financing; people only make enough money to support prices 1/3 as high as they currently are. Prices in these neighborhoods quadrupled or more since the late 90s–incomes have not.


24 Lagunita Dr kitchen

Asking Price: $8,995,000

Income Requirement: $2,248,750

Downpayment Needed: $1,799,000

Monthly Equity Burn: $75,000

Purchase Price: $5,500,000

Purchase Date: 8/31/2000

Address: 24 Lagunita Dr., Laguna Beach, CA 92651

Beds: 5
Baths: 6
Sq. Ft.: 7,220
$/Sq. Ft.: $1,246
Lot Size: 8,580 Sq. Ft.
Property Type: Single Family Residence
Style: Contemporary
Stories: 3+
View: Catalina Island, Coastline, Ocean, Panoramic, Has View, Water, White Water
Year Built: 1983
Community: Laguna Village
County: Orange
MLS#: S564400
Source: SoCalMLS
Status: Active
On Redfin: 68 days

Gourmet Kitchen Award


What is a WAT BAR?

A listing for a $9,000,000 property in ALL CAPS. Amazing.

The property records on this house are bit confusing, but I will try to sort through it. It was purchased on 8/31/2000 for $5,500,000. That buyer took out a $2,000,000 loan and put $3,500,000 down. On 6/30/2004 this property was resold to a different couple for $6,000,000. The new owners used a $5,500,000 first mortgage and a $500,000 seller financed second mortgage-100% financing. It seems like an unusual transaction as one would think the property would have been worth more in 2004, but that is what the records show. This is where it gets interesting.

  • The new owners too out a new second for $1,250,000 on 1/26/2006.
  • On 9/1/2006, they refinanced the second again for $3,000,000.
  • On 7/11/2006 there is another loan for $1,850,000.
  • On 8/8/2007 there was a refinance for $10,000,000.
  • On 9/18/2007 they took out a stand-alone second for $1,000,000
  • Total property debt is $11,000,000.
  • Total mortgage equity withdrawal is $5,000,000.

I have no idea what this money went into. Perhaps these people are so rich that these sums are insignificant. Of course, if they were, this wouldn't be a short sale as the borrowers could simply pay off any shortfall.

The facts are that these owners pulled out $5,000,000 in 3 years. That is $1,666,666 per year if you want to think of it in terms of income…

1435 Cerritos Dr front 1435 Cerritos Dr kitchen

Asking Price: $1,999,900

Income Requirement: $500,000

Downpayment Needed: $400,000

Monthly Equity Burn: $75,000

Purchase Price: $1,500,000

Purchase Date: 10/19/2004

Address: 1435 Cerritos Dr., Laguna Beach, CA 92651

Beds: 6
Baths: 6
Sq. Ft.: 5,306
$/Sq. Ft.: $377
Lot Size: 1.21 Acres
Property Type: Single Family Residence
Style: Chalet
Stories: 3+
View: Ocean
Year Built: 1984
Community: Laguna Village
County: Orange
MLS#: P648466
Source: SoCalMLS
Status: Active
On Redfin: 280 days

*APPROVED SHORT SALE* Over 5300 square feet on 1.2 acres priced at $380 a square foot is the best deal on the coast.This custom 3 story swiss chalet estate is the BEST DEAL in LAGUNA BEACH. 6 bedrooms, 5 1/2 baths, 3 fire places, over 5300 square feet with OCEAN VIEW priced at $380 per square foot.

Shouldn't "swiss" be capitalized?

This property is more typical of a HELOC-dependent Ponzi-financing master. Read on and learn.

  • This property was purchased on 10/19/2004 for $1,500,000. The owners used a $1,000,000 first mortgage, a $200,000 second mortgage, and a $300,000 downpayment.
  • On 12/21/2004 the first mortgage was refinanced for $1,500,000 which got the owners their downpayment back. The two-month waiting period is typical of refinances. They knew how to game the system.
  • On 2/4/2004 they opened a HELOC for $500,000. At that point, they had owned the house for just over 3 months, and they had extracted their downpayment plus $500,000.
  • On 7/15/2005 they refinanced their first mortgage with a $2,337,500 Option ARM. It must have seemed like an eternity waiting to get that extra $337,500. It took 5 whole months!
  • On 12/8/2005 they opened a HELOC for $500,000.
  • One 12/23/2008 they got another loan for $20,500.
  • Total property debt is $2,858,000
  • Total mortgage equity withdrawal is $1,658,000 including their downpayment.

These people milked this property for every dime just as quickly as they could. They did have to come up with $300,000 for two months to get access to this money, but it seems a small price to pay for that kind of income.

With the free money these properties were generating for their owners, is it any wonder the kool aid intoxication is so strong in California?


Don't go near the water…

Don't you think it's sad,

What's happened to the water?

Our water's goin' bad.

Oceans, rivers, lakes and streams

Have all been touched by man.

The poison floatin' out to sea

Now threatens life on land.

Don't Go Near the Water — The Beach Boys

91 thoughts on “HELOC Abuse Laguna Beach Style

    1. christian

      For the commission on a nine million dollar property I would think that you would get more than 9 exclamation points, small condos get more than that!!!

  1. Kiran


    This house is so big that finding the other bedrooms require a long journey involving bridges and dragons.

      1. Alan

        “Shouldn’t “swiss” be capitalized?”

        I lived in Switzerland for quite a few years, and that is not a Swiss chalet estate, so “swiss” may be the appropriate weasel term. Kind of like the “Rollex” watches you can buy from guys working the beaches at 3rd world resorts.

  2. Chuck in Newport

    You’re right,IR the abuse is as stunning here as it was in that Hancock Park beauty profiled earlier. Thanks for sharing. I keep telling friends (and my spouse) that this abuse will take time to “work through the system” and that prices will eventually get affordable. There is just no way to sustain the house as an ATM, unless you use the HELOC money to pay the increasing mortgage on the ARMs resetting, which few are probably inclined to do. Musical chairs with millions takes quite the chutzpah!

  3. Jonathan

    Up to 70% off, even on the beach front? Homes there are very desirable and I’m skeptical that the beach house listed here will sell for less than the 2000 price.

    I love this blog (read it everyday) and am not trying to be a dick. It’s just that the uber-rich live in their own world and are sometimes detached from the same price determining factors the rest of us are.

    1. IrvineRenter


      I think you may be missing the larger point: the beachfront has been invaded by uber-pretenders. Flushing these people out of the houses they cannot afford is going to crush the market. There are many more pretenders than there are uber-rich to clean up the mess.

      There will probably some isolated neighborhoods where the rich can support somewhat higher price levels, but what struck me about the $5,000,000 HELOC abuser was that it was in a neighborhood where you would think this kind of behavior would not be seen. I thought only the uber-rich lived there. How did this neighborhood get invaded by 100% financing and HELOC abuse?

      Bottoming price levels are much easier to predict in markets like Irvine where there are fewer cash transactions. The prices in Irvine are determined by available financing and income levels. In beachfront neighborhoods, financing is still important, but the activities of those with piles of cash is even more important. The buying and selling of the uber-rich is much less predictable.

    2. Lee in Irvine

      Not everyone up there is “uber-rich”. This Ponzi scheme allowed pretenders to temporarily live like they were “uber-rich”. We (including you) are just now starting to understand how many people have been living way beyond their means. And in the case of Laguna Beach, many people have been living, way, way, way beyond their means. It was easy to do during the bubble years, cause the appreciation was enough to re-fi and extract mortgage payment money, including Maserati/s, trips to Hawaii, Rolex/s, and all the other excess too. Those days are over … poof, like a thief in the night.

      I like to mountain bike in Laguna Canyon, and every time I drive to the Rim of the World, I see more short-sale signs. It’s spreading faster than the pig virus.

      1. Tim

        Great article and observations….

        True story…
        Wife and I were going through an open house in Laguna. Mega buck on the beach pad. As we are walking out a guy pulls in driving a new Lamborghini. He has a friendly bloke so I chatted him up a bit about the car (I am a car-nerd). In the conversation he mentioned that he just bought the car using……..wait for it…..his HELOC. Now, he was looking for a ‘beach home’.
        That conversation motivated me to pop into the local Lambo dealer (now out of business btw) and ask the sales guy/ FI guy a few questions…main one being HOW people paid for their $250K+ cars….after some back and forth he told me…HELOC money.
        This blog post…is 100% spot on. There is no question that much of the bling-bling lifestyle was financed with borrowed housing money.
        I am not judging or being a hater…just passing along info for the other readers.

    1. IrvineRenter

      I saw that one. It is a short-sale hoping to generate a bidding war. I suspect it will make financing much more difficult for sellers within 1 mile of this property because banks will consider it a comp whether or not it can transact at this price level.

      I hope they get some pictures up so I can profile it. We haven’t seen any high-end homes near 50% off yet. IMO, that property will be trading around $600,000 at the bottom a couple of years from now, but it is too soon for it to sell at that price now because the comps are still inflated.

      1. Lee in Irvine


        Do the banks have any say on the asking price of a short-sale? Do they have to approve the asking price?

        What’s to stop some rogue real estate agent from placing a very low price on a desirable (short-sale) home, just to generate big interest?

        1. IrvineRenter

          The banks used to request that the buyer list the property at a price that would pay off the bank to prove that it could not be sold for that value and that a short sale was necessary. Now, I don’t think they care. The bank does not have to approve the asking price, but they do have to approve the final sales price.

          There is no restriction that stops agents from putting very low listing prices in the market to generate interest. That is exactly what this listing is intended to do. Remember, a listing price doesn’t mean anything. If a buyer accepts a listing price, it doesn’t mean that the seller has to go ahead with the sale; however, if a buyer makes an offer which the seller accepts, the seller can force a sale. Asking prices are fantasies whereas written offers are real.

          1. LC

            I thought that the seller is obligated to accept a full price offer. That is pretty significant, if the buyer comes in with a non-contingent offer. One of these days somebody is going to get burned in one of these things.

          2. tonye

            No, the seller is not obligated to accept any offer. The buyer is on the hook for their offer while the offer is valid.

            That is, if the buyer makes an offer valid for five days, then the seller has five days during which they can hold the buyer’s feet to the fire.

            It would seem that in short sales, however, the dynamics of the buyer/seller relationship are overshadowed by the mortage holder’s ability to deny the deal.


            I mean, I wouldn’t know. I sold a house once, but it was well over the mortgage, so the selling price was strictly up to us.

      2. Geotpf

        What’s really weird with that house is that it’s labeled as a fixer, purchased new in 2006. What the hell did they do in three years’ worth of ownership that trashed the property so much that it already has fixer status? It’s possible that the condition of the property is so poor that the value is lowered by that much because of it. But, without pictures, who knows (unless somebody actually goes out and looks at it)?

  4. OC Progressive

    These HELOC abuses are eye-poppers, if only for the sheer amounts of money.

    A 2.3 million Option ARM with a half million HELOC on top of it? I remember when option ARMs were defended as a tool to make housing more affordable for those just getting into the market.

    Have you ever tried to estimate the commissions that were generated by mortgage brokers and financial institutions on a series of transactions like this? I remember reading that the price paid to a mortgage broker on a 400,000 option ARM could be as high as $15,000.

    1. tlc8386

      If you can find it in the OC Register archives I remember an article stating many were bring in 30 grand a month from commissions on loans.

      And when you go to some of these homes and ask what the owners do for a living I bumped into many who both were mortgage brokers and would also tell me the deal they could me on their home.


    1. Gemina13

      Imagine, for a moment, that you took out an option-ARM on this home.

      Now imagine that, on top of your monthly mortgage payments, you have an HOA fee to pay.

      Which would you default on first?

  5. biscuitninja

    Im suprised that some young, out of work english teacher hasn’t come to the rescue these illiterate realtors…. really, how hard would it be to train somebody and pay them a nominal amount to update the text?


    1. AZDavidPhx

      They probably figure that most of the people reading the descriptions are other realtors anyway – so what is the point?

  6. ochomehunter

    youtube showing the housing mess in southern california.
    its pretty sad to see new homes being demolished.
    and i thought the experts said we already hit the housing bottom. they wish we did.


    I guess its cheaper to demo than to finish and hope fo sale

    1. tacoshark

      Wow! Couldn’t even give it away! I would’ve took it for $1. Heck, I would’ve went up to $100 if there was mltiple bidders.

  7. Kelja

    We live in a nice neighborhood in Carlsbad, near La Costa. Has a nice canyon view and on a clear day you can see to Palomar mountain. We rent and house is nothing special, 2100 sq feet with in need of major update.

    It was purchased from a partnership by our landlord – he was one member of the partnership. When this hit the online records, we were approached by a couple of neighbors who thought we had purchased.

    When my wife told them no, that she didn’t think it was even worth the price that it sold at, $550,000, our neighbors recoiled in horror.

    They are starting to realize how under water they are.

    1. Gemina13

      Either the neighbors at that point were still intoxicated on the Kool-Aid, or they had their epiphany. No way for them to fix it at this point, I take it?

  8. awgee

    They pulled out $5,000,000 in tax free HELOC?

    I am quite unsure of whether I should be morally indignant or admiringly jealous?

    1. tlc8386

      Hopefully the party is over for now—so imagine how long it take to correct this? any ideas?

    2. IrvineRenter

      “I am quite unsure of whether I should be morally indignant or admiringly jealous?”

      I feel the same thing when I see what these people did. For the 98% that blew the money, I feel schadenfreude for the suffering they will endure now that the money is gone. For the 2% that either invested the money wisely or squirreled it away where it cannot be found, I fee either indignation at the theft or admiration at the investment savvy. But let’s be realistic about one thing: less that 1% has any of this money left over. Most spent it, and those that invested it put it into stocks or other real estate which is getting creamed. The ones that borrowed this money and shorted financials and homebuilders; those are the ones I really admire.

      1. No_Such_Reality

        Was the 2004 transaction an arms length transaction? It didn’t show up on automated reports and it does seem pretty wierd for having a sales price in 2004 the same as 2000.

        It’s a little over a million a year in withdrawals. That’s impressive. Carefully played, how long can they live payment free in the house before the bank kicks them out? Two years? Longer? One has to imagine that part of the five big bills wil provide a crafty and unscrupulous lawyer.

      2. David W. (as worried)

        Well, we cash out and heloc it out 1.5 M (looks very modest now comapred to what you’ve featured here) in LB in summer 2006 and 2007. Put it in Indymac’s “super safe 5.?% cds”. And then Indymac went to hell in 2008. We barely got out in time before FDIC took over. Who could have imagined that even banks are’t save at that time! Sigh!

  9. hbrenter

    There’s some other areas that look interesting in Laguna Beach. Particularly the gated Emerald Bay area.


    Original $23M now at $18M.


    Original $17.25M now $13.5M


    $5.7M… lowest/sqft of the 3.

    There’s also a piece of land for sale…


  10. Future OC Owner

    Regarding the home on Cerritos. It is owned by [deleted]. [deleted]and his ex wife [deleted]are both RE Appraisers who owned [deleted], now defunct I believe.

    I know someone who knows them VERY well. Total fraud here. The appraisals were done by [deleted]and his ex wife [deleted]and severely inflated, especially on Cerriotos. Raymond bought numerous properties in and around Laguna Beach with the intent to come in with a 2nd appraisal from his wife Yolanda and flipped most of them.They were always advertised with comments about all the appraisals that came with the propertys by Master appraisers. [deleted] and her group represented many of [deleted] flips which netted him millions. [deleted] and his ex wife should both be sitting behind bars right now as they are in my opinion one of the most scandalous RE Appraisers that were out there.
    Someone needs to seriously look into these two people.

    [note: Sorry I needed to delete the names. I have no doubt everything you wrote is factual, but it is an IHB policy not to use names.]

    1. Chris

      Yeah but you wrote [deleted] and [deleted]…or are they fictitious names as well?

      [note: Sorry Chris. For what its worth, the names you gave are their real names. That is why I deleted them.]

  11. lagnalover

    Boy am I the naive one. I was never aware that there was such a thing as a HELOC in the millions. Would someone have had to qualify for this? Or were these no doc, too?

  12. Thomas

    Gosh, there’s a lot of misinformation here. I work this area and I know the owner of the first property. He was a builder in the Inland Empire and got flattened out there. It looks like it’s either a blanket loan on this property, or he cashed-out the money trying to keep the company going. He’s just an entrepreneur, the kind this country was built on. And the second property was completely remodeled. When’s the last time you saw anyone use a construction or rehab loan when building or rebuilding? They stopped and turned to HELOC’s because the banks don’t have to get in the middle and disburse draws when you do it this way. I wouldn’t call either one of these HELOC “abuse”, but I guess “Cross-collateralized commercial loan abuse” or “Construction loan abuse” doesn’t have the same ring to it. And the story about short sale comps limiting appraisals for the neighborhood is flat out wrong. Appraisals are probably weighted 80% to the sold comps and the listings have to be in line with the closed sales. A couple of rogue listings aren’t going to have any impact at all. Who told you such a thing? And finally, money cashed out of real estate is taxable. In the first story, the basis is $6,000,000 and the 1099(s) will be for $11,000,000 ($9,000,000 on the HUD-1 and $2,000,000 from the loan forgiveness). This guy is single, so he would be able to exclude $250,000 of the $5,000,000 profit and would pay capital gains on the $4,500,000.

    1. E

      It’s not about what the money went to but rather the vehicles that were used to obtain the money.

      Gigantic loans against personal residences…whodathunk it would become such a problem?

      It’s also interesting to note the dates of the refinances for both properties.

      On the first one, $11,000,000 worth of refinancing went out when the IE was already toast…not to mention LONG after the house was put on the market.

      The other one appears to have been given a last “lease on life” 20k loan at the end. The listing price was already down to $1,499,999 and then they futzed around with the asking price. I’m more curious about the 20k loan at the end personally.

      Just because people were using the money for “business” and is the supposed “Amurikan” way, it is just greed on a magnified scale.

      They just had to have MORE.

      Is “enough” ever “enough” for the wealthy?

    2. IrvineRenter

      You start by claiming there is misinformation in the post, but then you proceed to confirm everything it states.

      I can’t believe you can try to justify millions of dollars in cash-out refinancing. You are demonstrating that you are part of the problem. If the bank will not give people business loans, how is it OK to borrow the money from the home for business purposes? Even if I accepted your explanation for the borrowing–which I don’t–why does that change anything? They didn’t lose their own money. These people stole money from the lenders, and the US taxpayers (meaning us) are going to end up paying for it. Pardon me if I don’t feel to sorry for these people. There is no justification for this behavior other than they thought they could get away with it.

      As for the other item, “Appraisals are probably weighted 80% to the sold comps and the listings have to be in line with the closed sales. A couple of rogue listings aren’t going to have any impact at all. Who told you such a thing?” I am not sure what you are talking about, but I know for a fact that lenders are impacted by low listings on comparable properties because they reflect future sales prices. They didn’t used to be, but once prices started dropping they began doing this to keep the LTV less than 80%.

      1. Chris

        It’s been awhile since I saw a rebuttal from IR that I can fully agree with.

        You go IR….great job.

    3. Freetrader

      Geez Thomas,

      With friends like you defending this guy, we don’t even need a judge. If he really wanted to help out his business, he could have sold the house at the peak. You state that ‘money cashed out of real estate is taxable’ which is false – cashing out phantom equity isn’t taxable, which is part of the problem. As long as you still owe the money, it isn’t taxable. You relay this yourself when in attempting to excuse the damage this fool has caused you note that the ‘debt forgiveness’ on the money he borrowed and neglected to pay back might actually be taxable. Well, OK then. Give me $5,000,000 and we’ll see how you feel if I don’t pay you back and then excuse myself by saying that it might be taxable! Besides, we both know that whatever happens, this guy will probably pay the taxes on the money he borrowed — and then refused to repay. The government, the banks, and the public all suffer because of people like this, and only the banks have some culpability since they loaned the guy the money — which is an explanation for what happened, but not an excuse.

      1. Freetrader

        correction of typo in above reply: I meant to write (pretty obviously I think) that “this guy will probably never pay the taxes” on the money he borrowed. Dropped the “never” accidently.

    4. Future OC Owner

      Of course Thomas you know the first owner of the 1st property profiled, you were behind the appraisals and know him very well. You certainly know the 2nd owner because you are him, the owner of Cerritos who recently filed BK to stall your short sale/foreclosure and the one who made millions doing fraudulent appraisals like the one you sold on Temple Hills Drive where you touted all the hoopla about all the appraisals that came in way above asking. I have a file on you a mile wide. We will eventually see you with a roommate like Madoff. Clink.

      1. priced_out

        … wow, I’d really like to hear more of what you have to say about this guy.

    5. Soapboxpolitico

      Thomas – after some thought, I’d like to add my hat to the ring …
      I’m not sure where your loyalty lies here, in other words what is it you are defending?

      The entrepreneurial spirit? – I would submit this person was hardly the model intrepid business person you suggest. It was far from risky to be a “builder” during the hey day run-up to this mess. You bought land (old dairy land) in the IE, stuffed as many boxes as you could on it and sold them at increasingly exorbitant prices to people who could ill afford them. Rather like being a saloonkeeper or prostitute during the gold rush. Further, if he was such the businessman, why did he put his home at risk to bolster a clearly failing enterprise?

      Are you defending the loan practices? – I should think by now you should have a firm grasp on how this mess were now in was created. I, Joe Taxpayer, have every right to be angry and question this guy’s motivations, morals and ethics because I’m now paying for his corrupted behavior.

      Are you defending a friend? – I admire your loyalty. However, blind loyalty to a person or cause befits neither. With friends like him, who needs enemies? Perhaps he started out with the best of intentions but clearly somewhere, sometime he crossed the line and allowed greed to corrupt his thinking. I’d ask him a very pointed question … Did he ever intend to pay off the $11MM in debt on the house? Did that reality ever cross his mind?

      Gaming loose lending standards doesn’t clear anyone of culpability; it just makes you complicit in perhaps the most widespread economic scandal in US history. I’ve always said that just because you CAN do something doesn’t mean you SHOULD. That is what is called ethics. I would never defend anyone I knew, even my own family, if I knew they’d behaved immorally or unethically because THAT is what separates humans from animals.

  13. newbie2008

    Will the banks go after a person with this recourse loan?
    Is this person related to an officer in the bank?

    1. IrvineRenter

      All these loans are recourse as they where not purchase money mortgages. The lenders may go after them if they believe they can collect.

      As for whether or not the person is related to a bank officer, you do have to wonder…

      1. tonyE

        I would imagine that with abuse of this scale the banks and the IRS will indeed move fast.

        The folks walking away from 300K are nothing, it’s the folks walking away from 3MIL that will take the hit.

        How soon before we start seeing these folks hauled to jail for failure to pay taxes? Stay tuned to KTLA?

        1. jonesy

          Don’t hold your breath. With the gub’ment printing money like crazy to buy these distressed assets, the banks won’t be in any hurry to pursue long legal actions. The T will Then just sell it off to China in the form of long term bonds, which they will just default on 20 yrs from now. The real X factor is if China will keep paying to keep us afloat? They’ve already called for the debasing of the dollar. Stay tuned!

    1. Freetrader

      Well obviously if you compare the Bay Area and Irvine you are talking Apples and Oranges (no pun on OC intended). The South peninsula is the focus of the economy for Northern California and the jobs there are plentiful and well-paying — the average worker in San Jose earned about $100k last year. Contrast that to Irvine, where the weather is nice but there is simply no economic driver equivalent to Silicon Valley. The economy in Irvine is a mish-mash of high tech, biotech, etc., but the main driver unfortunately has been real estate, where until recently the biggest employer was, um, New Century Mortgage.

      Furthermore, the lack of available land in the Bay Area makes the alternatives more difficult and expense — there simply isn’t a easy access to a vast Inland Empire like there is in OC, so the downside pricing pressure is significantly muted.

      A decent house in a nice middle-class neighborhood in SJ with comparable schools to Irvine will run you at least $200k and probably $300k more than a comparable house in Irvine. This has been the case, relatively speaking, for about the past 30 years and while things could change, I wouldn’t bet on that in the short run.

      1. grabasnorkel

        “the average worker in San Jose earned about $100k last year. Contrast that to Irvine, where the weather is nice but there is simply no economic driver equivalent to Silicon Valley.”

        ??? – data to support this?

        “until recently the biggest employer was, um, New Century Mortgage.”

        ??? – can you support this?

        “A decent house in a nice middle-class neighborhood in SJ with comparable schools to Irvine will run you at least $200k and probably $300k more than a comparable house in Irvine.”

        ??? – oh never mind. Gotta love blogs like the IHB, where posers are free to spout of “sounds ’bout right” stats while not knowing what they’re talking about.

        “Furthermore, the lack of available land in the Bay Area makes…”

        Ahh, the hallmark of a faker.

        1. Freetrader2

          Yes, I too love the IHB except where clowns like you can hide behind a screen name and make 1.) unsupported smart ass remarks or 2.) hide the fact that they are really uneducated, bottom feeding realtors desperate to get back in the game. “Faker”? How the hell would I be a faker? How does one become a faker on a blog?

          Let’s see. I currently live overseas, however, I have spent most of my life in California, in the Bay Area (where I own a home) and in Irvine (where I also own a home). I am a partner in a Big Four accounting firm, and know just a little bit about real estate, finance, economics, and taxes. The data about salaries in San Jose is available from numerous sources, and if you are trying to argue that the income base in Irvine is as healthy, or ever has been, as in San Jose, then you are either extremely uninformed or delusional. The data on NCM (oh, I should have said “private employers” since the largest employer in Irvine is probably UC) was available for a couple of years on the Wiki entry on Irvine, and I don’t recall anyone ever challenging it.

          As it happens I just refinanced both my homes. My house in Almaden Valley, San Jose (close to Leland High School) came in around $950,000, while my larger, nicer, somewhat newer house in Irvine (University High) was around $650,000. Coincidentally, both houses cost around the same amount (several years apart) so I have had a vetsed interest in tracking the RE market in both places for about 10 years now, and the distinction I mentioned has been pretty consistent over that time. If I had to choose today between the two locations, I would probably retire in Irvine.

          As far as the IE, I suggest you read the previous blogs by IR and others regarding the pricing pressure faced by OC due to the collapse of the IE, or if that is too much for you to handle, try looking at map.

          If there is a poser here, pal, I suggest its you.

          1. nefron

            Just curious Freetrader, since I follow the UP neighborhood very closely, just how big and new is your home, and in what section of UP? I’d like to get a fix on what $650,000 would get me in UP these days, since there’s just about nothing on the market.

          2. Freetrader

            It is in fact in UP — which for some reason is not very highly regarded in Irvine and has somewhat lower comps that some of the other neighborhoods. But we really like it there.

            It is a 5bd/2.5ba/2419 sq ft, one storey, built in 1970, so fairly old but average for UP. I don’t remember the model name but those are the stats. Our house looks reasonably good from the street and has a great view of a green park in the back, but like all Irvine homes has a tiny lot. Of course, who really knows how valid an appraisal is now, or ever was.

            BTW, I just read in the community newsletter that Lyon Homes is planning on building some more two story single residences on the old Vista Verde School location. I would assume they won’t build anything for at least a couple of years, but it will be interesting to see what effect some newer housing has on the relatively old UP area, once we bottom out.

          3. grabasnorkel

            do big-shot accounting “partners” like you (right) have a habit of not checking your facts and reviving old saws about running out of land?

          4. Chris

            Well, I wouldn’t dispute what Freetrader mentioned above since I make over the avg salary in his previous statement. There are a lot of high tech folks here in the BA, that’s for sure.

            However, I still wouldn’t buy BA for these reasons:

            1. For homes in nice school district (think high APIs), you must pay at least $200-300k more than similar school district qualities in Irvine. Almaden Valley pricing is just as ridiculous as Willow Glen because of Leland High (Freetrader knows what I’m talking about….think Monta Vista High).

            2. High tech is consolidating (think ORCL and JAVA). Consolidation will amount to job losses, I can guarantee you that. Silicon Valley is becoming like Detroit except for the fact that it hasn’t be run by unions so it’s still healthy in a way. However, the dot bomb back in ’01 basically killed any chances of making it big here (although there still might be a small chance of getting lucky there). R&D? Forget the R…it’s all D here.

            3. Staid life here. It might be me but, frankly, high tech hubs are not exactly a mega attraction for fun activities or else employers will look elsewhere where they can squeeze as many staid hours outta you as they can. It runs in the family too as children of high tech workers become bored of life after heavy doses of homework and activities that are geared toward Ivy-League type schools. It’s not as bad in Irvine….well, that perhaps might be subjective.

            With #2 above, it’ll have an effect on the housing prices in the Bay Area (South Bay in particular). But the key is MEW and, AFAIK, not as many BA folks drank the kool-aid so that might hold up the prices.

            But seriously, would you spend $2+ mill on a Victorian House in Willow Glen?

          5. Freetrader


            I agree, I would not spend $2M on a house in Willow Glen, and I think most of your comments are spot on…I was trying to point out the differences in the markets and the reasons, historically, why the BA has had higher pricing.

            My personal view is that you are absolutely correct with point #1, and at least partially correct on #2 (SV has historically boomed, busted, consolidated, and sprouted again, but the past is not a certain guide to the future, and it is true that Detroit was once a high-tech location in its way), but for me, #3 is the real clincher…Irvine, and OC more generally, is just a nice place to live. I would defend the BA somewhat to say that there are lots of fun things to do up there, especially if you are outdoor-oriented, but the weather in OC is even better — probably some of the best weather in the world. Still, to live somewhere, you usually have to have a job, and there are still a lot more jobs in the BA, which is why the pricing is generally higher.

          6. nefron

            Yeah, I was confused by the discussion in the newsletter, which, from what I recall, said something like the community association wanted some kind of restrictions on how WLH would develop the property, but didn’t get anything. So what exactly that means, I don’t know. I only know that it’s going to impact the most expensive part of UP, Parkside, and increase congestion around the Terrace. I was looking in the Terrace, but when I read about the development, I decided to pass on the Terrace. That hasn’t stopped the buyers, though – the most recent 3-bedroom on the marekt there went into escrow within a couple of weeks. At that speed, I figure it went for close to asking price – over $500,000 for an attached 3 bedroom 1500 square foot home built close to 35 years ago. I continue to choose to rent.

          7. Freetrader


            The situation with the school is annoying. It was a great school and now the kiddies have to mostly go over to Turtle Rock. The fact that the builder is supposedly going to build high end homes there doesn’t compensate for the increased congestion, etc. However, to put my NIMBY hat on, I was somewhat relieved that they aren’t planning on building some quasi-public housing there, which was the rumour when our fair city government sold the land to Lyon.

          8. nefron

            I hear you. If I were a homeowner nearby I’d feel the same way. It’s easy to criticize other people who want to keep something like a recycling plant or a public housing development out of their neighborhood, until it’s your own neighborhood they’re talking about. Not so easy then.

  14. scott

    Another theme from these listings is just how much money people were making off the real estate industry. I suspect the owners of these homes were making alot of money during the bubble years which is probably why they bank’s lent as much as they did. So not only were the “DTI’s” based on silly lending standards but the “I”‘s were Bubble Income. So it will be a double-whammy ie not only can you borrow less of a multiple of your income but incomes will go down. I’d think this will particularly hit your 600k-2m range as I suspect alot of the high six figure income people were in the real estate biz in Southern California. Any stats for how many people worked in real estate related areas (including mortgage, re brokers, developers, etc) during the bubble?

  15. IrvineCyclist

    I have to say I’m a little taken aback by some of this discussion. Are you are saying that it’s not ok to restructure loans on a home you live in? Does that apply to a second home or an investment property? Real estate is an asset class and in a free market people are allowed to borrow against their assets. You should be satisfied if people have to prove they can afford this leverage and leave your personal preferences and preachiness out of it. And If a businessperson wants to deploy his capital and risk losing it all on a venture, it’s nobody’s business but his own. In a strict lending environment, his lender shouldn’t even lose, so in theory it’s not even their business. All that’s needed is sound lending practices, and not real estate police. And I’m really surprised that there’s disagreement over whether HELOC proceeds are taxable. They are not taxable when they are received, because a loan is outstanding, but they’re an advance of capital gains which are taxed later. Capital gains are paid on the difference between what you buy an asset for and what you sell if for (after the exclusion). It makes no difference whether you have loans on the asset or not. An asset bought for $100 and sold for $200 produces a gain of $100 and that is taxable whether or not it was financed.

    1. Eat it in the OC

      That’s all well and good, except you left out the part about Citi, BOA etc all accepting taxpayer borrowed money to pay for these advances on future capital gains. So I shouldn’t be angry that they mortgaged my future, my children’s future and quite possibly my children’s children’s future?

    2. Laura Louzader

      In a truly free market this FB would never have been able to borrow this kind of money against his house, because in a truly free market (which the U.S. has never had)there would be no Freddie Mac, Fannie Mae, or Ginnie Mae to buy all the crap paper away from the banks. There would be no explicit or implicit government guarantees for imprudent lenders.

      In a free market, you must eat the results of your risk-taking, for better or for worse. Only because it has always been understood by financial institutions that they will be bailed out by the U.S. treasury, would lenders take the risks they took in during the housing rampage.

      1. jefa

        Well, where does AIG fit into that scenario? Insurers who take the paper and assure you that your risk is totally mitigated to the tune of x, and then when everything drops they realize they’re screwed.

        I don’t think Fannie Mae was part of AIG’s thinking. In fact, I know someone who worked at a ratings agency, and he told them the paper was worthless, and he was nearly fired. (ratings agencies make their money from those they rate).

        What did Fannie Mae have to do with his worthless rating getting transformed into a AAA on the paper? Nothing.

    3. IrvineRenter

      “And If a businessperson wants to deploy his capital and risk losing it all on a venture, it’s nobody’s business but his own.”

      I know it was stated above, but I want to reiterate: these people lost money that you and I have to pay back. That gives me a vested interest in this guy and every right to be pissed off about his behavior.

    4. Freetrader


      You make some good points, although I think the fact that the loans were available speaks to both a broken system with a lack of proper risk aversion on the part of both the banks and the borrower.

      But, to clarify, HELOC advances are certainly not taxable. If the loan is subsequently paid off, the only tax impact is the (partially or potentially) deductible interest paid by the borrower. However, in a default situation when the loan is written off by the lender, which is the vast majority of the situations we view these days at IHB, the HELOC advance SHOULD be taxable as relief of indebtedness income (Section 108). The borrower should get a 1099 from the lender, and be subject to tax on the amount they borrowed and didn’t pay back (plus interest). What we have seen anecdotally on this blog is that apparently some lenders are so screwed up that they don’t even issue 1099s, which allows the defaulters, assuming they are comfortable with tax fraud (no suprise that they mostly are) walk away clean. That is the situation now…whether there will be a new series of IRS focused tax audits on this issue is speculation at this point, although I think a working tax system demands it.

    1. IrvineRenter

      Not a chance. The high end neighborhoods have yet to be flattened. The low end neighborhoods that have already been pounded are closer to the bottom than the nice neighborhoods.

    2. newbie2008

      “Banks are an even bigger X factor, and not just because of their stricter lending requirements and bailout havoc. USC real estate professor Tracey Seslen said she’d heard that lenders were carefully timing the release of homes they’d repossessed to avoid further flooding the market and driving prices down more. Those institutions also know that a fresh avalanche of foreclosures from people with resetting loans may be looming”

      Thanks for the link, thrifty. Will save some money instead of being setup to lose the money.

    1. RE in the LBC

      Amazing. Started out asking $1,299,000 and 18 price reductions (and one increase!) later, it’s asking $535,000.

      That is some serious market-chasing.

      1. Geotpf

        Of course, it’s a short sale, so pricing might be completely fictitious. Plus, it’s less than 100 yards from the “Detroit River”, as Jim the Realtor calls it, aka the 5 freeway. “Feel the serenity of the ocean and canyon” my ass. Feel the noise and pollution of the interstate is more like it.

  16. newbie2008

    IrvineCyclist ,
    When are private loss that are paid by the govt (therefore taxpayers) free market?

    Capital gains on house appreciation is not taxable up to to a certain amount. Loan forgiveness is likely taxable, except in certain special cases and for a few special years especially for the zero down crowd. It looks like the banks get bailed out, large loan abusers get their special cram downs and loan forgiveness, but the little guy and responsible regular W2 earners get stuck with the bill.

    I figure that my future grandchildren will be still paying for these bailout when they retire (BTW: my children are still in school).

    Some of the proposed restructuring by the White House looks like converting non-recourse loans into recourse loan. That maybe best for the banks, but not necessary good long-term for the homeowners.

  17. MalibuRenter

    You will eventually find a HELOC abuser for $10 mil+. I think I might know where to look.

    Point Dume, Malibu.

    At the edge of Point Dume, you might also find a $1 million+ HELOC abuse on a mobile home in Paradise Cove.

    1. IrvineRenter

      If you have some good candidates, email me. I was going to look into Malibu next weekend. It does seem like prime hunting grounds.

  18. Markus Arelius

    Great post.
    Man, I’ve always wondered “how they did it”. The speed boats, the convertible Mustang for the wife, the Lexus for the girlfriend on the side, those week long vacations to Cancun and Spain.
    Now I get understand.

    But is there another underlying story here as well about the tax implications associated with these loans and foreclosure and how the IRS might consider this money “income” on tax day?

    Love to hear stories about great parties. I just hate it when I’m the one having to clean up the mess afterward with more of my taxdollars.

  19. Transplant

    Got to admit, if I had 9 million I buy that house on the water in a second. Actually, maybe if I had 30 million I would buy it in a second, just to be safe. If I had 30 million I could afford to be a knife catcher.

  20. srla

    Excellent reporting, the very kind that is so sorely lacking in the mainstream media as it slowly withers away.

    Ironically, today the press ran with the latest NAR “Yunspin” hyping a whopping 1.1% uptick in new contracts (despite a far lower conversion of contracts to sales that renders this uptick null). Of course, the press totally ignores the current waves of NOD, the coming waves of alt-A and option-ARM resets, the escalating, double-digit unemployment, and the types of HELOC abuse time bombs you are highlighting.

    Apparently, the huge amount of evidence presaging a coming plunge in prices is outweighed, in their minds, by the slightest bit of manufactured “positive” news. I never thought I would be actually cheering the demise of the mainstream press, but given that it has devolved into a mere spin and propaganda machine for the financial sector, it deserves to die. Hopefully the new class of online journalists can continue to step up and fill the void.

  21. Kristen

    Check out 530 Ruby in Laguna Beach. I have been watching this property for a year and the owners are unreal with their tricks and ability to keep out of a foreclosure. They are the problem with this country. Please do a report on these people and the property…it is fascinating!

    1. Kristen

      Don’t be fooled by the data here. If you do some research you will see that this family have swapped names and agents over and over again. The taxpayers (myself included) are out over $1,000,000.00 on this property so far and these people are asking for the following (email from a Laguna Beach realtor):
      Here is the motivation for the Seller as you may recall: The Seller will have “$0” cash upon close of the short sale so he is going to accept the Offer with the largest cash amount back to him. He is asking the Buyer to buy back some or all of the furnishings which is the cash part of the deal. The offer price is less important to him in other words. If the offer it too low, the bank may counter back. The agent said if you made an offer price at 700K, for example, and a “Buyer to purchase all furnishings for 75K” added into the contract than that would be of interest to the Seller. The point being the Seller will probably choose the offer that has the highest cash portion of the deal and submit that offer to the bank (as you are not required to submit all offers to the bank, unfortunately).”

  22. John Madison

    Wow! I can’t believe these people were taken advantage of like that! These people are true victims.
    That’s what the losers in the Obama administration want to say about the same mentality of those who bought lower priced houses. But, trust me – it’s no different. EVERYBODY knew exactly what they were doing! Even those elderly minority “victims” you see all over the news. They were all geniuses on the way up, and somehow they are now victims on the way down.
    Of course, that socialist prick Obama wants to bail every loser in America out. Guess what?
    He is going to screw this country up so bad we may never recover from his corruption.

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