Our popular tour to surrounding communities in search of HELOC abuse has turned up a gem in Newport Coast. I admit, I cherry picked this one, but I suspected I could top the $3,367,500 HELOC Abuse from Hollywood and even the $5,000,000 HELOC abuse from Laguna Beach last week, and I was right.
Newport Coast sets the new HELOC Abuse record: $7,000,000. Congratulations Newport Coast!
Asking Price: $6,500,000
I’m Too Sexy — Right Said Fred
I’m too sexy for my shirt too sexy for my shirt
So sexy it hurts
And I’m too sexy for Milan too sexy for Milan
New York and Japan
Newport Coast is where all the beautiful people live. Newport Coast residents have big fancy homes, and they are so rich and sexy that the rest of us can only watch and be envious–at least that’s what many there believe. A number of very wealthy people do live there. As I looked through the property records, there were many properties owned with no debt. As a percentage of listings, it is higher than what I have seen in other places. Of course, with our highly leveraged society, that doesn’t take much. Unfortunately, like everywhere else in California, it has been invaded by the pretenders too.
Today’s featured property started with no debt, but from 2001 through
2006 the debt went from zero to $7,000,000 in that telltale sign of slow
accumulation through persistent HELOC abuse.
It must be nice to make a million dollars a year off your house. You get to live in a beautiful mansion, you don’t have to do anything, and the house gives you a million dollars a year to spend. Who wouldn’t want that? (Remember The California Social Contract?)
Ponder that lifestyle for a moment…
If you could just get in to a house like that, you get a beautiful home and practically unlimited spending money…
I could see where that would be a very desirable set of circumstances. Do you think they can reinflate the housing bubble after I get one of these houses?
With houses being so desirable, it is no wonder prices went up a great deal, and despite the falling prices all around, the kool aid is still freely flowing, particularly in these high end neighborhoods. They are simply refusing to let the party end; too bad the lenders are not longer helping them out.
Back in the day, the bulls used to claim “it is different this time.” In some ways, it is. What really makes this recession different is the debt levels of Americans. This recession was caused by debt and the collapse of debt structures. This recession will continue until this excess debt is flushed from the system. There are no short cuts.
In past recessions people would borrow from credit cards or other sources and maintaining their lifestyles until the economy picked up and they could either pay off some debt or be issued more credit. That is not working this time because we already have too much debt. The credit card companies already see this coming, and many of them are cutting back on credit lines because they know unemployed borrowers will max out their credit lines before going under. Lenders know debt is the problem, and more debt is not going to bridge the divide. According to our own government, even the lenders need to raise money, and they cannot borrow to do it.
All the pretenders who have been living off their homes are awaiting the re-inflation of the housing bubble. Rising home prices and the resultant HELOC income is the only way their lifestyles can be maintained. This is not going to happen. We hit the ultimate limit of our ability to borrow as a society. We are going to be forced to live within our means, after an enormous amount of painful debt restructuring.
When I look around these neighborhoods of hopelessly overextended HELOC dependent homeowners, I keep coming to the same conclusion; there must be a massive purging of personal debt. We are already seeing this in Riverside County. Entire neighborhoods of homes are turning over, and household debts are being cut in half. It is a painful process characterized by waves of foreclosures and personal bankruptcies, but it is a necessary one. The people in Orange County, and in particular in the beach communities, are in complete denial that this same purging must happen in their neighborhoods. It must, and it will.
Think about it. These people have more debt than they can afford. This problem requires someone who can afford these debt levels to buy them out and pay off their debts. That is the Ponzi Scheme. But what happens when there are not enough people making the incomes necessary to take out the previous debt? Someone is going to be left with debts they cannot afford and nobody to bail them out. The music stops and they don’t have a chair. Right now in Newport Coast, there are hundreds of homeowners dancing and very few chairs.
Asking Price: $6,500,000
Income Requirement: $1,625,000
Downpayment Needed: $1,300,000
Monthly Equity Burn: $54,166
Purchase Price: $1,341,000
Purchase Date: 4/18/2001
|Property Type:||Single Family Residence|
|View:||City Lights, Hills, Ocean, Panoramic, Water|
|On Redfin:||139 days|
Judging by the description, even the agent doesn’t give a crap. What chance do you see of this selling?
Unfortunately, a nicer house next door on Shoreridge went into escrow based on a $4.5 million asking price, and 50 Shoreridge (which may have a peek ocean view) sold in January for $4.9 million. A couple of chairs were filled, and this owner is still dancing…
So how did these people do it?
- The property was purchased on 4/18/2001 for $1,341,000. It appears the buyers paid cash. I guess having that kind of cash is a barrier to getting started…
- On 3/5/2002 they took out a first mortgage for $1,000,001 and opened a HELOC for $1,050,000 which they did not use.
- On 7/25/2002 they refinanced with a $1,285,000 first mortgage.
- On 4/21/2003 they refinanced with a $1,500,000 first mortgage.
- On 11/19/2003 they refinanced with a $2,500,000 first mortgage and opened a $750,000 HELOC.
- On 3/11/2005 they refinanced with a $4,750,000 first mortgage.
- On 5/5/2005 they opened a HELOC for $975,000.
- On 3/21/2006 they refinanced with a $6,000,000 first mortgage and opened a $1,000,000 HELOC.
- Total property debt is $7,000,000.
- Total mortgage equity withdrawal is $7,000,000 including their $1,341,000 downpayment which is now gone.
It was less than 5 years between the first mortgage and the final refinance. That is $1,400,000 a year from the house. If this property sells for its current asking price, and if a 6% commission is paid, the total loss to the lender will be $890,000.
Last week, a couple of the astute observers argued that this shouldn’t be our concern; it is a problem between a borrower and a lender. Bullshit. The moment we all became liable for these losses through our tax dollars, it becomes very much our business. I think the MSM is missing a big story by not telling the tale of these people. I imagine Joe SixPack would love to see where his tax dollars are going.
I have documented larger losses in Irvine than the loss on this property, but this one is unique because the sale would actually be recording a $5,000,000 gain for the owners. I wonder if the IRS will give them capital gains tax relief? It is a bit over the exempt amount. You don’t mind subsidizing this behavior with your tax dollars, do you?
And I’m too sexy for your party
Too sexy for your party
No way I’m disco dancing
I’m too sexy for my car too sexy for my car
Too sexy by far
And I’m too sexy for my hat
Too sexy for my hat what do you think about that
I’m Too Sexy — Right Said Fred