The ATM Value

Now that HELOC abuse and housing ATM addiction are part of our culture, how does it change the value of real estate?

Asking Price: $430,650
Address: 10 Pebblepath Irvine, CA 92614

Seal the door (of which only one lock works)
What is expected of me now…who knows
With tacks stuck in toes
Debating on what’s likable
But certainly this isn’t home
Certainly not

Awful Fall — Stolen Babies

This isn’t home. Certainly not. It is a hidden ATM machine. Someone took one of the least desirable properties in Irvine and managed to milk it for $384,640 in cash withdrawals through HELOC abuse. As we have all seen here at the IHB, this homeowner was not alone. Now that houses are viewed as great investments that enable owners to borrow and spend, people may be willing to pay more to get one.

Real estate in California is magic. Ordinary tract homes can attain Manhattan Island values. Houses are not merely shelter, they are investments with unlimited wealth potential that can double your income — at least in the kool aid intoxicated world of most would-be owners.

Does kool aid intoxication add value? It does cause people to overbid because they believe they will be compensated for the additional “investment” through mortgage equity withdrawal. Can the collective action of the foolish herd sustain inflated prices forever?

We will see. I doubt it.

Asking Price: $430,650

Income Requirement: $81,534
Downpayment Needed: $86,130

Purchase Price: $169,500
Purchase Date: 5/13/1997

Net Gain (Loss): $235,311
Percent Change: 154.1%
Annual Appreciation: 12.5%

Address: 10 Pebblepath Irvine, CA 92614

Beds: 2
Baths: 2
Sq. Ft.: 1,216
$/Sq. Ft.: $354
Lot Size: 3,240 Sq. Ft.
Property Type: Single Family Residence
Style: Traditional
Stories: 1
Year Built: 1980
Community: Woodbridge
County: Orange
MLS#: S589372
Source: SoCalMLS
Status: Active
On Redfin: 3 day

Possibilities abound in this single-level Woodbridge home! Vaulted ceilings in living room and master bedroom, fireplace in living room and a family room or large dining area/breakfast-nook off kitchen.

Possibilities abound…

This is one of the worst locations in Irvine…

10 Pebblepath   Irvine, CA 92614

Think about the noise and pollution at this location. When you are right at the intersection, the noise is not a consistent drone, but rather an endless series of stopping and starting movements. People will squeal tires, lock up brakes, grind through gears and show off their new exhaust pipes. Have you ever noticed that first puff of smoke that comes from a car or bus when they first step on the gas? That is the air you would breathe here.

This owner was an epic HELOC abuser, not for the amount, but for the frequency of the withdrawals and percentage of original value — this homeowner refinanced twelve times and borrowed more than three times what he paid for the house.

  • This property was purchased on 5/13/1997 for $169,500. The owner used a $135,360 first mortgage and a $34,140. At least he did have some of his own money in there for a while.
  • On 5/21/1998 he opened a HELOC for $18,800.
  • On 9/1/1998 he took out a stand-alone second for $52,500.
  • On 12/31/1998 he refinanced the first mortgage for $198,500. As you can see, he learned HELOC abuse early.
  • On 2/8/1999 he opened a HELOC for $12,400.
  • On 9/27/1999 he opened a HELOC for $40,000.
  • On 10/21/2002 he refinanced the first mortgage for $254,000.
  • On 5/16/2003 he refinanced the first mortgage for $292,500.
  • On 11/13/2003 he refinanced the first mortgage for $318,000.
  • On 10/1/2004 he refinanced the first mortgage for $353,000.
  • On 2/22/2005 he opened a HELOC for $45,500.
  • On 8/30/2006 he refinanced the first mortgage for $472,500.
  • On 4/18/2007 he refinanced the first mortgage for $520,000.
  • Total property debt is $520,000
  • Total mortgage equity withdrawal is $384,640.

This owner was not finished playing the game when the ATM closed down. He arranged for a loan modification to extend his time and then defaulted again.

Foreclosure Record
Recording Date: 03/06/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2009000105992

Foreclosure Record
Recording Date: 12/04/2008
Document Type: Notice of Default
Document #: 2008000559854

Foreclosure Record
Recording Date: 06/06/2008
Document Type: Notice of Rescission
Document #: 2008000271889

Foreclosure Record
Recording Date: 04/22/2008
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)
Document #: 2008000187359

Foreclosure Record
Recording Date: 01/17/2008
Document Type: Notice of Default
Document #: 2008000025457

This owner was hopelessly addicted to the home ATM. Obviously, he did not intend to pay back this money. His plan was to transfer this debt to someone else when he sold the home — if he sold the home. Most people believed the housing ATM was going to keep giving twice-yearly cash infusions to support the lifestyle to which they have become entitled.

Do you think the lenders will enable this again?

I am quite certain that many, many people in California expect lenders to go back to their foolish ways soon. Houses are much more than a place to live, it is a great cashflow investment that can support significant supplemental spending. The only drawback is that you must lose the home, your income and your credit score when the Ponzi Scheme blows up. Many will gladly pay that price if given another opportunity.

The lenders will reap what they sow.

57 thoughts on “The ATM Value

  1. Freetrader

    One gets punch drunk after reading IHB for awhile. The daily listing of abuse is relentless.

    The place does look like a bit of a dump — SFR on a 3500 sq ft lot (I don’t mean to knock anyone who would pay a fair price for it — but this guy extracted half a million dollars). Does that really even qualify as a ‘SFR’ — isn’t it a ‘condo’?

    Anyway, Redfin indicates a sale on July 23, 2009 for $422,100. Was that the bank taking it over? The ad makes it look like it is still owned by the HELOC abuser.

    1. IrvineRenter

      No, the bank does own the property now. They bought it back in 2007 when they loaned this guy $520,000 on this POS. The bank didn’t realize they bought it then, but they did. They picked it up at auction a couple of months ago, so now it is officially their problem.

    2. Dan in FL

      The bank owns this and they think it’s worth $350/sqft?

      Realistic prices in realistic cities are hitting the $85-$90/sqft price range. Is there anything that really makes this area four times more expensive?

      1. Craig

        $350 per square foot is still realistic (i.e. people will pay it for some reason) in the best neighborhoods in Irvine. A realistic price for this home would be $250 per square foot, or about $300K. (I expect prices to fall substantially more, but they haven’t yet.)

        The location is not as bad as IrvineRenter makes it out to be. Sure, it’s not secluded and it’s close to a major intersection, but it’s also pretty centrally located, and close to everything. Some people like short commutes.

  2. cara

    There’s a Kenneth Harney article in the LA Times on strategic default (of which this is definitely not an example, strategy home-ATMing maybe). What are your thoughts on whether these people will be pursued? If they’re already trying to identify those who might strategically default, then presumably they can try to ID those with other assets or a good enough income stream to attempt to tap, or force bankruptcy.

    1. QueenCityEddie

      The story clearly identifies the bulk of strategic defaulters as being in a serious negative equity position on realistic valuations. As such they are much closer to renters and their “landlord” is simply charing them too much for the property and market. I don’t think you’ll see many of these folks pursued at all. If they have big seconds or HELOCs, maybe, but if it just a first they will likely be left alone, excluding the credit score hit. And the credit score hit is going to look pretty excuseable in a couple of years for loans that have otherwise solid underwriting.

  3. Emily

    That actually looks like a nice little house, at least from the outside. It’s not dominated by a garage. That makes a house look ugly, to me anyway.

    I’m not saying that I’d want to buy it. The location, as IR points out, is terrible. And I’m not looking to buy a house anyway. I already own one in a different state. But the house does have “curb appeal.”

    1. IrvineRenter

      Part of the problem with this house is that there is not road in front of it. You can’t see the house from the curb. It has 100′-down-the-sidewalk appeal.

      1. Sue in Irvine

        This is one of the Cottage homes in a different phase than the one profiled weeks ago. It could look a lot better if they had fixed up the outside with some of the HELOC money. This model is long and narrow. I drive through that intersection at Culver and Main every day. The traffic is especially heavy in the morning of school days.

    2. autox

      you definition of curb appeal is certainly different from my definition of curb appeal.

      I’ll take a McMansion over that owl house with windows any day of the wk.

    3. SoOCOwner

      I think it has the potential to be very cute. However as it stands now, it has surpassed ugly – it is fugly.

      1. thrifty

        And why do people keep saying you need a/c in Irvine – with that wonderful ocean breeze and equable climate??

          1. thrifty

            Partly ๐Ÿ™‚
            There do seem to be some who think a/c isn’t needed. Having lived in San Clemente for a couple of decades, I found that a/c was needed about 4-6 weeks a year. Lately, I think that is increasing. Since Irvine is further inland, I assume it is at least as or warmer than S.C.

  4. winstongator

    Can anyone estimate the fees all these refis generated? A good portion of the equity ‘extracted’ will have stayed with the bank.

    I think tax value getting reset with refi appraisal would have slowed this type of abuse.

    What bank refi’d this home’s 1st for 520 in April 2007? The Bear hedge funds had already imploded by then and the writing was becoming visible to all.

    With the recession & bailouts, taxpayers are reaping what the lenders sowed. Many are out of business, but their trail of damage is long and wide, and touches many who did not participate.

    1. tonye

      The tax value did not get reset.

      Per Prop 13 the tax value gets modified only when you pull working permits and add to the property or when you sell.

      1. winstongator

        I understand that, and why prop 13 is there. The ‘we can’t afford the higher taxes’ excuse dies when you accept higher P&I payments. I think laws like Prop13 are ok, but can be modified to discourage refi abuse, or at least have municipalities get a little more to offset future decreases.

        My point is that I’d like to see laws like that changed to have agreed-to appraisals for refi reflected for tax value purposes.

        1. tonye

          Well, if you refinance correctly:

          (1) You simply refinance your existing mortage. Hence there is no ATM. No gain.

          (2) The IRS allows you to cash out $100K over your purchase price, which is sort of an advance when you sell your house. Since there is no sale, I suppose you could argue for the additional tax, but since there was no value added to the house you might have some problems with an RE tax.

          (3) Refinance for a remodel. In this case you add value to the house and you are subject to a tax increase to the tune of the “additional value at current market rates”, so in that case, yes, you pay more tax.

          Of course, I understand your point about refinance abusers. The LA Times carried a blurb this weekend were the IRS is being asked to look into it to make sure that people who take out more than 100K over their purchase price in cash do not deduct that part of the mortgage.

          1. winstongator

            The spirit of prop 13 seems to be that property appraisals for tax purposes should reflect market prices, except where those increased taxes would adversely affect a long-term homeowner. When people refi & increase the balance on the loan, they are choosing to increase their payment, and an associated increase in property taxes is fair.

            As IR said, this would probably not have stopped many heloc abusers, but think. You buy for 300k, taxes 3k. You refi to 600k It would add $250/month to the payment. That’s a decent small car.

            Maybe you cap it at the total loan value, so that if you want a heloc for 25k or something you dont’ get hit with the full reappraisal, but the view of a home as unimpeachable collateral was not helpful.

  5. Geotpf

    I didn’t know there were houses in Irvine this small. Condos, sure. Other cities, sure. But in Irvine the smallest house is normally about twice this size.

  6. E

    Banks = Grocers

    Homes = Bananas

    Have you ever been to the supermarket and seen the nearly empty banana display with a minimal amount of overripe bananas on their way to becoming rotten?

    It’s not like the store is out of bananas. Rather, if they put the nice fresh ones out first, nobody would buy the spotted ones.

    This POS isn’t even worthy of banana bread.

    1. Bitter Renter

      > Have you ever been to the supermarket and seen the nearly empty banana display with a minimal amount of overripe bananas on their way to becoming rotten?

      Um… no. At least not in many many years. Where the heck are you shopping?

      At the markets I go to, the majority of the (large pile of) bananas are green, with a handful of bunches getting close to the point of losing all their green. Definitely no brown, rotting bananas.

  7. IrvineRenter

    $30 billion home loan time bomb set for 2010

    Thousands of Bay Area homes have a ticking time bomb embedded in their mortgage. The homes were purchased with loans known as option ARMs, short for adjustable rate mortgages.

    Joey Amacker in the backyard of his Newark home, which is…ARM recast for the Bay Area metropolitan statistical area…Joey Amacker makes dinner at his Newark home, underwater …

    Next year, many option ARM payments will begin to readjust, slamming borrowers with dramatically higher monthly mortgage bills. Analysts say that could unleash the next big wave of foreclosures – and home-loan data show that the risky loans were heavily used in the Bay Area.

    From 2004 to 2008, “one in five people who took out a mortgage loan (for both purchases and refinancing) in the San Francisco metropolitan region (San Francisco, Alameda, Contra Costa, Marin and San Mateo counties) got an option ARM,” said Bob Visini, senior director of marketing in San Francisco at First American CoreLogic, a mortgage research firm. “That’s more than twice the national average.

    “People think option ARMs (will be) a national crisis,” he said. “That’s not really true. It’s just in higher-cost areas like California where you see their prevalence.”

    Of the 10 metro areas nationwide with the most option ARMs, three are in the Bay Area, according to Fitch Ratings, a New York research firm. They are the East Bay counties of Alameda and Contra Costa, the South Bay area of Santa Clara and San Benito counties, and the counties of San Francisco, Marin and San Mateo.

    Together, these areas account for the second-most option ARMs in the country, although they are still far behind the greater Los Angeles area (including Los Angeles, Riverside, San Bernardino and Orange counties), according to Fitch data.

    First American shows more than 54,000 option ARMs issued here with a value of about $30.9 billion. Fitch shows more than 47,000 option ARMs here with a value of about $28 billion. Both say their data underestimate the totals.

    1. CA

      Nothing new here for readers of this blog and Mish, just makes it more “readable” for popular consumption.

      IR…wish there was an IDENTICAL blog like this for the bay area, but irvine is a “special” place and can’t imagine you writing for any other city/locale. keep up the good work!

      As for this home…I’d rather take this little home than the Ave1 condos directly facing jamboree. Culver, while essentially being a freeway, is decidedly less so. Since Main terminates at the loop right there, there’s less through traffic than Alton, Barranca, or Irvine Ctr. Drive. Still a mess though, but you can do worse….granted, I think the properties on Culver and Alton/Barranca/IVC are all apartments.

    2. HydroCabron

      In the CalculatedRisk comments on this article, a mortgage-professional type in Florida mentioned that she had arranged plenty of neg-am loans with a 10-year fixed-payment period.

      I have trouble believing that there are more than a few of these sleeping land mines, but if there are, here’s hoping that the holders capitulate early.

      10 years: Were banks really that stupid?

    3. tonye

      Honestly, what’s 30 Billion when our Gov threw like 1.5 trillion into Wall Street and the banks last year.

      Perhaps the way out of this mess will be to give money to every taxpayer this year. And to stop helping the banks.

      Helping the banks helps the investors, many of them foreigners.

      Helping the taxpayers puts the money into the banks as deposits (helping the balance) and into spending.

      I think that works out to $1.487 trillion divided by 156.3 million equals $9,513.76 per U.S. taxpayer.

      1. E

        30 Billion probably doesn’t sound like much until you consider the derivatives that were spun off by the wall street crooks.

      2. newbie2008

        Do the math:
        1. If they give the money directly to the taxpayer/citizens, how much campaign contributions will the two parties get? I
        2. If the govt gives the money to the banks and WS how much campaign contributions will the two parties get?
        3. If the US banks defaults on the loans, who’s going to lend the new US banks money? The citizens must lend (no choice) to the US banks by the use of US dollars, deposit, and taxes.

        We stuck with the system and their not much we can do about it except work financially within that system.

        1. tonye

          Well, that kind of thought sure helped Benedict Arnold back in 1776, huh?

          If we all thought like that we’d be part of the British Commonwealth and the US-Mexico Border would be somewhere in St. Louis, not San Diego.

          Actually, since I live in Irvine, I wouldn’t be part of the British Commonwealth but -hopefully- some rich white gabacho in a nice hacienda.

          1. newbie2008

            Tonye, Old BA was just one against many. Just think if the Brits paid off the entire contintential congress instead of going head to head, but then again the Brits were going up against fanatical Christians who beleived that God made man in his image and thus has God given rights. Look how far the USA has progressed.

            I don’t agree with what’s going on, I just try to deal with it the best I can.

      3. Freetrader

        Actually, the federal government made a profit with its equity injections into the banking system. The $1.5 trillion stabilized the industry and will probably be returned to the taxpayer with interest. It is arguably true that the banks are still underestimating their problems and will be slammed by another wave, but I wouldn’t assume (as most people do) that the $1.5 trillion is a sunk cost.

  8. dafox

    First NOD 1/17/08. Meaning they stopped paying ~Oct 2007.
    10/07->7/09 = 21 months of being in the house for free. 18 months from NOD->REO.

    Thats the timeline I think is becoming more and more ‘the norm’. If you add an attempt at a shortsale in there, you can stretch that NOD->REO timeline to 24mo pretty easily.

    IR, I’ve told ya before – I dont think our old NOD->REO=12mo timeline exists anymore. For those that dont try *at all*, yes. I believe most people are trying to stay in their homes, therefore extending their stay.

    1. IrvineRenter

      Yes, that is what I am seeing. It is also why the cure rates are so low. It certainly throws off my attempts to calculate shadow inventory.

  9. Waterdog

    IR or anyone,
    can you clarify this or tell me if I’ve got it right?
    When I see “notice of default” on 1/17/08, does that mean the owner has missed roughly 3 months of payments already? If so, does the “notice of rescission” mean that the loan was modified by the lender at the last second? And finally, with the final “notice of sale” on 3/6/09 the bank obviously took back the property. Is it possible that this owner has not made a payment since late 2007? I hope not cuz that would be another huge chunk of money this owner squeezed out his cottage.

    1. mike in irvine

      In a way he makes us renters look like fools. This owner lived rent free for almost two years, HELOC’ed the heck out of the house. In 7 years his credit will be clean and he home prices should be low enough for him to repeat this scam again.

      The state and county lose out on two years worth of taxes. Bankers made the money off of his loan and refi’s. Eventually someone has to pay for for this mess..any guesses?

      1. maliburenter

        The property taxes will be paid, with penalties and interest. If counties could have huge numbers of people be just late enough to get the penalties, they would be overjoyed.

  10. Laura Louzader

    This is unbelievable. This little house is a piece of garbage by Irvine standards. It looks like the ticky-tacky you see in rapidly deteriorating south Cook County Post WW2 suburbs. I’m surprised it was allowed to be built as late as 1980.

    I’d give the price of the lot for this dump, because it’s a tear-down. You’d want to buy it and the one beside and kick them both down to get a decent house lot. What would be a fair price for the lot it’s sitting on, do you think?

    1. newbie2008

      That “house” is like “poor people’s housing” in the midwest. Rent at $500-$560 per month or $50K-$70K purchase price (depending on the neighborhood).

      1. Laura Louzader

        Here in Chicago, where the prices are steeply higher than the rest of the midwest, it would fetch perhaps $100K in some rundown south suburb. More if it were some rundown north suburb, but as a teardown.

        It’ exactly the kind of housing no one wants anymore, a dated, tiny, nondescript one-story house.

        1. newbie2008

          Yes to all your questions. I had an cable with a little under a T3 speed (not too many heavy users) and HOA of $50 per year (included a common lake and beach), but house 3 times the size and 4 times the price.

          Poor people’s housing don’t have the HOA fee nor common lake, but will have cable TV and high speed internet.

          One plus of this house is only on one floor, but the location street noise will be unchangable unless you can get the city remove the traffic light, add speed bumps, then reroute the traffic. Won’t happen without a lot of juice and if they had that much juice to spare, they wouldn’t live in that house.

    2. Sue in Irvine

      Ah, please don’t be so harsh on this little house. It’s only one picture. I live nearby and it’s on a really nice street in Woodbridge near all 3 schools (elem, middle, HS). Many of these cottage homes have been remodeled on the outside. This little guy just needs some love. It probably looks better from the side angle.

    3. Freetrader

      Let’s be fair. The house is in Irvine, not Chicago, and accordingly should command a better price. Chicago is a great place, but I don’t know anyone who wants to move there for their retirment.

  11. IrvineRenter

    Did you know that Irvine is competing with Australia for foreign cash buyers?

    Foreign buyers blow out the housing bubble

    The causes of Australiaโ€™s ever-inflating housing bubble are many ?โ€”?artificially low interest rates, government stimulus and a real-estate industry devoted to an ever-increasing house price to name but a few. However, a less well-publicised factor may also be at play, that is the influence of foreign buyers.

    In December 2008, the federal government, whose primary goal appears to be maintaining property prices at unsustainably high levels, introduced legislation relaxing rules for foreign buyers of Australian property. The rules were especially helpful for property developers, who coincidentally happen to be large donors to the Labor party.

    Previously, developers were able to offload no more than half of the new dwellings in a development to overseas buyers. This would mean that companies such as Central Equity, Becton or Mirvac would develop extensive overseas distribution networks and sales teams to offload half of their over-priced, off-the-plan apartments to gullible and foolish overseas buyers (usually based in Asia, but also in the United Kingdom and US).

    1. Freetrader

      Thank you for that comment about Australia. We lived in Sydney for three years (2006 – 2008) and people thought I was crazy for saying what is self evidently true to an outsider — that property prices there are unsustainable. I would ask people when they thought the ‘bubble’ would burst — they would answer, “oh, it already did, back in 2003.” Prices, you see, were flat that year and have been increasing ever since.

      The part about foreign buyers is important. Australia is a relatively small country, and a few thousand rich immigrants per year from Hong Kong and Taiwan have driven the prices in upper-middle class Australia. Australians don’t get a tax deduction for home mortgage interest, so mortgage interest can’t be justified on a ‘net tax’ basis, but the ‘bigger fool’ theory prevails. Prices cannot be justified by the available earnings to pay debt – cash from rich foreigners has been keeping the market humming. The only thing I can’t figure out is why the bubble hasn’t burst yet. If they let foreign investors in (not just immigrants), the bubble may still have another couple of years to run, but when it bursts, it is going to be really ugly.

  12. norcal

    New Zealand is competing, too. Big ads in the Singapore papers entreating Singaporeans to buy new “executive” condos in Auckland.

    There’s still pent-up demand for safe real estate investments worldwide, but most Singaporeans can’t afford to buy in Singapore. Hence the attraction of extra-national homes. But this is only because 1) people save a lot of money; 2) there’s no HELOC here; 3) Singapore banks yield laughable interest (CDs max out at .5% [yes, one half of one percent] for a five-year commitment).

  13. E

    It was meant to be a loose analogy.

    I’ve noticed that many of the homes that IR profiles have pretty extreme location issues.

    I also notice that in my neighborhood in L.A. (Hancock Park) that the majority of the homes that have already been foreclosed on are on Highland (The busiest street in the neighborhood).

    I doubt that people with toxic loans only bought homes on arterials.

    So…basically…what I was trying to say is that from what I see, the banks foreclose on the shitty properties first as if they put the nice homes on the market, the subpar ones wouldn’t find their knifecatchers as easily.

    Are you seeing a pattern here?

  14. shortsalesinSC

    Apropos of this discussion, an update on a previous article about HELOC abuse in San Clemente. I was foolish enough to bid on one of the properties you listed (239 Neblina). What a mess!!!
    1.) Owners (husband and wife) got >$1M in HELOC loans by setting themselves up as a ‘company’ (she was CEO, he was Exec. VP).
    2.) They declared bankruptcy in August, so NO bank would commit to any house offer until that was done.
    3.) Now that BofA has our offer and the docs, they have NO incentive to close this deal – they stand to lose >$300k and have already gotten $40billion of Federal money.

    Until assets like this are cleared off the books, this mess isn’t going away.

    1. thrifty

      I’ve been following the prices in San Clemente having previously owned there from 1978-99 (I know – sold at exactly the wrong time ๐Ÿ™‚ The prices for similarly sized homes are about the same as Irvine and recently there’s been a significant majority shift to homes in the $750K – $1.5M range. The only short sale and REO area where values seem semi-reasonable is Talega (but still high). I can’t imagine how far all the buyers with the required down payment and annual income would have to commute if buying at these asking prices. I wouldn’t be surprised to see at least another 35% or more drop in asking prices now that the second wave of adjustable rate mortgages involving prime borrowers is starting to occur.

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