An accepted Calfornia oxymoron is debt is equal to wealth. Today we take a special look at the lives of debt millionaires.
Irvine Home Address … 29 LOOKOUT Irvine, CA 92620
Resale Home Price …… $1,300,000
Some boys kiss me, some boys hug me
I think they’re o.k.
If they don’t give me proper credit
I just walk away
They can beg and they can plead
But they can’t see the light, that’s right
’cause the boy with the cold hard cash
Is always mister right, ’cause we are
Living in a material world
And I am a material girl
You know that we are living in a material world
And I am a material girl
Madonna — Material Girl
I have noticed that many in California believe the trappings of success are immediate. You get a job, and you lease the BMW. You get a $1,000 a year raise at work, you get an additional $10,000 credit line. You get married, and you borrow $1,000,000 and get your dream home. You have no need to save or wait, you can have it all now. You service the debt for your working life, and you obtain a reverse mortgage to retire on your boundless appreciation. Once you go into debt, you never, ever get out.
To "arrive" in life is to obtain every object of status you desire. Rich people arrive once they have saved enough money to pay cash for a few indulgences. High wage earners arrive once they can prove enough income to service a $1,000,000 debt.
Ponzis are changing the definition of a millionaire. In California debt equals wealth, so a millionaire is someone capable of obtaining and servicing a $1,000,000 debt. A million dollars in debt makes you rich.
I cannot fathom what is must be like to feed a beast that large. Right now the debt monster has a low 5% appetite, but what will those adjustable rate mortgages feel like when rates go up? To paraphrase and parody Irving Fisher, perhaps interest rates have reached what looks like a permanently low floor.
Irvine properties in default on $1,000,000+ mortgages
The following list of addresses are in default on mortgages over $1,000,000.
|59 GRANDVIEW||$ 2,975,376||$ 3,350,000||6/9/2010||$ 3,542,938|
|65 GRANDVIEW||$ 3,018,675||$ 3,556,567||5/28/2010||$ 3,351,639|
|1672 REYNOLDS AVE||$ 1,924,306||$ 7,170,000||9/10/2010||$ 2,570,000|
|27 STARVIEW||$ 2,149,100||$ 2,990,000||7/7/2010||$ 2,361,129|
|58 CEZANNE||$ 1,339,060||$ 2,250,000||6/16/2010||$ 2,186,850|
|136 STARCREST||$ 1,369,470||$ 3,900,000||7/19/2010||$ 2,119,577|
|31 VILLAGE WAY||$ 1,842,061||$ 2,485,750||7/6/2010||$ 2,089,102|
|17801 CARTWRIGHT RD 250||$ 3,036,374||$ 3,487,500||6/10/2010||$ 1,981,419|
|8871 RESEARCH DR||$ 2,788,321||$ 3,609,000||9/1/2010||$ 1,980,000|
|51 CEZANNE||$ 1,549,068||$ 3,770,000||6/7/2010||$ 1,939,524|
|28 SYLVAN||$ 1,739,418||$ 1,810,000||6/28/2010||$ 1,851,139|
|23 CLOUDS PT||$ 1,617,945||$ 3,550,000||7/2/2010||$ 1,800,000|
|35 TRIPLE LEAF||$ 1,128,734||$ 1,726,660||6/3/2010||$ 1,725,079|
|24 ROSE TRELLIS||$ 1,212,019||$ 282,800||6/10/2010||$ 1,693,240|
|27 MOMENTO||$ 1,794,521||$ 1,800,700||5/27/2010||$ 1,652,288|
|24 PISMO BCH||$ 1,432,305||$ 1,700,000||5/27/2010||$ 1,644,278|
|23 SHADY LN||$ 1,393,233||$ 1,990,000||7/28/2010||$ 1,600,000|
|33 TALL HEDGE||$ 1,553,769||$ 2,836,709||6/3/2010||$ 1,563,247|
|29 ANTIQUE ROSE||$ 1,127,091||$ 1,630,000||6/10/2010||$ 1,504,574|
|29 LILY POOL||$ 1,218,079||$ 1,470,000||6/10/2010||$ 1,484,931|
|16500 ASTON||$ 1,200,270||$ 2,916,000||8/13/2010||$ 1,458,000|
|11 GAVIOTA||$ 1,520,671||$ 6,652,937||5/27/2010||$ 1,411,878|
|7 BUELLTON||$ 1,179,546||$ 1,426,000||6/8/2010||$ 1,327,302|
|101 LATTICE||$ 1,188,392||$ 1,104,000||6/10/2010||$ 1,322,836|
|24 TWIGGS||$ 1,181,325||$ 1,529,800||6/1/2010||$ 1,301,968|
|3131 MICHELSON DR 1702||$ 1,276,361||$ 1,226,600||6/3/2010||$ 1,295,430|
|109 LATTICE||$ 1,218,342||$ 1,282,500||5/28/2010||$ 1,270,512|
|20 ROSE TRELLIS||$ 1,294,508||$ 1,883,023||6/16/2010||$ 1,267,500|
|24 ARBORWOOD||$ 1,092,891||$ 1,428,000||6/18/2010||$ 1,228,000|
|22 FAITH||$ 1,194,303||$ 2,650,000||6/4/2010||$ 1,223,705|
|40 DESERT WILLOW||$ 964,519||$ 1,175,420||6/24/2010||$ 1,205,941|
|15 PASO ROBLES||$ 1,219,922||$ 1,346,250||6/10/2010||$ 1,205,837|
|9 OLYMPUS||$ 1,520,417||$ 1,200,000||7/10/2010||$ 1,200,000|
|103 RETREAT||$ 1,200,302||$ 1,620,000||6/22/2010||$ 1,196,779|
|152 TAPESTRY||$ 982,692||$ 956,250||6/14/2010||$ 1,183,656|
|23 WALNUT CRK||$ 1,162,055||$ 1,247,467||6/9/2010||$ 1,153,285|
|39 CRIMSON ROSE||$ 1,340,634||$ 1,760,000||6/2/2010||$ 1,089,990|
|28 CRIMSON ROSE||$ 1,250,228||$ 1,530,000||5/27/2010||$ 1,088,739|
|147 TAPESTRY||$ 1,183,862||$ 1,341,000||6/21/2010||$ 1,088,509|
|16480 BAKE PKWY||$ 1,689,903||$ 1,946,700||6/30/2010||$ 1,081,500|
|5 BAYPORTE||$ 1,060,316||$ 1,347,500||6/16/2010||$ 1,079,174|
|41 MOJAVE||$ 1,248,973||$ 1,080,000||6/21/2010||$ 1,062,837|
|129 LATTICE||$ 1,071,133||$ 1,000,000||6/10/2010||$ 1,062,797|
|29 LOOKOUT||$ 1,248,257||$ 1,048,000||5/29/2010||$ 1,048,000|
|59 BAMBOO||$ 857,115||$ 1,601,000||6/14/2010||$ 1,043,759|
|19 PETRIA||$ 930,592||$ 1,080,000||6/7/2010||$ 1,034,881|
|8083 SCHOLARSHIP||$ 1,313,197||$ 2,595,000||6/28/2010||$ 1,033,331|
|29 PASO ROBLES||$ 1,395,677||$ 2,010,000||6/3/2010||$ 1,018,865|
|20 VILLAGER||$ 1,018,786||$ 952,000||6/14/2010||$ 1,006,757|
|36 PRAIRIE||$ 1,266,928||$ 1,401,486||6/22/2010||$ 1,000,000|
|20 TOPIARY||$ 1,531,562||$ 1,704,347||7/29/2010||$ 999,950|
|12 GALAXY 24||$ 861,094||$ 1,062,000||6/11/2010||$ 988,749|
|20 BRIGADIER||$ 1,824,777||$ 1,880,000||6/29/2010||$ 980,000|
|31 SHEPARD||$ 1,148,118||$ 1,366,000||8/21/2010||$ 966,000|
|40 VACAVILLE||$ 899,371||$ 1,289,880||7/16/2010||$ 960,000|
|13645 ALTON PKWY A||$ 1,099,580||$ 2,047,000||5/27/2010||$ 899,679|
|18971 GLENMONT TER||$ 1,064,859||$ 1,091,800||6/28/2010||$ 895,949|
|64 ROCKPORT||$ 808,905||$ 1,026,000||6/2/2010||$ 872,698|
|2 HICKORY TREE LN||$ 897,980||$ 1,102,900||6/10/2010||$ 863,428|
|5502 SIERRA ROJA RD||$ 955,606||$ 1,375,250||6/2/2010||$ 818,490|
|6052 SIERRA SIENA RD||$ 1,029,837||$ 1,000,800||6/10/2010||$ 801,982|
|46 WHITFORD||$ 831,784||$ 1,016,000||7/24/2010||$ 791,000|
|17752 FITCH||$ 2,752,146||$ 2,216,657||8/18/2010||$ 750,000|
|18 HIDDEN CRK||$ 1,330,028||$ 1,911,641||7/20/2010||$ 200,000|
This list barely scratches the surface on the problems stemming from the lack of a jumbo loan market. For example, only 6 homes in Irvine with an estimated value over the conforming limit of $729,750 went through foreclosure last month. There are 146 in pre-foreclosure or scheduled for auction. In Orange County, there are 2,046 in the foreclosure process over the conforming limit, and only 101 foreclosure sales.
Also, since banks know the jumbo market is hopeless, fewer of these homes have been served notice. The shadow inventory of squatters with huge loans is bigger than the banks are willing to face.
Shadow Inventory's Shadow
It isn't only the distress we see that feeds into the problems with housing. Visible inventory includes the properties on ForeclosureRadar.com on which there has been some filings. Shadow Inventory includes those properties where the owners are not making payments but the bank has not begun foreclosure proceedings. Shadow inventory's shadow includes all the Ponzis who are not currently behind on their mortgage payments but are completely dependant upon increasing debt in order to survive. The people in Shadow inventory's shadow living the life of a Ponzi will implode before this debacle is truly behind us.
Over the last few weeks, I have collected a few stories about Ponzis living in shadow inventory's shadow. The names and circumstances have been changed, but the essential facts of the following stories are true.
Property ladder to oblivion
One family lived in a 1,500 SF 3/2 in a comfortable area of Irvine. They HELOCed about $200,000 out of their property, but they still sold it in 2006 for a hefty profit and a check for $250,000 of remaining equity. They took this $250,000 and put it down on a $1,100,000 dream home. They now have an $800,000 interest-only mortgage. The husband is a sole breadwinner whose based salary is about $120,000 a year.
This family is treading water after borrowing 6.6 times their income. Unless or until house prices go back up and they are able to access HELOC money like they used to in their old house, they will not make it. In 2016, their $800,000 mortgage will amortize over 20 years, and their payment will go sky high. Of course, their plan is to refinance the $800,000 debt in 2016, probably with another interest-only loan. They cannot afford their house, but they pay the huge rent on money to stay there. They do not show up in statistics on shadow inventory, but they are doomed.
Baby on the way
One family bought a small home in a really expensive market in 2005. They put $100,000 down, and they have a $950,000 mortgage which is now underwater. The husbands job is secure, but the wife is pregnant and wants to quit work when the baby is born. She can't afford to. Because of their house loan, she must work to make ends meet. The HELOC money they were counting on to renovate the house and substitute for her wage income is not forthcoming. They are trapped and unhappy. They may not be doomed to lose the house, but keeping it is ruining their family life and future plans. They are very house poor.
Side business suffers
One family bought an ocean view property in 2004 for about $1,100,000. Two years later, they sink several hundred thousand into a renovation, and they refinance with a $1,400,000 Option ARM. The property would currently sell for about $1,000,000.
When they took out the Option ARM, the man had a base salary of $120,000 per year, and he was running a side business making about $100,000 — or so he said on his loan application. The side business dried up during the recession, so they have drained all savings and tapped their other credit lines to keep making the minimum payment on their Option ARM. The only way these people survive is another infusion of borrowed money or the side business coming back. Even then, their prospects are bleak. Their real hope was for the housing ATM machine.
I need that bonus
Many people spend like drunken sailors running up huge credit card bills and pay them off with yearly bonuses. Over the last two years, one family received no bonus which used to be almost 50% of the husbands take-home pay. The lack of a bonus did nothing to curb their spending. They are paying the bills on their $1,300,000 mansion, taking vacations, and generally continuing to spend in a conspicuous manner. So far they have managed on increasing credit card balances.
Perhaps they believe big bonuses are in the future, perhaps they think the housing ATM will save them, or perhaps they are simply committed to living as Ponzis until their creditors cut them off. Either way, it doesn't seem likely they will sustain ownership even when the bonus money comes in.
None of the people I described above appear on any measure of housing distress, but given their situations, most of them will not make in through the next five years in their homes. Financial distress will cause them to sell and move.
Who will take their place?
The Ponzis are far more common than frugal savers with huge down payments and high incomes. Heavy cash buyers are common in Irvine's market, not because there are so many of them, but because they are the only ones capable of paying our still inflated prices. Because there are more Ponzis than frugal replacements, there will be more Ponzi homes coming to market than the frugal buyers can absorb. Lenders know this. They are restricting inventory as long as they can hoping that somehow the Ponzis will get bailed out and the banks will have someone to sell their houses to. So far denial and inaction has worked out well for the banks — unless you count the loss of income from all those squatters….
Today's would-be millionaire couldn't cut it
The owner of today's featured property used his million dollar loan and a substantial down payment to acquire the property. Unfortunately, his reach exceeded his grasp.
Today's featured property was purchased on 11/16/2006 for $1,478,000. The first mortgage is $1,048,000 and the owner used a $430,000 down payment. The current asking price. would yield him about $180,000 out of the $430,000 he put down. I question whether he will get the asking price. Not much is selling at these price points.
Irvine Home Address … 29 LOOKOUT Irvine, CA 92620
Resale Home Price … $1,300,000
Home Purchase Price … $1,478,000
Home Purchase Date …. 11/16/2006
Net Gain (Loss) ………. $(256,000)
Percent Change ………. -12.0%
Annual Appreciation … -3.4%
Cost of Ownership
$1,300,000 ………. Asking Price
$260,000 ………. 20% Down Conventional
4.94% …………… Mortgage Interest Rate
$1,040,000 ………. 30-Year Mortgage
$267,342 ………. Income Requirement
$5,545 ………. Monthly Mortgage Payment
$1127 ………. Property Tax
$450 ………. Special Taxes and Levies (Mello Roos)
$108 ………. Homeowners Insurance
$105 ………. Homeowners Association Fees
$7,335 ………. Monthly Cash Outlays
-$1468 ………. Tax Savings (% of Interest and Property Tax)
-$1264 ………. Equity Hidden in Payment
$497 ………. Lost Income to Down Payment (net of taxes)
$163 ………. Maintenance and Replacement Reserves
$5,263 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$13,000 ………. Furnishing and Move In @1%
$13,000 ………. Closing Costs @1%
$10,400 ………… Interest Points @1% of Loan
$260,000 ………. Down Payment
$296,400 ………. Total Cash Costs
$80,600 ………… Emergency Cash Reserves
$377,000 ………. Total Savings Needed
Baths: 6 full 1 part baths
Home size: 3,500 sq ft
($371 / sq ft)
Lot Size: 5,300 sq ft
Year Built: 2007
Days on Market: 16
Listing Updated: 40318
MLS Number: P734262
Property Type: Single Family, Residential
3,500 sq2 house with 6 bedrooms, 6 1/2 baths, marble floor, granite countertop and island, fully landscaped and hardscaped, gorgeous conditions, more than $100,000 upgrade w/ backyard barbecue island for family entertainment.