My feelings about HELOC abuse keep changing, and I am not angry anymore. How do you feel when you think about this now?

Asking Price: $830,000

Address: 12 Rutherford Irvine, CA 92602

{book}

I’m at peace, I’m the man
Buying stocks on the day of the crash
On the loose, I’m a truck
All the rolling hills, I’ll flatten ’em out, yeah
It’s herd behavior, uh huh
It’s evolution, baby
…
This land is mine, this land is free
…
Admire me, admire my home
…
I crawled the earth, but now I’m higher
2010, watch it go to fire
It’s evolution, baby
Do the evolution
Come on, come on, come on

Do the Evolution — Pearl Jam

Change is a constant in our society. The rules evolve, and our relationship to money and housing changes. When people bought houses in the late 90s, they either put 20% down, or they used an FHA financing program. Prices fell for 6 years, and the market was dominated by conventional mortgages; there were few alternatives available (much like today).

In such an environment, few were borrowing their home equity to sustain personal spending. The path to spending addiction through HELOC abuse can release the inner Darth Vader in any of us. This wasn’t a problem because lenders were not enabling it in the late 90s — then came The Great Housing Bubble.

Once lenders started loaning money to anyone and begging people to take it, those who might be tempted by the Dark Side found it increasingly difficult to resist — if they saw a reason to resist at all. Why not spend the money when real estate always goes up? Those who failed to recognize the trap willingly spent to their own destruction.

People do not wake up one day and decide to become addicted to HELOC money; it creeps up on them in a series of small borrowings for “necessities” they are entitled to. We have all seen the pattern of ever-increasing borrowing that crescendos with an Option ARM and ultimately a short sale or foreclosure.

In a series of small increments many people gradually and consistently increased their dependence on their home equity and spent it as fast as it accumulated. The best of people can be seduced by such a powerful Force and the desire to direct it.

Heroic characters like Anakin Skywalker succumb to their own vices and weaknesses with tragic results, but sometimes these stories end with success and absolution. These characters are not alone. Many who suffer from HELOC addiction can be reformed and their lives atoned. Stories of redemption will abound when this crisis has past.

Whether people overcome their HELOC addiction or not, everyone is going to have to learn to live without HELOC money for the foreseeable future, perhaps a decade. The trees didn’t grow to the sky. Will the toxin of kool aid addiction and HELOC abuse persist for that long? Or will the addiction simply resurface once the supply of easy money comes back?

The Secret Wish-Fulfilling Tree

Last year I wrote a parable that came to mind:

A weary traveler was on a
quest to satisfy his deepest longings and desires. He traveled from
place to place, but no matter where he went or what he tried, nothing
would quite satisfy him. One day, exhausted from his search, he
happened to sit beneath a magical wish-fulfilling tree. He thought to
himself, “Perhaps it is not so good to desire so much. It has not
brought me any lasting satisfaction, but I am tired, and I could use
something to eat and drink…” No sooner had he thought this when
delicious food and drink appeared for him to enjoy. “Wow,” he
exclaimed, “this is fantastic, but it would be nice to have someone to
share this bounty with.” As soon as the thought occurred, a companion
appeared to enjoy the feast. His desires replete for the moment, he
thought to himself, “This is very strange. Everywhere I have traveled I
have wanted and found no satisfaction, and here at this tree, I can
have anything I desire. I wonder if there is something magic in this
tree? I wonder if it is inhabited by some spirit? I wonder if it is a
goblin that will consume me?” And, as soon he had this thought, a goblin
appeared, and consumed him.

HELOCs enabled people to satisfy
their hunger for vacations, consumer goods and the like and live well
beyond their means. This went on for an astonishingly long time. Many
of these people became accustomed to living off the extra “income”
coming from their houses. Like the goblin in the parable, the magic
wish-fulfilling house consumed them, and now they have lost their
house, their credit and themselves.

How long with the residue of this lifestyle continue to impact our prices? How many knife catchers are buying because they think the market has bottomed and the housing ATM will soon be dispensing $20 bills like toilet paper? Has cool aid intoxication become such a part of the culture that it has a measurable effect on fundamentals?

HELOC abuse was everywhere. There are the few Millionaire’s Next Door, but you are far more likely to find the HELOC Abuser Next Door than you are the millionaire.

Asking Price: $830,000

Income Requirement: $207,500

Downpayment Needed: $166,000

Purchase Price: $919,465

Purchase Date: 7/31/2009

Address: 12 Rutherford Irvine, CA 92602

Very nice 3 bedroom 2 1/2 bath on a cul de sac in the gated community
of Bella Rosa. Large center isle kitchen with granite
counters/backsplash, 18′ tile flooring,plantation shutters,breakfast
nook,partial w/w carpet, fireplace, ceramic tile in master
bath,separate tile shower stall,large walk in closet, mirrored
wardrobes, laundry room,built in BBQ and firepit,association resort-
like pool, spa, cabanas and state of the art gym.

• If this property sells for its current asking price, the sales price will be 51% higher than the original sales price of $548,500 back on 5/27/2003. The original owner used a $438,750 first mortgage, and a $109,750 downpayment.
• A few months later on 10/20/2003, he opened a HELOC for $100,000 to gain access to the downpayment.
• Then there was a series of refinances (can I abbreviate the description, or should I detail every loan?)
• On 2/20/2007 the final refinance was $860,000.
• On 5/15/2007 the last HELOC was $115,000.
• Total property debt is $975,000.
• Total mortgage equity withdrawal is $536,250.

It must have been a great ride….

I no longer know how to feel about HELOC abuse when I see it. I am not angry anymore. I still feel a bit of awe and perhaps a sneaking sense of admiration for what they pulled off. I imagine how my life might have turned out differently if I made different choices. It would have been a great deal of fun while the money lasted.

I have no regrets about failing to game the system. We all want the money to spend, but is holding up a bank the best way to get it? How many Bonnie and Clydes did we create?

I hope people will come forward and tell their stories. I want to hear their Truths, and their rationalizations. HELOC abuse is a cultural phenomenon that defines the 00s.

When a problem gets this large, people of all walks of life and all manners of character get caught up in it. There will be interesting stories of good people who ruthlessly default and ordinary people whose financial lives are wildly enriched or utterly destroyed.

In the end, we need to deal with our emotions concerning HELOC abuse and the impact it had on our society. The financial fallout is painful but short lived, but for many the emotional repercussions will linger much longer.

So, how do you feel about HELOC abuse now?

{book4}

When I wrote this post, I came across Predictions for 2008 written on 1/1/2008. It was an interesting trip down memory lane. I have enabled comments on the old post if you want to add the perspective of history or tell someone from years ago how wrong they were….