Money, Money, Money — ABBA

I find HELOC abuse stories fascinating in a train-wreck sort of way. I like to try to imagine the thought processes and belief system that would allow someone to do something so incredibly foolish. Spending your home equity is not a one-time event that could be the result of a single, rash decision, it is the cumulative effect of numerous bad decisions made over a long period of time. Each refinance or equity extraction was the result of a rational thought process with some deliberation. The fundamental belief must be that house prices always go up, therefore additional equity will always be available to spend. If you didn’t believe that, you might pull the money out to screw the lender, but you wouldn’t do it knowing it might cause you to lose your house. The second fundamental belief must be that interest rates and payments will always decline. When you take on more debt, you have to make larger payments to service it, unless of course, you continually refinance with an adjustable rate mortgage in a declining interest rate environment. It is possible some of these people believed their income would rise to make the larger payment as well, but the overriding belief had to have been that low interest rates and serial refinancing would always be available. All of these beliefs are wrong, and the market is driving this point home (literally) right now.

It is the end-game planning I can’t quite get my head around. When was this supposed to end? If people are perpetually spending their equity increases as income, when they finally sell the home, they have no equity. I suppose if you really believed house prices always go up, the house could serve as a perpetual breadwinner that would provide income for retirement and beyond. I guess it really doesn’t make much sense to rent when you can buy a house for no money down and live off the appreciation forever. Did people really believe that was possible? If you look at the behavior of HELOC abusers like today’s featured property owners, you would have to conclude they believed all of those absurd things, and so did a great many others in California as well.

Asking Price: $675,000

Income Requirement: $158,750

Downpayment Needed: $135,000

Monthly Equity Burn: $5,625

Purchase Price: $465,000

Purchase Date: 1/8/2004

Address: 7 East Deerwood, Irvine, CA 92604

Dierfield? beatiful?

How do you like the staging of the photographs? You can just imagine the realtor showing up with some plants to try to hide the mess. Is it too much of a bother to clean up the place before taking pictures for the MLS?

This one requires the bullet-point recap:

• On 1/8/2004 the property was purchased for $465,000 with a $372,000 first mortgage, a $46,500 second mortgage and a $46,500 downpayment.
• On 3/11/2004 the owners opened a HELOC for $92,000 and withdrew all their downpayment plus another $45,500.
• On 9/20/2004 they refinanced with a $552,000 first mortgage.
• On 8/16/2005 they opened a HELOC for $38,000.
• On 12/8/2005 they opened a HELOC for $150,000.
• On 6/8/2006 they refinanced with an Option ARM for $650,000 and a second mortgage of $115,000.
• Total property debt of $765,000.
• Total mortgage equity withdrawal of $393,000 over a 2 1/2 year period.

Those owners were livin’ large for a few years there. I wonder how they are adjusting to life without free money…

For the record, if this place sells for its asking price (doubtful), the total loss on the property will be $130,500 after a 6% commission. One interesting note: the second mortgage being wiped out is listed as being insured by either Freddie Mac or Fannie Mae. No wonder there is talk about having to bail them out.

.

I work all night, I work all day, to pay the bills I have to pay
Aint it sad
And still there never seems to be a single penny left for me
Thats too bad
In my dreams I have a plan
If I got me a wealthy man
I wouldnt have to work at all, Id fool around and have a ball…

A man like that is hard to find but I cant get him off my mind
Aint it sad
And if he happens to be free I bet he wouldnt fancy me
Thats too bad
So I must leave, Ill have to go
To las vegas or monaco
And win a fortune in a game, my life will never be the same…

Money, Money, Money — ABBA

Failure’s Not An Option — Chamillionaire

The old adage in real estate is location, location, location. During the Great Housing Bubble, location and quality really didn’t matter much. It all came down to financing and the options it created. 100% financing gave all buyers a “Call” option on real estate. If the price went up, they got to keep all the money, and if it went down, the losses were passed on to the lender. 100% refinancing gave all owners a “Put” option on real estate. If the property went down in value, they had already extracted all their equity, so again the risk was passed on to the lender. Of course, the real bonanza for speculators was the Option ARM. This gave speculators a way to drastically reduce the carrying costs on their speculative investment. Many could even rent the property out for positive cashflow, particularly if they used a 1% teaser rate like today’s speculator. With all the incentives favoring speculative betting in the housing market, it is really any wonder people got a bit carried away? Is it any wonder lenders are now expected to lose $1,600,000,000,000? (That is $1.6 Trillion.)

Asking Price: $639,000

Income Requirement: $159,750

Downpayment Needed: $127,800

Monthly Equity Burn: $5,325

Purchase Price: $815,000

Purchase Date: 3/15/2006

Address: 129 Roadrunner, Irvine, CA 92603

ATTN INVESTORS!! Here is your opportunity to prove you have no idea what you are doing. Someone needs to buy this overpriced property before the lender losses any more money. HURRY!!!

Note the increasing number of exclamation points as the realtor got excited at the beginning of the description.

Don’t be surprised if this property gets multiple offers over the asking price. After all, this is Turtle Ridge, and properties there are immune to price declines — except perhaps for this one that has declined 20%…

If this property sells for its asking price, the lender stands to lose $214,340 after a 6% commission. The seller didn’t use 100% financing at first, but after 30 days, she opened a third mortgage and extracted her downpayment plus $2,000. She won’t lose anything other than her good credit.

.

Do it do it
Do it do it
Do it do it
Ain’t got to tell you I’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest)
You better tell them i’m the truest (Truest Truest) everyday AY

I keep a ear to the street u can see im eves droppn
They talkn bout my buzz tryn to picture me floppn
Under ground ruler wreck on every beat knockn
Gobble gobble all the green so they call me green goblin

Failure’s Not An Option — Chamillionaire

Mercy — Duffy

By now most of you have seen the revised Option ARM reset schedule.

There is one more variable that this schedule does not capture, and neither does the ARM reset schedule: people who give up early. Being trapped in a property you cannot sell is torture. You just want to be released from your obligations and go about your life. Begging for mercy probably doesn’t help much, but it might make some of these sellers feel better.

Today’s featured property is an Option ARM holder who gave up early.

Asking Price: $389,000

Income Requirement: $97,250

Downpayment Needed: $77,800

Monthly Equity Burn: $3,241

Purchase Price: $443,000

Purchase Date: 5/19/2008

Address: 8 Eastmont #46, Irvine, CA 92604

Gourmet Kitchen and pregraniteel.

{Adsense-ir}

Today’s sellers are going to lose their own money. They put 20% down ($88,600) and took out an Option ARM for $354,400 with a 1% teaser rate. As one might imagine, they likely made only the minimum payment, and now they are hoping to sell for enough to pay off the debt and a commission. If they get their asking price and pay a 6% commission, they stand to lose $77,340. Assuming they have added almost $11,000 to their loan balance during the period of ownership, this sales price reflects the minimum they need to salvage their credit. Their downpayment is lost.

Both of this chart and the Option ARM reset chart are very ominous, and they show the tentative schedule of the disaster in our housing markets. However, the whole ARM reset issue is more complex than either chart makes apparent. Most people when they read the chart assume that houses will hit the market on the same schedule. This is an overly simplistic reading. Some people, like today’s featured owners, give up early. Some people, will try to make the new payment for an extended period of time before they give up. Some people will make the new payment and keep their houses. All of the people who give up, will go through a foreclosure process (which they can drag out) before the property is sold at auction and finally added to the MLS inventory. I have outlined this whole process before. It takes almost a year from reset to final sale.

What is really important is not when the ARM resets, but when the property is added to available inventory. As we have seen with the lenders slowly adding their REOs to the market, prices do not get hammered until the REOs are actually put up for sale. We are starting to see more REOs on the market, and the process will likely accelerate this fall and winter. We will probably see another big drop then. It is hard to say when we will see a bottom, but it doesn’t seem likely that there will be any sustained appreciation before 2012-2014.

The Gods of the market have no mercy…

.

I love you
but i gotta stay true
my morals got me on my knees
I’m begging please stop playing games

Why wont you release me yeah yeah
break it down

Mercy — Duffy