America inflated a massive housing bubble, but the Irish managed to build so many excess houses that they could house every Irish citizen and still have many left over.

Irvine Home Address … 26 LEWIS Irvine, CA 92620

Resale Home Price …… $620,000

{book1}

There's a tappin' in the floor

There's a creak behind the door

There's a rocking in the chair

But there's no-one seem there

There's a ghostly smell around

But nobody to be found

And a coffin inlay open

Where a restless soul is spoken

Don't understand it

Don't understand it

Michael Jackson — Ghost

Building houses that remain unoccupied is a terrible waste of societal resources. Houses are expensive. When we put hundreds of thousands of dollars of sticks, bricks, and labor into something of no benefit to anyone we get a temporary economic boost from the construction itself, but when no use if made of the final product, it is all a complete waste. We could have sent a hundred laborers out to dig holes then bury them back up and accomplished the same nothing.

This cycle repeats in California. In the early 90s, we had many excess housing units in fringe markets like we do today. The markets are different as the fringe markets moved eastward, but the effect is the same. There are many empty McMansions in eastern Riverside County, the High Desert and in housing markets all over the country.

For as stupid as we were here in the United States, the Irish make us look prudent and restrained.

Ghost estates testify to Irish boom and bust

David McWilliams is the man who coined the phrase "ghost estate" when he wrote about the first signs of a disastrous over-build in the Irish Republic back in 2006.

Now, it is a concept the whole country is depressingly familiar with. Most Irish people have one on their doorstep – an ugly reminder, says the economist and broadcaster, of wounded national pride.

"Emotionally, we have all taken a battering," he says. "Like every infectious virus, the housing boom got into our pores. You could feel it.

"You'd go to the pub and people would be talking about what house they'd bought. And now a lot of people, myself included, think 'God, we were conned'."

The Irish have reached a state of capitulation. We haven't. Most people you talk to here in California really believe house prices have bottomed and they they will appreciate back up to the peak in a couple of years. The totality of our failure has not reached the masses. In Ireland it has.

'Emotional thing'

Mr McWilliams paints Irish history as one of "economic failure".

"So to have risen so quickly and seemingly in the right direction and then to have that pulled away from us," he says, "it's more of an emotional thing than a financial thing."

That is the root of much denial in our own market. Failure is difficult to admit. Many people bragged about their financial genius and convinced others to participate in the madness. Now they find themselves hopelessly underwater and unable to admit their error. They cover it with anger and condescension.

There are 621 ghost estates across the Irish Republic now, a legacy of those hopeful years. One in five Irish homes is unoccupied.

If the country immediately used them to house every person on the social housing list, there would still be hundreds of thousands left over.

OMG! Empty out the homeless shelters by putting them into McMansions, and they still couldn't fill their housing stock. Squatting is not a problem there, I guess. Who would know or care?

It is difficult to comprehend that level of overbuilding. I remember living in Texas in the early 90s, and I was astonished at the number of empty office and retail spaces. They built a 20 year supply in a few years. Strip malls and office buildings were everywhere — all of them empty. It must be rather eerie to drive through modern subdivisions of empty houses.

The obvious question of who people imagined would live in all these new-builds makes Irish people wince now.

But hindsight is a wonderful thing. Only a few years ago, developers feeding money into local government coffers were getting free rein to build row upon row of five-bedroom detached houses on the green outskirts of towns nobody had even thought of commuting from before.

'Raised eyebrows'

Banks were throwing money at members of the public who saw these houses either as an escape to a better lifestyle or an investment route to riches.

Builders from eastern Europe were working overtime to create homes, the value of which was sometimes three times what it is now.

Sound familiar, doesn't it. How many people bought second homes for their retirement — houses that were to actually provide for that retirement with the inevitable appreciation? Everyone in California was a speculator, and many (if not most) took out this appreciation and spent it like income.

Instead of eastern Europe, we imported our labor from northern Mexico to build houses worth about a third to a half of what they were a few years ago. The pattern is the same, it is only a matter of degree.

As the slump set in, the immigrant workers went back home, the banks ceased lending on the scale that had fueled the frenzy and the market disappeared.

Property supply had become completely divorced from property demand.

County Leitrim alone would have needed about 590 new houses between 2006 and 2009 to accommodate its population growth. It got 2,945.

That sounds like most of the fringe markets here in the US. There are many small towns about 90 miles out of downtown Phoenix that saw huge numbers of empty homes built. South Florida is a wreck.

[empty neighborhoods in Ireland]

The resulting mess is currently being addressed by a nationwide audit of empty and unfinished housing.

It has raised eyebrows that precise numbers are not already clear, even to the local councils who gave planning permission for the homes in the first place.

'Everyone was buzzing'

Ciaran Cuffe is the Green Party minister of state in charge of the audit.

"It's one heck of a challenge", he says, "because we have the legacy of many years of poor planning, and an economy that was overheated, paid far too much attention to construction and was more interested in the quantity than the quality of homes".

Fortunately, we have stringent building codes here, and most of the bubble era construction is very good; however, we certainly got much more than was required.

He says the state's perceived wealth was part of the problem.

"I think there was a view that demand would continue indefinitely at a time when we had very high levels of immigration.

"People thought the housing was needed not only for the people of Ireland but also for others that had come here, and that this golden goose would continue to lay golden eggs for ever."

No matter how it is cloaked, the illusion of permanent prosperity is associated with every financial bubble. The roaring twenties saw a land boom and bust in Florida — there was only so much buildable land there, so certainly it would rise in price forever. We followed that with a stock market bubble built on the belief in the prowess of American industry. In the stock market bubble of the 90s, people thought tech stocks, semiconductors in particular, would rise forever. We were entering a new era driven by technology, or so we thought.

Nobody expects the majority of the Republic's surplus new housing simply to be ploughed down by the bulldozers now.

But Mr Cuffe admits some of the recent headlines in the Irish press on the subject are not completely wide of the mark.

"I certainly think demolition could be part of the solution in cases where we have housing estates that are unoccupied, that are miles away from where people want to live and that were badly built in the first place."

It is rare that houses are bulldozed, particularly new construction. Perhaps 40 year-old crack houses in Detroit, but new McMansions will be occupied by someone even in remote locations.

And indeed, many of the Irish ghost estates are in the unlikeliest, most isolated places.

It is strange, looking down vast rows of immaculate new-builds, taking in their optimistically-planted front gardens and peering through curtain-less windows into unwanted granite-topped fitted kitchens, to comprehend the fact that they might never be occupied.

Mr McWilliams says the whole of the Irish Republic is having to come to terms with what he compares to a collective addiction.

"Everyone took the property drug at the same time", he says, "everyone was up at the same time, everyone was buzzing.

"Now we are all in the middle of this huge comedown. And people are looking around and saying – 'what happened? Was that us?' And then we look at our bank statements and we realise – 'yes, it was'".

The end of a financial mania has all the symptoms of a severe hangover. Nothing is free in life, and when people act like it is, when they become entitled, life has a way of slapping them in the face.

Look at what the housing bubble has already done to our population. We have created a massive sense of entitlement, and everyone still wants to own a home — not because it is a place to shelter their family, but because they see it as their own personal ATM machine capable of giving them everything their greed desires. Lenders try to take advantage of this foolishness and give people huge mortgages. Those that sign up get to live a life of servitude endlessly feeding the beastly lenders. Those of us who do not want to play the HELOC game have to pay a 30% premium to provide shelter for our families because the ignorant HELOC abusers bid up prices. Great system.

Routine HELOC abuse

I have looked at enough of HELOC abuse properties to become convinced that HELOC abuse was considered a wise financial management tool by a broad cross-section of Irvine home owners. Day after day after day, I profle these. I have to go out of my way to find someone who didn't spend their home.

Hey, sellers, contact me if you didn't abuse your HELOC, and I will profile your property and call attention to your good behavior. A responsible borrower is hard to find.

• Today's featured property was purchased on 12/22/2004 for $610,000. The owners used a $488,000 first mortgage and a $122,000 second mortgage. There was no down payment.
• On 2/13/2007 they refinanced with a $588,000 first mortgage and a $73,500 second mortgage.
• Total property debt is $661,500.
• Total mortgage equity withdrawal is $51,500.
• Total squatting is at least 6 months so far.

Foreclosure Record

Recording Date: 02/03/2010

Document Type: Notice of Sale

This isn't a bad case by Irvine standards, but then again, they did buy late into the bubble. While the rest of us were paying for our housing, their house was paying them.

Irvine Home Address … 26 LEWIS Irvine, CA 92620

Resale Home Price … $620,000

Home Purchase Price … $610,000

Home Purchase Date …. 12/22/2004

Net Gain (Loss) ………. $(27,200)

Percent Change ………. 1.6%

Annual Appreciation … 0.3%

Cost of Ownership

————————————————-

$620,000 ………. Asking Price

$124,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$496,000 ………. 30-Year Mortgage

$130,726 ………. Income Requirement

$2,711 ………. Monthly Mortgage Payment

$537 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$52 ………. Homeowners Insurance

$0 ………. Homeowners Association Fees

============================================

$3,300 ………. Monthly Cash Outlays

-$467 ………. Tax Savings (% of Interest and Property Tax)

-$579 ………. Equity Hidden in Payment

$252 ………. Lost Income to Down Payment (net of taxes)

$78 ………. Maintenance and Replacement Reserves

============================================

$2,584 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$6,200 ………. Furnishing and Move In @1%

$6,200 ………. Closing Costs @1%

$4,960 ………… Interest Points @1% of Loan

$124,000 ………. Down Payment

============================================

$141,360 ………. Total Cash Costs

$39,600 ………… Emergency Cash Reserves

============================================

$180,960 ………. Total Savings Needed

Property Details for 26 LEWIS Irvine, CA 92620

——————————————————————————

Beds: 3

Baths: 3 baths

Home size: 1,856 sq ft

($334 / sq ft)

Lot Size: 5,642 sq ft

Year Built: 1979

Days on Market: 27

MLS Number: S612183

Property Type: Single Family, Residential

Community: Northwood

Tract: Othr

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

NO Mello Roos! NO HOA dues! Award winning Northwood schools in Irvine. Walking distance to elementary. This beautifully upgraded home features 3 spacious bedrooms plus an office/den with built ins – could be converted to 4th bedroom, and 3 full bathrooms. Home upgrades throughout, bath surround tiles in showers, tile flooring, newer roof less than one year, spacious backyard, premium corner lot site and quiet neighborhood across to park. Convenient location with easy access to major freeways, employment hubs, shoppings and entertainment.

.

There are many ways to view strategic default. Borrowers use mortgages like option contracts giving them a "put" from a lender. It can also be viewed as an insurance contract against downside price movements. Borrowers are merely collecting on their insurance policy.

Irvine Home Address … 26 MIRADOR #59 Irvine, CA 92612

Resale Home Price …… $750,000

{book1}

Where do we go from here now that all other children are growin' up

And how do we spend our lives if there's no-one to lend us a hand

I don't wanna live here no more, I don't wanna stay

Ain't gonna spend the rest of my life, Quietly fading away

Games people play, You take it or you leave it

Things that they say, Honor Brite

If I promise you the Moon and the Stars, Would you believe it

Games people play in the middle of the night

Alan Parsons Project — Games People Play

Do loan owners really want to spend a decade or more under water? It will be difficult to send their children off to college when they make too much for their kids to get aid, but they haven't saved anything because they are paying on a bloated mortgage. At some point, they may decide they don't want to stay, but then they can't move because they can't sell. They spend the rest of their lives quietly fading away.

Many in California will stay because they believe the next housing bubble is right around the corner. Like gamblers at the craps table who were just wiped out, everyone places their bets and hopes for another long run. At least with HELOCs, you never have to worry about leaving chips on the table.

Buyers have no moral duty to lenders

by Brent T. White Brent T. White – Apr. 25, 2010 12:00 AM

Associate professor of law, UA The Arizona Republic

As a result of the housing collapse, many Arizonans have seen their homes lose half of their value. Many owe several hundred thousand dollars more than their homes are worth and are unlikely to dig out of their negative equity hole for decades.

For these homeowners, the American dream has become a nightmare – and their financial future is dim.

To compound the stress and anxiety, when they've called their lender to work out a solution, they've discovered that their lender won't even talk to them about a loan modification or a short sale as long as they are current on their mortgage.

With no help in sight, some of these underwater homeowners have decided that they would be better off letting go of their homes and have stopped making their mortgage payments. Many have done so with the hope that defaulting will finally bring their lender to the table, but they are also resigned to the fact that they will likely lose their homes.

Wait until Cartel Crusher LLC makes its way to Arizona. They appear to need widespread debt destruction to enable them to get on with their lives. I suspect a broadcast message of hope to home debtors to stay in their homes and eliminate the crushing debt would be well received, at least among the indebted.

It has been suggested that such homeowners are immoral or, at least, irresponsible. I disagree.

Before explaining why, it is important to emphasize that the decision to strategically default on a mortgage involves many complex, localized and individualized factors. No one should decide to strategically default on their mortgage without sitting down first with a knowledgeable professional.

I wonder if professor White laughed to himself as he wrote that silly disclaimer.

But let's say that you've actually sat down with a professional to do the calculations and have concluded that defaulting on your mortgage is the only way out of your financial nightmare. Would it be immoral or irresponsible for you to do so?

The arguments against homeowners intentionally defaulting on their mortgages generally center on the same three basic points.

First, underwater homeowners "promised" to pay their mortgages when they signed the mortgage contract. Second, foreclosures lead to depreciation of neighborhoods, so underwater homeowners should hang on in order to help preserve their neighbors' property values. And, third, if all underwater homeowners defaulted, the housing market might crash. Homeowners thus have a social obligation to pay their underwater mortgage in order to save the economy.

While all three of these arguments might hold some initial appeal, none holds water.

I had never considered the final two arguments Dr. White presents because they are so silly, but he does go on to address them.

First, a mortgage contract, like all other contracts, is purely a legal document – not a sacred promise.

Think of it this way: when you got your cellphone, you likely signed a contract with your carrier in which you "promised" to pay a set monthly payment for two years. Would it be immoral for you to break your contractual "promise" to pay for two years if you decided that you no longer needed the cellphone and elect instead to pay the early termination fee? Of course not. The option to breach your "promise" to pay is part of the contract.

Though involving more money and something of great sentimental value to most people, a mortgage contract is simply a contract. Like a cellphone contract, a mortgage contract explicitly sets out the consequences of a breach of contract.

A mortgage is like a cellphone contract? Wow, I broke one of those and paid the fee. When you break it down like that, you see how much of the argument about morality and mortgages is pure emotional bullshit. Commercial lenders deal with default all the time because commercial borrowers are completely unemotional about their decisions to pay or default. Since loan owners get emotional about their houses, lenders have learned to play on that emotional bond to create a bogus moral connection.

In other words, the lender has contemplated in advance that the mortgagor might be unable or unwilling to continue making payments on his mortgage at some point and has decided in advance what fair compensation to the lender would be. Specifically, the lender included clauses in the contract providing that the lender can foreclose on the property and keep any payments that have been made. By writing this penalty into the contract, the lender has agreed to accept the property and any payments already made in lieu of the remaining payments.

Moreover, lenders charge Arizona borrowers on average an extra $800 per $100,000 borrowed because Arizona is a non-recourse state, meaning the lender cannot come after the borrower for a deficiency judgment on a purchase money loan. In other words, borrowers in Arizona pay for the option to default on a purchase money loan without recourse. The lender can only take the house.

That's the agreement. No one forced the lender to make the loan or sign the contract. Indeed, the lender wrote it. And, to be sure, the lender wouldn't hesitate to exercise his right to take a person's house if it was in his financial interest to do so. Concerns of morality or socially responsibility wouldn't be part of the equation.

In short, as far as the law is concerned, choosing to exercise the default option in a mortgage contract is no more immoral than choosing to cancel a cellphone contract. Indeed, exercising the default option in your mortgage contract is similar to cashing in on an insurance policy. You paid for it – and have you a right to exercise it.

I have demonstrated that borrowers used mortgages as option contracts. It is the same idea. Lenders sold downside risk protection to borrowers. They assumed 100% of the risk of price decline, and now lenders want to appeal to borrowers misguided sense of right and wrong to cajole borrowers into paying for the lender's mistakes.

But what about the argument that mortgage default hurts neighborhoods and the economy?

Well, first, in a capitalist society, we don't generally expect individuals to make personal economic decisions for the collective good. Aside from this fact, however, it's unfair, in my opinion, to ask underwater homeowners to prop up neighborhood property values, or the housing market, on their backs – especially if means sacrificing their ability to send their children to college or save adequately for their own retirement.

Distressed sellers are under no obligation to endure pain for the fantasies of their neighbors. If the neighborhood values get inflated by a few stupid buyers enabled by reckless lenders, and if the owners in that neighborhood concoct fanciful dreams of wealth, the people become poisoned with entitlement and HELOC spending and other abuses. In my opinion, distressed sellers are doing the neighbors a favor by removing the air from the bubble. As long as the bubble air is present, lenders have room to enable more HELOC borrowing.

Why take homeowners, and not lenders, to task for putting their own financial interest ahead of the common good? Indeed, if lenders were less intransigent and more willing to negotiate, underwater homeowners wouldn't have to walk away from their homes in order to save themselves from financial ruin. And we wouldn't have to worry about the fragile housing market crashing again.

Why it is that we speak of morality and social responsibility only when talking about the little guy, who must take his lumps for the common good, while financial institutions are free to protect their bottom line?

It just can't be the case that it's morally acceptable for banks to look out for their financial best interest, but it's not OK for the average American do to exactly the same thing.

I covered Dr. White when he came on the national scene with his paper on walking way, Should You Walk Away from Home Debt?

Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis

Brent T. White

Abstract

"Contrary to reports that homeowners are increasingly "walking away" from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure's perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse."

WalkingAway1029.pdf

From the main text:

"This article suggest that most underwater homeowners don't default as a result of two emotional forces: 1) the desire to avoid the shame or guilt associated with foreclosure; and 2) fear over the perceived consequences of foreclosure – consequences that are in actuality much less severe than most homeowners have been led to believe. Moreover, fear, shame, and guilt are not mere "transaction costs" that homeowners calculate according to their own personal tolerance for each. Rather, these emotional constraints are actively cultivated by the government, the financial industry, and other social control agents in order to induce individual homeowners to act in ways that are against their own self interest, but which are – wrongly this article contends – argued to be socially beneficial."

Dr. White gets it.

Games People Play

When I look through the property records I often come across the shady games people play to attempt to dodge responsibilities for their debts. California is a community property state which means marital assets are owned jointly; however, it is common for both husbands and wives to maintain separate lives, particularly if there was an extreme asset imbalance prior to the marriage.

The owners of today's featured property attempted some rather bizarre things to compartmentalize what happens with this property. I can't see how they were successful.

• First, the property was purchased by the husband as his sole and separate property for $428,500 on 2/29/2000. He used a $385,650 first mortgage and a $42,850 down payment.
• On 4/13/2001, he refinnced the first mortgage for $390,000.
• Then on 6/13/2003 the husband sells the property to the wife as her sole and separate property. Perhaps an attorney can comment on how this would work. Seems like commingling to me.
• On 6/2/2004 the wife opens a $100,000 HELOC.
• On 6/2/2005 she obtains $280,000 HELOC.
• On 11/10/2005 the wife sells the property to a family trust owned by both the husband and wife.
• Then on 2/14/2006, the trust sells the property back to the wife as her sole and separate property. I can't see how that is valid, but they tried.
• On the same day, the wife borrowers $800,000 in a first mortgage, and takes out a $150,000 stand-alone second.
• Then on 2/15/2005 — the next day — the wife sells the property back to the trust with the husband. Do they really think they can compartmentalize the debt like that?
• Total property debt is $950,000.
• Total mortgage equity withdrawal is 564,350.
• Total squatting time is at least one year.

Foreclosure Record

Recording Date: 02/11/2010

Document Type: Notice of Sale

Foreclosure Record

Recording Date: 08/12/2009

Document Type: Notice of Default

Irvine Home Address … 26 MIRADOR #59 Irvine, CA 92612

Resale Home Price … $750,000

Home Purchase Price … $428,500

Home Purchase Date …. 2/29/2000

Net Gain (Loss) ………. $276,500

Percent Change ………. 75.0%

Annual Appreciation … 5.2%

Cost of Ownership

————————————————-

$750,000 ………. Asking Price

$150,000 ………. 20% Down Conventional

5.16% …………… Mortgage Interest Rate

$600,000 ………. 30-Year Mortgage

$158,136 ………. Income Requirement

$3,280 ………. Monthly Mortgage Payment

$650 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$63 ………. Homeowners Insurance

$487 ………. Homeowners Association Fees

============================================

$4,479 ………. Monthly Cash Outlays

-$808 ………. Tax Savings (% of Interest and Property Tax)

-$700 ………. Equity Hidden in Payment

$305 ………. Lost Income to Down Payment (net of taxes)

$94 ………. Maintenance and Replacement Reserves

============================================

$3,371 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$7,500 ………. Furnishing and Move In @1%

$7,500 ………. Closing Costs @1%

$6,000 ………… Interest Points @1% of Loan

$150,000 ………. Down Payment

============================================

$171,000 ………. Total Cash Costs

$51,600 ………… Emergency Cash Reserves

============================================

$222,600 ………. Total Savings Needed

Property Details for 26 MIRADOR #59 Irvine, CA 92612

——————————————————————————

Beds: 2

Baths: 2 full 1 part baths

Home size: 1,830 sq ft

($410 / sq ft)

Lot Size: n/a

Year Built: 1985

Days on Market: 211

MLS Number: S591359

Property Type: Condominium, Residential

Community: Turtle Rock

Tract: Po

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

THIS IS A SHORT SALE!!!!!! Stunning Tuscan Villa with professional chef's kitchen; granite counters; Viking appliances; Enjoy the peaceful serene setting while relaxing in your totally upgraded remodeled home. This is a perfect home in an exclusive gated Turtle Rock neighborhood; This home is gorgeous!!!

No shortage of exclamation points. The realtor must be very excited about this deal. Of course, some ALL CAPS are thrown in for good measure.

There are not many words, but she did manage to use two of my graphics.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter