Category Archives: Real Estate Owned

High End Home Prices Benefit from Lack of Inventory

The high end has benefited from a lack of supply and low sales volumes. With lenders proceeding with foreclosure faster, we are starting to see the inventory we have been waiting for.

28 WOODS Trl kitchen

Irvine Home Address … 28 WOODS Trl Irvine, CA 92603

Resale Home Price …… $2,049,900


We can never know about the days to come

But we think about them anyway, yay

And I wonder if I'm really with you now

Or just chasin' after some finer day

Anticipation, anticipation

Is makin' me late

Is keepin' me waitin'

Carly Simon — Anticipation

Since the Government deeply inserted itself into the housing market, the future has become far from certain, and we spent an agonizing year anticipating the release of inventory lenders have determined will never come. Two-thousand ten is a different year; lenders are foreclosing in earnest, and we are seeing the first of this inventory hitting the market.

Report: Sales of pricey California homes drop in 2009

Sales of California homes priced at $1 million or more tumbled for the fourth consecutive year in 2009, according to a report out Thursday.

The number of million-dollar-plus homes sold dropped 23.8% to 18,621 in 2009 from 24,436 in 2008, according to San Diego real estate research firm MDA DataQuick.

If we were experiencing a true, robust housing market recovery, why are sales at the high end falling year after year? Low volumes are sustaining asking prices (that plus denial), but actual sales continue to plummet, and unless the government is planning to subsidize this market, look for a crushing weight of pricing to fall at the $729,750 conforming limit plus available downpayment savings. Expect a dramatic squashing of the market down to the $800,000 to $1,100,000 range

The decline was the result of buyers holding back, a weak mortgage market for big loans and the drop in home prices over the last several years dragging the value of several houses below the $1-million-dollar threshold, DataQuick said.

"Prestige home sales are a unique subcategory of the real estate market. The buyers and sellers respond to a different set of motivations,” DataQuick president John Walsh, said. “In the multimillion-dollar price ranges, decisions are largely discretionary and aren't as dependent upon jobs, prices and interest rates the way they are for most buyers and sellers."

This article is focused on homes prices at $1,000,000 and above, and yet the reporter quoted John Walsh's statement about multimillion-dollar homes. The reporter is implying that the dynamics of real wealth have some bearing on the pretenders who own houses they believe are worth between $1,000,000 and $2,000,000 where the major disaster is coming. Multitudes of borrowers overextended themselves to get into houses in the no-man's land between the FHA limit and price points only the truly wealthy can afford.

The trend underscores the nature of the state’s housing recovery. Sales of California home sales at all price levels increased 16.9% percent last year, to 460,166 from 393,703 in 2008. One in 25 homes sold for a million dollars or more last year, while the year before it was one in 16 and was one in nine in 2006.

No, the trend underscores the nature of the State's housing fiasco; we have no housing recovery, and saying that we do doesn't make it so; although, it makes people feel good, and it keeps the high end in denial. Why are homedebtors idiots? Because they are lied to constantly.

Lower-end homes largely fueled last year’s buying spree as both investors and first-time purchasers sensed opportunity in steeply discounted foreclosure properties across the state.

The Federal Housing Administration, a federal agency that insures mortgages often used by first-time buyers with little cash for a down payment, has played a big role in supporting the market for lower-end properties in California and some move-up markets. In pricier California communities, such as Los Angeles County, the limit for FHA loans was increased to $729,750 from $362,790 less than two years ago.

But more expensive homes haven't enjoyed that same level of government support nor were they hit as hard by the subprime mortgage meltdown.

Traditional luxury markets are faring better than those that experienced large price increases during the bubble years. For instance, million-dollar-plus home sales in Riverside County dropped 48.6% last year while Los Angeles County saw a 13.3% decline.

Notice the subtle lie perpetrated in this sentence: "Traditional luxury markets are faring better than those that experienced large price increases during the bubble years." Did you read, "Traditional luxury markets did not participate in the bubble therefore, prices will not fall?" The writer intended for you to get that message, and it is deceitful drivel.

There is one, and only one, reason million-dollar-plus home prices have not fallen off a cliff: lenders have not been foreclosing and discretionary sellers are in denial, so both available inventory and sales volumes are very low. Demand is nearly absent, but if supply is restricted enough, prices don't fall. What we are left with is a huge market segment dominated by shadow inventory with nobody to sell it to.

Lenders are finally moving properties through the foreclosure system, and I am anticipating much more high-end inventory this year. Through the summer, demand may be sufficient as unsatisfied buyers exist from 2009, but their numbers will be depleted quickly, and once exhausted, prices will get pushed down by the weight of all this inventory. Financing will not return, and many properties will fall to the $729,750 limit plus savings. Have you noticed that the Irvine Company priced everything within reach of financing? If they believed the over $1,000,000 market was viable, they would be selling at those price points; they are not because no market exists there.

I am profiling many more Trustee Sale flips lately because there have been many more Trustee Sales, sales that simply were not occurring last year. The pace is quickening with some lenders clearing their books. Today's featured property is an REO the lender is hoping to flip for a price higher than its peak purchase price in 2006. Has the high end already fully recovered?

No, no way.

28 WOODS Trl kitchen

Irvine Home Address … 28 WOODS Trl Irvine, CA 92603

Insightful Housing Beacon

Resale Home Price … $2,049,900

Income Requirement ……. $426,871

Downpayment Needed … $409,980

20% Down Conventional

Home Purchase Price … $1,700,000

Home Purchase Date …. 11/4/2009

Net Gain (Loss) ………. $226,906

Percent Change ………. 20.6%

Annual Appreciation … 57.5%

Mortgage Interest Rate ………. 5.05%

Monthly Mortgage Payment … $8,854

Monthly Cash Outlays …..….… $11,650

Monthly Cost of Ownership … $9,100

Property Details for 28 WOODS Trl Irvine, CA 92603

Gourmet Kitchen Award

Beds 5

Baths 4 full 1 part baths

Home Size 3,800 sq ft

($539 / sq ft)

Lot Size 9,052 sq ft

Year Built 2007

Days on Market 11

Listing Updated 2/3/2010

MLS Number S603502

Property Type Single Family, Residential

Community Turtle Ridge

Tract Arez

According to the listing agent, this listing is a bank owned (foreclosed) property.

Spacious five bedroom plus four and one half bath home situated on a private cul-de-sac in the gated community of Turtle Ridge. This home is like brand new through out. Gourmet kithcen offers stainless steal appliances, granite counters, travertine flooring. Upper level media/game room loft. Main floor bed and bath. Entertaining rear yard with custom designed pool, spa, outdoor kitchen, fireplace, courtyard fountains, water features. Plus much more

kithcen? Does the realtor still earn the gourmet kitchen graphic when he spells kitchen wrong?

How many of you were introduced to Carly Simon this way?

IHB News 2-6-2010

This weekend's featured property is an REO where the lender failed to drop their opening bid and grossly overpaid for the property.

88 STEPPING STONE Irvine, CA 92603 kitchen

Irvine Home Address … 88 STEPPING STONE Irvine, CA 92603

Resale Home Price …… $519,800


Mirror, mirror on the wall

The face you've shown me scares me so

I thought that I could call your bluff

But now the lines are clear enough

Life's not pretty even though

I've tried so hard to make it so

Mornings are such cold distress

How did I ever get into this mess

Snowblind — Styx

How did we get into this mess? Lenders must be wondering how they can issue first mortgages at 80% value and find themselves foreclosing and losing money.

This weekend's featured property was sold at Trustee Sale recently. The lender did not drop their bid, and they bought this property for well over its resale value. At first this may look strange, but the lender is likely acting as a servicer executing instructions contained in documents drafted during the bubble when nobody anticipated these problems. As a result, the lender is flipping for a $92,000 loss.

IHB News

Shevy has been busy with clients, and he received the following email earlier this week:


Thank you for setting up the viewing of the homes we were interested in. While they were okay houses they were not the houses for us. So, we'll keep looking and we'll keep looking at all the emails you've been sending to us, which have been really helpful. I also wanted to thank you for keep in constant contact with us and for the quick responses to our emails and our phone calls. I can't tell you how it makes such a difference when your customers feel like they are important to you, which we do and we appreciate that. Also, we'd like to thank Rana for taking the time out of her schedule to show us the houses and also for her laid back approach, no pressure, just letting us make up our own minds. I'm sure we'll be in constant contact about more houses in the future.


[IHB Client]

We recently updated our WYSIWYG editor, so now I can change fonts, change colors, highlight text, subscript, superscript, block quotes, and other fun stuff. I will explore these new tools over the next several weeks.

As I mentioned a few weeks ago, I take a writing class from Irvine Valley College. I laugh to myself whenever I find a simple, embarrassing error I make frequently. This week, I discovered the word "attorney" is made plural by adding an "s" to form "attorneys." I have spelled it "attornies" on many occasions. I know many attorneys read this blog, and I imagine a few have chuckled at my error; I would.

Lately, I hunger for words. As a writer, words are my only commodity, and having more of them and using them with greater precision is a high priority. The weary UPS guy carries numerous 800+ page books I order from or I get dictionaries and thesauri (I had to look up that plural), and various versions of each to explore what they offer.

There are hundreds of thousands of words in English, and many great minds have looked at different ways of organizing them, particularly writers whose need for words is great. Exploring these books is a minor fascination of mine right now.

Also, since the blogging medium is rich with graphics and images, I have purchased a number of visual dictionaries to provide creative source material, so don't be surprised to find the occasional esoteric reference supplemented by either a link or an image to provide greater detail.

I recently bought the Visual Thesaurus, and I like it so far. I frequently use mind mapping, so the interface is very intuitive for me, and the branched searching for words is great exploration. Another cool resource is Visuwords a website based on the same mind-mapping principles.

I am addicted to Babylon 8. I believe it is the greatest writing tool available for those who write in a word processor as I do. It is expedient to right-click and call up dictionary, thesaurus and encyclopedia references, and it is much faster than looking words up in big, clunky books.

So why do I keep the big books? Kinesthetic learning is not dead, and there is a tactile pleasure with thumbing through any book, but I like the big books for browsing, embarking on journeys of discovery. For instance, a random opening of the dictionary led me to "plebe: a freshmen at a military or naval academy," to which I would add pledging fraternities which is where I heard the term. A few entries down is "plebs: the general populace." I have never used the word plebs before, but with as many times as I refer to the sheeple and make other references to the general populace, having another term is very helpful, particularly if it is loaded with negative connotations like plebs. Watch for it, as plebs will almost certainly appear in a future post — I may spare you from philistines — or maybe not.

I recently finished reading Spunk & Bite: A Writer's Guide to Bold, Contemporary Style by Arthur Plotnik. The only problem I had with the book was the frequent pauses to look up words; the author's vocabulary is impressive. I like his advice on selecting active verbs, and I focus on writing in the present tense with active verbs and reducing or eliminating words without propositional content. I also drop articles (a, an, the) whenever possible. The difference in pace and feel is the difference between a leisurely stroll and a breakneck bronco ride. The quicker pace makes for easier reader engagement which is ultimately what both you and I want.

I gravitate toward present-tense writing as a reflection of my inner world of present-tense living. I believe it breathes life into what can be, at times, a moribund subject matter. Auxiliary verbs and various states of being plagued my writing, slowed it down, and provided little important information. For instance, I began this paragraph with "I gravitate," when I could have said, "I have been gravitating." The latter implies the slow ongoing process which more accurately represents the nuanced truth, but who cares? The shorter version is punchier, and the nuanced version is only interesting to me.

I am work in progress, or is that "a" work in progress?

BTW, in case it isn't obvious, I truly enjoy the writing.

Housing Bubble new from

Mortgage lenders "pursue" homedebtors even after foreclosure (

88 STEPPING STONE Irvine, CA 92603 kitchen

Irvine Home Address … 88 STEPPING STONE Irvine, CA 92603

Insightful Housing Beacon

Resale Home Price … $519,800

Income Requirement ……. $108,243

Downpayment Needed … $103,960

20% Down Conventional

Home Purchase Price … $581,316

Home Purchase Date …. 1/22/2010

Net Gain (Loss) ………. $(92,704)

Percent Change ………. -10.6%

Annual Appreciation … -127.0%

Mortgage Interest Rate ………. 5.05%

Monthly Mortgage Payment … $2,245

Monthly Cash Outlays …..….… $3,280

Monthly Cost of Ownership … $2,670

Property Details for 88 STEPPING STONE Irvine, CA 92603

Beds 3

Baths 3 baths

Home Size 1,600 sq ft

($325 / sq ft)

Lot Size n/a

Year Built 2004

Days on Market 2

Listing Updated 2/5/2010

MLS Number S604324

Property Type Condominium, Residential

Community Quail Hill

Tract Casa

According to the listing agent, this listing is a bank owned (foreclosed) property.

From the moment you walk into this property you will fall in love! This open floorplan features an upgraded kitchen with Granite countertops that opens to the family room with fireplace! Separate dining area with China Hutch! Downstairs bedroom/bathroom, and upstairs loft area with built in desk! Beautiful master bathroom with dual sinks and separate tub and shower! Large private balcony off upstairs bedroom with huge walk in closet! This property is a must see!

Option ARM Losses Surpass Subprime

Congratulations to Option ARM borrowers for costing lenders more in losses than subprime borrowers! Today's featured property is one of a number of two-bedroom condos sporting a wide range in asking prices.

14 WILDFLOWER Irvine, CA 92604 kitchen

Irvine Home Address … 14 WILDFLOWER Irvine, CA 92604

Resale Home Price …… $295,000


You're getting closer

To pushing me off of life's little edge

'Cause I'm a loser

And sooner or later you know I'll be dead

You're getting closer

You're holding the rope and I'm taking the fall

'Cause I'm a loser, I'm a loser, yeah.

This is getting old.

I can't break these chains that I hold

My body's growing cold

There's nothing left of this mind or my soul.

Addiction needs a pacifier, the buzz of this poison is taking me higher.

This will fall away, this will fall away.

Loser – 3 Doors Down

A particular borrower or loan category will be the biggest loser of the housing bubble. Subprime was an early front-runner, but loan amounts were small, so despite astronomical default rates and severe losses on a percentage basis, in absolute terms, subprime did not have the potential of Alt-A, and Prime borrowers nor the potential of Interest-Only and Option ARM loans to lay waste to lender balance sheets. Subprime is officially old news as we are all subprime now.

Option ARMs Surpass Subprime Mortgages in Loss Severity

Moody’s does not expect a bottoming of house prices before Q310, with another 11% national decline likely before the worst is over. These price declines, taken with rising unemployment, housing inventory oversupply and weak demand, are pressuring performance.

I also agree that we are not at a housing market bottom (also see: Deutsche Sees House Prices Falling Another 10 Percent).

On the heels of longer foreclosure and liquidation time lines “exacerbated by unsuccessful modification efforts” in 2009, loan loss severities worsened across all sectors, according to Moody’s.

Despite the fact that loan modifications make payments affordable people are defaulting in large numbers, particularly those with negative equity.

Option ARMs have surpassed subprime as the sector with the steepest loss projections for securities issued from 2005 to 2007, according to Moody’s. The rating agency now expects a 20% cumulative loss on ‘05 option ARM RMBS (from 11.7% in Q109), 41% on ‘06 securitizations (from 26.7%) and 51% on ‘07 securitizations (from 29.7%).

The loss severities are very high, but not unexpected. Option ARMs were loans about twice as large as they should have been if qualifying payments were applied to 30-year fixed-rate financing. IMO, before this is over, Option ARM loss severities will approach 70% and defaults will exceed 90%.

Delinquencies of 60 or more days, assets in foreclosure or held-for-sale rose “markedly” since the last Moody’s revision to option ARM RMBS projections in Q109. Serious delinquencies rose to 40.4% from 33.3% for ‘05 securities, to 47.3% from 38.6% for ‘06 securities and to 41.3% from 30.4% for ‘07 securities.

Forty-plus percent delinquency rates? That is remarkable! Nearly half of all Option ARM borrowers are living in a house rent and payment free, any many of these people have not faced their recasts yet!

Subprime soured, now Option ARMs fall out-of-the-money, so what is next? Loan poison creeps up the equity tree tainting higher branches: Alt-A Losses Outstripping Expectations, Moody’s Says, Prime Jumbo RMBS Delinquencies Swell to 9.2%: Fitch. No market segment is immune, and any borrower without fixed-rate financing at an affordable payment level is in peril.

Two-Bedroom Two-Bath Pricing

Today's featured property is one of the least expensive condos on the market at $295,000… which is rather disheartening when you think about it….

Other small condos for sale:

$350,000 — 241 HUNTINGTON Irvine, CA 92620

$395,000 — 209 ALICANTE AISLE #219 Irvine, CA 92614

$439,900 — 42 FABRIANO Irvine, CA 92620

I doubt any of the three sellers above are happy with an REO undercutting them by 20% or more.

Is being detached a premium worth $144,400 or $140/SF? Sharing dated interiors, the main difference between today's featured property and the last one on the list above is the degree of detachment. I think that premium is excessive, but the market will be the final arbiter.

14 WILDFLOWER Irvine, CA 92604 kitchen

Irvine Home Address … 14 WILDFLOWER Irvine, CA 92604

Resale Home Price … $295,000

Income Requirement ……. $61,990

Downpayment Needed … $10,325

3.5% Down FHA Financing

Home Purchase Price … $147,500

Home Purchase Date …. 4/29/1996

Net Gain (Loss) ………. $129,800

Percent Change ………. 100.0%

Annual Appreciation … 5.1%

Mortgage Interest Rate ………. 5.13%

Monthly Mortgage Payment … $1,551

Monthly Cash Outlays ………… $2,180

Monthly Cost of Ownership … $1,750

Property Details for 14 WILDFLOWER Irvine, CA 92604

Beds 2

Baths 1 full 2 part baths

Home Size 1,050 sq ft

($281 / sq ft)

Lot Size n/a

Year Built 1974

Days on Market 2

Listing Updated 1/28/2010

MLS Number P719435

Property Type Condominium, Residential

Community El Camino Real

Tract Db

According to the listing agent, this listing is a bank owned (foreclosed) property.

Charming two bedroom condo with detached two car garage. Spacious living room with fireplace and access to private patio; galley style kitchen; separate dining area; bedrooms have mirrored closet doors and private baths; street parking for guests. Perfect for small family or investor. Sold 'As Is'.

So how does a property double in value and become REO? You guessed it, HELOC abuse.

This property was originally purchased by a single man. The current owner appears on title later and ownership of this condo may have been transferred in a divorce.

  • The man purchased the property on 12/26/2002 for $270,000 using a $216,000 first mortgage, a $54,000 second mortgage, and a $0 downpayment.
  • On 6/18/2004 the now couple's first mortgage was refinanced for $315,000.
  • On 8/26/2004 they added a stand-alone second for $11,000.
  • on 10/26/2004 they refinanced the second for $29,000.
  • On 5/5/2005 they refinanced the second again for $36,000.
  • On 6/7/2005 they refinanced the first mortgage for $340,000.
  • On 6/14/2005 they added a stand-alone second for $36,000.
  • On 7/20/2005 they added a third mortgage for $11,000.
  • On 8/24/2005 they opened a HELOC for $75,000.
  • On 8/31/2005 they expanded the HELOC to $87,500.
  • Finally, on 4/12/2006 they refinanced the first mortgage for $472,500
  • Total cash investment by owners is $0.
  • Total property debt was $472,500 plus fees.
  • Total mortgage equity withdrawal is $202,500.

This owner invested nothing and managed to pull out $202,500.

May I have one of those?

HELOC Abuse Grading System

Home Equity Line of Credit (HELOC) abuse was a massive stimulus to our economy, and now it is one of the leading causes of foreclosure. Today, we are going to take a detailed look at this phenomenon and the implications for future lending.

25 ROSE TRELLIS Irvine, CA 92603 kitchen

Irvine Home Address … 25 ROSE TRELLIS Irvine, CA 92603

Resale Home Price …… $1,267,000


He hears the ticking of the clocks

And walks along with a parrot that talks,

Hunts her down by the waterfront docks where the sailers all come in.

Maybe she'll pick him out again, how long must he wait

Once more for a simple twist of fate.

People tell me it's a sin

To know and feel too much within.

I still believe she was my twin, but I lost the ring.

She was born in spring, but I was born too late

Blame it on a simple twist of fate.

Simple Twist of Fate — Bob Dylan

There is a simple truth about the housing market; people are going to buy and sell homes when is suits their life's circumstances. Unlike many of the readers of this blog, few base their decisions on market dynamics, and even when they do, each sets their own risk parameters.

The main factor separating those who benefited from the housing bubble from those who did not was a Simple Twist of Fate; for some it was time to sell or buy, and Fate either enriched or destroyed them.

I have often wondered if I had made different decisions during the bubble if I would have been caught up in the frenzy. Although I don't believe I could have fully ingested kool aid, I probably would have behaved like most of my cohorts and increased my loan balance. I consider those who did this with fixed rate financing and still managed to lower their payments as the sly ones. That is as far as I would have gone, but I probably would have taken some of the free money.

The conditions that spawned the rally of The Great Housing Bubble are gone, and we will not see rapid appreciation and a HELOC-fueled economy for decades. I believe we are embarking on a 20-30 year cycle of slowing rising interest rates as we stay one step behind inflation the entire journey. In an environment of increasing financing costs, mortgage equity withdrawal is rare because there is little equity available, and the cost of accessing and spending that equity is high — the opposite of what people have become accustomed to over the last 20-30 years.

It is important to me for people to realize HELOC spending is not coming back. Many buyers operative today are basing their decisions on poor information, they believe that if they can just get into a home, they will get to live off the HELOC money like everyone did in the 00s — they may have to wait a few years, but most buyers are certain HELOC money is on its way. It's not. As long as buyers are making buying decisions based on poor information, they will likely overpay and be unhappy with the results later on.

HELOC Abuse Grading System

I was looking back on the abundance of HELOC abuse stories from last year, and since I know we are going to see many, many more of these disasters over the next several years, I have developed a simple grading system that will tell you at a glance information about the borrower. By devoting this post to the grading sysem, in the future when you see a small graphic that labels the owner a "Grade D HELOC abuser," you will know a great deal about how they lived and how they managed their debt.

HELOC Abuse Grading System

As I contemplated a grading system, I wanted something visually intuitive so I developed the graphic above. The origin point to the left represents the total loan balance on the day the property was purchased. The lines emanating from the origin extend to the right with an angle of trajectory that either pays down a mortgage or adds to it.

Each HELOC grade is separated by a psychological or behavioral threshold, and each one has observable results — you can compare the current mortgage balance with the original one and see how quickly the debt went up or down.

HELOC Abuse Grade AHELOC abuse grade A

Most people who borrow money do so because they need it. There is a limitation to how quickly they can repay the money, and the limit at the bottom of Grade A is the pinnacle of borrower prudence.

I probably shouldn't call this HELOC abuse at all because in order to earn an A, a debtor must pay off a mortgage faster than a 30-year amortization schedule. This should not be a difficult hurdle to jump over; in fact, prior to the housing bubble, most borrowers were forced to toe this line by conservative lenders.

The major difficulty in earning an A comes from deferred maintenance and renovation. People tend to borrow for major improvements with the justification it adds value to the property. Added value is debatable, but added debt is certain. Few people pay down their mortgage faster than a 30-year rate, and fewer manage to maintain that trajectory. Kudos and special recognition are in order for those who accomplish this difficult task.

HELOC Abuse Grade BHELOC abuse grade B

Earning a B in this system requires a debtor to at least hold the line on the total debt. Anyone who does better than treading water — which puts all interest-only borrowers on the line — can earn a B. As previously noted, prior to the bubble, few borrowers were near this threshold and most of the market earned a B for debt management.

Since lenders lost billions allowing copious amounts of mortgage equity withdrawal, since prices are no longer rising, and since the cost of money (interest rates) is likely to rise, borrowers of the future will be forced to earn a B as lenders drop their C, D, E and F customers.

Earning a B is a badge of honor; the scarlet letters are coming next….

HELOC Abuse Grade C HELOC abuse grade C

I hate to give borrowers in this category a "passing" grade, but this is the reality for most Americans. Growing credit card or mortgage debt slowly generally can be compensated for through home price appreciation, and although I consider this a bad idea, I can't really call it HELOC abuse, just foolish HELOC use. Is there a distinction there? I will let you decide.

Financial planners will tell you that most people fail to budget properly for unexpected expenses (they don't save), so when they fall behind a little each month, they put the balance on a credit card and hope they can pay it back with a tax return — or during the bubble with a visit to the housing ATM.

People are still going to manage their bills this way going forward, and there will be pressures to "liberate" this equity to pay for these expenses. The money changers will continue to peddle this nonsense as sophisticated financial management. It is a stupid way to manage debt, and I give it a C.

HELOC Abuse Grade DHELOC abuse grade D

The transition between a grade C and a grade D is somewhat subjective, but it is hinged to an idea; once borrowers start knowingly increasing their loan balance to spend appreciation as a matter of habit, once they start expecting appreciation and HELOC money as a reliable source of income, they have moved from what some may consider legitimate use of HELOCs to Ponzi Scheme financing and ultimately a foreclosure implosion. This Ponzi borrowing limit is an invisible threshold borrowers do not realize they have crossed, but once they accept using debt to pay debt as a concept, they have crossed over to the Dark Side.

The top of the range of D graded HELOC abusers is the limit of each borrowers self delusion when it comes to how much appreciation they feel comfortable spending without losing their homes. People who earn a D still planned to keep their homes, they were merely misguided by their own ignorance and the incessant Siren's Song of kool aid intoxication. These are the sheeple; like the rats St. Patrick cast into the sea, each borrower followed the Piper to their underwater mortgage and a watery foreclosure.

HELOC Abuse Grade EHELOC abuse grade E

Most of the HELOC abuse posts I have done have been Grade E abusers because they are entertaining. When someone borrows and spends a $1,000,000, it is dramatic, and as an outside observer, you have to wonder what they spent all that money on.

Somewhere beyond the limit of self delusion, a borrower makes another psychological leap, they no longer worry about the consequences of their actions and they spend, spend, spend. This grading category spans the continuum from thoughtless spending to foolish and reckless spending where the borrower exercises no restraint at all.

HELOC abusers who get an E had to make an effort to spend. It takes time and effort to really spend beyond ones means one small transaction at a time. How many dinners out, trips to Vegas and other indulgences does it take to consume $1,000,000? I don't know, but grade E abusers try to find out.

HELOC Abuse Grade F HELOC abuse grade F

Grade F HELOC abusers are the creme de la creme of their craft. These people are not maxing out their debt to spend recklessly — although I am sure much reckless spending occurred — grade F HELOC abusers are openly gaming the system to flip properties or strip equity while passing the risks on to lenders.

Another group that falls in this category are the Land Barons, as they are described at the Coto Housing Blog. People who stripped the equity from one property to acquire others build a massive Ponzi structure. Back in February of 2009, I profiled the holdings of one such land Baron in Everybody Wants to Own the World.

The upper limit of this boundary is determined by lender greed as reflected through their underwriting standards. During the housing bubble, this line was pushed so far as to create categories C, D, E and F. Since most of these people are going to lose their homes, expect to see lenders lower the trajectory of this line significantly.

Grade F HELOC abusers are the ones who benefited the most from the housing bubble. All Grade D, E, and F borrowers either have or will lose their homes. The grade F borrowers got to extract the most value out of their equity before the market collapsed. Any borrower who had any psychological restraint — even the clueless ones who get an E — are worse off than those who spent with the greatest abandon.

When you contemplate the wide range of bad behaviors that were encouraged during the Great Housing Bubble, do you think we will have future issues with moral hazard? I do.


25 ROSE TRELLIS Irvine, CA 92603 kitchen

Irvine Home Address … 25 ROSE TRELLIS Irvine, CA 92603

Resale Home Price … $1,267,00025 ROSE TRELLIS Irvine, CA 92603 sunset

Income Requirement ……. $272,289

Downpayment Needed … $253,400

20% Down Conventional

Home Purchase Price … $1,274,000

Home Purchase Date …. 11/24/2004

Net Gain (Loss) ………. $(83,020)

Percent Change ………. -0.5%

Annual Appreciation … -0.1%

Mortgage Interest Rate ………. 5.33%

Monthly Mortgage Payment … $5,647

Monthly Cash Outlays ………… $7,640

Monthly Cost of Ownership … $5,630

HELOC abuse grade C

Property Details for 25 ROSE TRELLIS Irvine, CA 92603

Beds 3

Baths 3 full 1 part baths

Size 2,650 sq ft

($478 / sq ft)

Lot Size 4,792 sq ft

Year Built 2004

Days on Market 3

Listing Updated 12/31/2009

MLS Number S599997

Property Type Single Family, Residential

Community Turtle Ridge

Tract Ledg

According to the listing agent, this listing is a bank owned (foreclosed) property.

Bank Owned Property With Spectactular City Lights Views. Upgraded 3 bedroom home with distressed hard wood flooring downstairs. Kitchen has a large center island, Granite counters and a breakfast nook. Each bedroom has its own bathroom with a guest half bath downstairs. Outstanding City views from master bedroom upstairs with two french doors to two juliet balconies. Upstairs laundry. Nice size Casita with full bath for your guests downstairs. An upgraded epoxy flooring in Garage. This community is guard gated 24 hrs with resort like association amenities that includes a Gym, Club House, Parks, picnic areas and two pools. Walking and biking trails everywhere with views of the city and the ocean. Agents, bring you clients to see this resort like area and this outstanding home. Don't miss out!

IMO, cropping the bottom half of the sunset photograph would be an improvement. The sunset is pretty; the black blob below is not.

upgraded epoxy flooring? Does epoxy flooring come in a standard and upgraded form?

bring you clients… correct you grammar…


The lender is trying to break even and get late 2004 pricing. If they can find a qualified buyer, the property will sell.

Foreclosures Ravage Irvine's High End

How many $4,500,000 REOs can the market absorb? More are coming.

Today’s featured property was a spec built by Fullerton Community Bank for a high end defaulter.

63 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 63 CANYON Crk Irvine, CA 92603
Resale Home Price …… $4,500,000


The world’s got a funny way of turning ’round on you
When a friend tries to stab you right in the face
Losing faith in everything I thought I hoped I knew
Don’t sweat it, {it was} set on false pretense

Betrayed but not gonna be willing to change
And it doesn’t seem likely to fade
Betrayed but not gonna be willing to change
Cu-cu-cu-cuz you know…

It’s sacrifice
False pretense you’ll hurt again
Stop pretending to deny
False pretense you’ll hurt again

False Pretense — The Red Jumpsuit

California is full of False Pretense. Ostentatious properties like today’s tend to be a showcase to an owner’s ego, a dream home of epic proportions. Usually, monuments such as this are built with a successful person’s accumulated wealth, so wasting money on personal taste is usually paid for by the owner; however, during the Great Housing Bubble, lenders were willing to enable monument building, and now we have thousands of McMansions and far too many real mansions like today’s.

Some stupid and greedy lender offered this homeowner a $4,300,000 construction loan. Ordinarily, it would be nearly impossible to get a loan like this, and the $4,300,000 would not be released until the borrower had spent their 20% (or more) equity first — often the price of the lot. Since this was a 2006 loan, it may have been a 100% financing deal, but whatever the downpayment (initial investment) requirement was, this owner has lost it all.

How many $4,300,000 loans are out there inflating values at the high end? Few new loans are being underwritten at such high amounts, so when this property sells, the financing picture will be much different for the future buyer than the previous one. Hopefully it will be more stable.

High end properties are often equity piggy-banks storing the
accumulated wealth of a lifetime of conservative financial management
and sustainable appreciation. If this loan and the many like it had not been written, high end property values would not have gone so high. With the addition of leverage, values appreciated too fast, and with access to HELOCs, the piggy bank was raided. The empty shell is discarded like an admission ticket that gave access to a great party long ago but no longer has value.

High end defaults are on the rise

Dr. Housing Bubble noted:

12 percent of mortgages with a balance of $1 million or more are now 90
days late
Last year, this number was 4.7 percent. If we look at
mortgages with a balance of $250,000 or less we find that 6.3 percent
are in distress. Now this is a stunning piece of data. You would
logically think that those with higher mortgages would have lower
distress rates simply because they have higher incomes. But the math
at least with monthly cash flows is simple. Spend less than you earn.
If you bring in $25,000 a month and spend $30,000 you will have
problems. Now if you bought a $2 million home that is now worth $1.25
million, will you continue to pay? Many of the California option ARMs and Alt-A loans are connected to these high priced properties.”

Serious U.S. mortgage delinquencies up 20 percent, according to Reuters: “It found 3.6 percent of prime mortgages — those made to the most
credit-worthy borrowers — were seriously delinquent in the third
That was more than double the year-ago quarter and up nearly
20 percent from the 2009 second quarter.” We also know from the numerous discussions of Shadow Inventory that foreclosures are not keeping up with defaults:

Don’t be confused by all the different percentages as they were looking at different data sets. The key observation is that defaults and foreclosures are rising, particularly at the high end.

Luxury Market Left Out

The Federal Reserve set out in January to lower fixed
mortgage rates by purchasing $1.25 trillion of bonds backed by
home loans. The 30-year fixed rate for so-called conforming
loans that can be bought by Fannie Mae and Freddie Mac dropped
to an all-time low of 4.71 percent in the week ended Dec. 4,
according to McLean, Virginia-based Freddie Mac, the second-
largest U.S. mortgage financier. The rate rose to 4.81 percent
last week.

The Fed purchases haven’t affected the high end of the
market because they exclude so-called jumbo loans. Mortgages
above the $729,750 limit set by Congress for the nation’s
highest-priced markets cost almost 1 percentage point more than
conforming loans, according to Keith Gumbinger, vice president
at HSH Associates, a mortgage-data company in Pompton Plains,
New Jersey. That’s quadruple the historic spread.

“There is no refinance market for you if you are
underwater and outside the Fannie and Freddie framework,”
Gumbinger said. “High-end neighborhoods are all suffering from
the same problems of diminished income at a time when there is
little equity to work with.”

Saving the Coastal California market

In Predictions for 2010, I predicted that a political effort will be made to save the Coastal California housing market by subordinating GSE loans. It would work as follows:

“If the GSEs wanted to raise the funding cap from
$729,000 to $1,229,000. They could simply allow their mortgages to be
subordinated to a single fixed-rate mortgage up to $500,000, and the
GSEs would be insuring their $729,000 mortgage as a second. The
interest rate on the first would be even lower than the GSE
mortgage—what risk is there? The GSEs would be taking on substantially
more risk, but it would allow them to underwrite loans on more
expensive properties, save the Coastal California housing market (not),
and pass enormous losses on to the US taxpayer.

Don’t be surprised when someone suggests this as a Treasury
Department leak and we read it in the MSM. Obviously, I think this is a
spectacularly bad idea, but lenders won’t, particularly if they think
they can pass losses on to us.”

As Lee in Irvine noted in the astute observations last week,

“There’s no doubt the coastal politicians are gonna make a run at
this. No Doubt. However, it will only lead to more economic
imbalances in Southern California. We can’t have an economy where our
incomes are 20-50% more than the rest of the country, but our home
prices are 3-4 X’S the country. As many of know, it just doesn’t work.

Also, I could see a political fight from others in DC that do not
represent these districts. After all, a case could easily be made that
this is welfare for the wealthy. “The govt is subsidizing huge
mortgages for people in California.”

One more point … the govt still needs to decide what they’re gonna do with the GSEs. After all, they’re insolvent.
The more money they loan, the more money they lose, and this leads to
more bailouts from the taxpayers. I think they should turn the GSEs
into private co’s, and therefore they would be forced to become
profitable (CHARGE MORE). However, this isn’t gonna happen.”

I agree.

So why is this such a big deal?

More Declines Expected

From the article:

“The reason the low end stopped falling is because the
government stepped in with affordable loans,” said Scott Simon,
managing director at Pacific Investment Management Co., a
Newport Beach-based investment firm that runs the world’s
largest bond fund. “There is no political will to bail out a
million-dollar house.”

Luxury home prices probably will drop another 5 percent
before reaching a bottom in September 2010, according to Sam
, senior economist at First American.

Those declines may lead to losses on jumbo mortgages that
dwarf the “haircut,” or discount to full value, that banks
take on short sales or foreclosures of moderately priced homes,
said Rodriguez, the agent with JM Group in Miami.

“When the bank takes a loss on a $3 million property it’s
a lot bigger than the loss on a home with a $150,000 mortgage,”
Rodriquez said.

This is going to end badly.

63 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 63 CANYON Crk Irvine, CA 92603

Resale Home Price … $4,500,000

Income Requirement ……. $967,086
Downpayment Needed … $900,000
20% Down Conventional

Home Purchase Price … $4,300,000
Home Purchase Date …. 5/10/2006

Net Gain (Loss) ………. $(70,000)
Percent Change ………. 4.7%
Annual Appreciation … 1.2%

Mortgage Interest Rate ………. 5.33%
Monthly Mortgage Payment … $20,058
Monthly Cash Outlays ………… $25,640
Monthly Cost of Ownership … $18,520

Property Details for 63 CANYON Crk Irvine, CA 92603

Beds 663 CANYON Crk Irvine, CA 92603 grounds
Baths 7 full 1 part baths
Size 9,600 sq ft
($469 / sq ft)
Lot Size 23,183 sq ft
Year Built 2009
Days on Market 7
Listing Updated 12/28/2009
MLS Number S599824
Property Type Single Family, Residential
Community Turtle Rock
Tract Shdc

According to the listing agent, this listing is a bank owned (foreclosed) property.

Bank Owned presented in distinctive Andalusian Style, this custom designed and built home artfully balances grand scale spaces with an extraordinary attention to detail. Numerous viewing decks and a courtyard entry pay tribute to Old World traditions, while graceful archways, hand turned balustrads underscore the architectural theme. With 2 of the 5 bedroom suites & an office on main level, this 9600sqft home offers optimal flexibility.Oasis like landscaping with various waterfalls enhance the villa appeal of this magnificent residence. Subterranean soaking pool, sauna, home theatre/game room/ bar and a temperature controled wine cellar with custom racking and table seatings of 8 or more. Optional Elavator.

Optional Elavator? How is an elevator (note the proper spelling) optional in a constructed house. Is using the elevator optional? Is there a giant elevator shaft sitting empty in the middle of this house waiting for a would-be buyer to make a decision on an elevator? Someone help me.

A $4,500,000 listing, and it has several typos…. controled? Elavator. balustrads.

FULLERTON COMMUNITY BANK FSB is not happy about this:

Foreclosure Record
Recording Date: 11/17/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 08/04/2009
Document Type: Notice of Default