With all the news about falling house prices and specials on the housing bubble, it is obvious to most people that prices are falling, and they will continue to do so. Unfortunately, most people do not do anything about it until the price drop is painful–and it is too late.

Today’s featured property is a high-end short sale. It will be a foreclosure soon enough.

Asking Price: $1,215,000

Address: 46 Crimson Rose, Irvine, CA 92603

If You Want Blood — AC/DC

Blood on the rocks
Blood on the streets
Blood in the sky
Blood on the sheets

If you want blood
you got it

I think we all know this is going to end badly, and there is nothing anyone in government or elsewhere can do about it. It should be obvious to anyone who watches the news and is capable of objectively seeing what is happening. Unfortunately, most people lose their ability to be objective about the course of prices in financial markets once they take a position. Since almost 70% of households are “long” real estate, most people are incapable of seeing the market objectively. Even now, surveys on housing prices show a majority of homeowners believe prices will appreciate in 2009. Crazy.

{book2}

When I wrote the post “speculation or investment?” I had this description of a speculator’s emotional cycle:

When prices begin to fall in a speculative market,
most speculators immediately lapse into denial. They were so
emotionally rewarded by purchasing and holding the asset, they see no
reason to believe the first signs of a declining market are anything
other than a temporary aberration. As prices continue to fall, the
emotions change: fear begins to creep in, and the battle between denial
and fear goes on well past the breakeven point where the speculator
could have closed the position without losing any money. As prices fall
further, the fear begins to take an emotional toll and the speculator
starts to feel pain. The further prices drop, the more pain is
inflicted on the speculator. What is the natural reaction to pain? Push
it away. As a speculative investment becomes painful, the natural
reaction is to want to get rid of it. This prompts the speculator to
sell the asset – only after they have lost money. A speculator’s
emotions always work against them. When the asset is rising in price
they want more of it, and when it is falling in price they want less.
This is a natural reaction, and it is the cause of all losses in
speculative markets. This is why most speculators fail.

I recently had a conversation with a friend who told me
about a family that lives in the Bay area that is important to him. The story of
what this family did during the great housing bubble is very common, and their reaction
to what is happening now is also very common.

It all started in the late 90s when they purchased their
first home for about $250,000. By 2005 the value of this property reached $650,000.
Along the way they lived somewhat beyond their means and spent about $150,000 of
their equity, but at the time they still had plenty of equity left over. In 2005 they
decided it was time to move up. They borrowed an additional $150,000 out of
their primary residence and used it as a downpayment on a $1.1 million property.
Rather than selling their first property they decided to keep it as an “investment.”

They put $50,000 down on their first property, and over the
course of the next eight years they managed to leverage themselves into $1.8
million worth of property, they were able to live beyond their means, and they
managed to increase their net worth. No problem, right?

Well, in order to achieve this great wealth and prosperity
they had to increase their debt from around $200,000 to nearly $1.6 million.
The rental income from their first property helps, but without exotic financing
they are unable to service the debt load. Through mortgage equity withdrawal
they were able to sustain their lifestyle through continued Ponzi Scheme
borrowing, but with the credit crunch their credit lines are frozen, and their
life lines are cut off. They do not make enough to support the debt, and my friend is concerned they will lose both properties. Unless Ponzi financing returns, they probably will.

Since the peak, property values in the area have declined
about 25%, which is less than the rest of the state of California, but it
leaves them with properties worth around $1,350,000. This puts them about
$250,000 underwater. They will probably be close to $600,000 underwater before
prices stabilize.

Right now they are in denial. They still plan to keep both
properties as they expect prices to be back up to the peak valuations in a
couple of years. They were so rewarded for buying and holding their first
property that they are not feeling enough pain in their current situation to do
anything about it. For them the price decline is not painfully obvious.

Today’s featured property is a fairly egregious HELOC abuser. Are you ready to pay off his debts as US taxpayers?

Asking Price: $1,215,000

Income Requirement: $303,750

Downpayment Needed: $243,000

Monthly Equity Burn: $10,125

Purchase Price: $1,384,000

Purchase Date: 9/28/2005

Address: 46 Crimson Rose, Irvine, CA 92603

LOCATION! LOCATION! LOCATION! Blah! Blah! Blah!

Take Back Up Offers. LOL!

• This property was purchased on 9/28/2005 for $1,384,000. The owner used a $1,000,000 first mortgage, a $245,159 HELOC and a $138,841 downpayment.
• On 2/28/2007 he refinanced with a $1,425,000 first mortgage.
• On 5/9/2007 he opened a HELOC for $284,990.
• Total mortgage equity withdrawal is $464,831.
• Total mortgage debt is $1,709,990.

The “approved” short sale amount of $1,215,000 would net Washington Mutual Chase (soon to be US taxpayer) $1,142,100 after a 6% commission. So if the lender gets this wishing price, the total loss will be $567,890.

So how do you feel about paying off this guy’s debt?

{book7}

It’s criminal
there ought to be a law
criminal
there ought to be a whole lot more
you get a nothin’ for nothin’
tell me who can you trust
we got what ya want
and you got the lust

Refrain:
If you want blood (YOU GOT IT)
If you want blood (YOU GOT IT)
BLOOD on the streets
BLOOD on the rocks
BLOOD in the gutter, EVERY LAST DROP, YOU WANT BLOOD
you got it
yes you have

If you want blood, you got it

If You Want Blood — AC/DC

Before the IHB began publicizing HELOC abuse, few realized how widespread the phenomenon really was. Now that we all know, I ask you “Will all the short sales and foreclosures caused by HELOC abuse doom the housing market?”

Today’s property is, of course, a HELOC abuse case. They are easy to find, just pick a listing at random, and it is either a 100% financing deal or HELOC abuse…

Asking Price: $415,000

Address: 65 Olivehurst, Irvine, CA 92602

{book3}

Another Brick in the Wall — Pink Floyd

All in all you’re just another brick in the wall.
All in all you’re just another brick in the wall.

People making their regular mortgage payments is the critical element that keeps money flowing into residential mortgages. Once people stop making payments according to the terms of their agreements, lenders and investors stop loaning money, and you have a colossal credit crunch. Everyone who borrows money needs to behave like another brick in the wall, or the wall will crumble. So it is with our housing market.

Many people got in over their heads because they bought too late in the rally and paid too much. Most were motivated by greed to capture appreciation, but some were honest borrowers whose life’s circumstances lead them to buy at the worst possible time. There is another group that is also in trouble, those that bought early but borrowed too much later on. This is the group that fascinates me. Why did they spend their houses?

{book7}

Many people who extracted their home equity lost their homes for lack of ability to refinance or make their new payments after their loans recast. After so many people lost their homes due to their own reckless borrowing, it is natural to wonder why these people did it. Why did they risk their home for a little spending money?

First, it was not just a little money. Many markets saw home values increase at a rate equal to the local median income. It was as if their home was another breadwinner. The lure of this easy money was too much for many to resist. The rampant, in-your-face, marketing of these loans in every available media outlet touting the glossy “lifestyle” of over-the-top consumerism was a drug to many spending addicts.

Also, during the bubble rally people really believed their house values would go up forever, and they would always have the ability to refinance enormous debts at low interest rates and maintain very low debt service costs. Most people did not think it possible they would end up in circumstances where they would lose their homes; however, they were mistaken.

Given these beliefs, the equity accumulating in their house was “free money” they just needed to access in order to live and to spend like rich people. Even though they were consuming their net worth, and making themselves poor, they believed they were rich, and they wanted to spend accordingly.

Mortgage Equity Withdrawal 1991-2007

Charts are always interesting, but what do they really mean? When you look at the chart of mortgage equity withdrawal, you can see that people took out a lot of money as house prices went up, and they spent it. It is an interesting macroeconomic phenomenon that is fascinating to economists, but it’s just another statistic of the great housing bubble. Or is it?

Here at the IHB, I document the far more interesting microeconomic consequences of mortgage equity withdrawal: people lose their homes. You can translate the big macroeconomic chart with the plethora of individual borrowers we profile here that made the bars on the chart grow so tall.

In many ways Irvine is the epicenter of the housing bubble. We were the home of subprime, and our market saw some of the greatest price changes of any local market. And as we see daily here at the IHB, Irvine residents were also major contributors to the mortgage equity withdrawal statistics.

{book1}

So my big-picture question you today is “will mortgage equity withdrawal be the straw that breaks the market’s back?”

Of course, the question assumes that the market might not have collapsed without mortgage equity withdrawal. A compelling argument can be made that the additional foreclosures caused by mortgage equity withdrawal are unnecessary to cause a market collapse. The diminishing bids caused by tighter credit are enough to lower prices. The foreclosures merely speed the process along. However, if you do not accept this argument, and if you believe the foreclosures are an essential element for the market to collapse, then mortgage equity withdrawal and the foreclosures it creates play an important part in the future of Irvine home prices.

So are the additional foreclosures caused by mortgage equity withdrawal sufficient in number to facilitate the collapse in local home prices?

Asking Price: $415,000

Income Requirement: $103,750

Downpayment Needed: $83,000

Monthly Equity Burn: $3,458

Purchase Price: $539,000

Purchase Date: 3/29/2004

Address: 65 Olivehurst, Irvine, CA 92602

THIS IS A SHORT SALE!!! Congratulations!!! And thank you for the three exclamation points.

Why does this realtor use “W/” in this description? Is is critical to save the two additional characters it would require to write the word “with?”

ALL CAPS.

I find this description painful to my eyes. I had to force myself to read it. The sacrifices I make for the IHB…

SEPERATED?

• This house was purchased on 3/29/2004 for $539,000. The owner used a $431,200 first mortgage, and a $107,800 downpayment.
• On 12/10/2004 they opened a HELOC for $147,000.
• On 11/2/2006 they refinanced with a $520,000 Option ARM, and opened a new HELOC for $65,000.
• Total debt is $585,000.
  
• Total Mortgage Equity Withdrawal is $153,800 including their downpayment. Mostly they got their downpayment back.

If this house sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $194,900.

Another day, another future foreclosure caused my mortgage equity withdrawal.

{book4}

We don’t need no education
We don’t need no thought control
No dark sarcasm in the classroom
Teachers leave those kids alone
Hey! teachers! leave those kids alone!
All in all you’re just another brick in the wall.
All in all you’re just another brick in the wall.

“wrong, do it again!”
“wrong, do it again!”
“if you don’t eat yer meat, you can’t have any pudding. how can you
Have any pudding if you don’t eat yer meat?”
“you! yes, you behind the bikesheds, stand still laddy!”

Another Brick in the Wall — Pink Floyd