Generation — Simple Plan

Generation Y began buying starter homes in earnest during the Great Housing Bubble. Generation X is just now coming into their prime earning years, and many of them bought move-up homes at inflated bubble prices. The Baby Boomers took their equity and bought multiple properties during the bubble. They all have one thing in common: they are all part of Generation Pwned. Pwned has many definitions, but it generally refers to a state of being defeated and helpless. People who paid bubble prices or HELOCed themselves into a massive debt are pwned by their houses and the housing market. I first wrote about this in America’s Debtor Prisons. Unfortunately, I know several families who this describes. All are overburdened with debt, and they were counting on increasing income and increasing home prices to finance their lifestyles and their family’s future. It isn’t going to turn out well for them.

Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) and to qualify for the workout, the homeowner must give up half their future appreciation — if there is any. Most would be better off walking away. Anyone paying 38% of their gross income (that is gross not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition. Rapid house price appreciation leading to a HELOC dependant lifestyle is not going to happen any time soon — if ever. Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve. They are truly pwned.

Those that participated in the housing bubble (bought late or borrowed much) will end up breaking down into two groups: those that are pwned, and those that lost their houses. The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can’t decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.

Today’s featured property is in the “borrowed much” category of housing bubble participants. These people did not make the mistake of buying at peak prices. In fact, they bought at the bottom of the last cycle. However, they too drank the kool aid, and now they have lost their home and their wealth. Another casualty of the Great Housing Bubble.

Asking Price: $459,900

Income Requirement: $114,975

Downpayment Needed: $91,980

Monthly Equity Burn: $3,852

Purchase Price: $183,000

Purchase Date: 2/6/1998

Address: 131 Islington, Irvine, CA 92620

Beds:	3
Baths:	2
Sq. Ft.:	2,000
$/Sq. Ft.:	$230
Lot Size:	2,100 Sq. Ft.
Property Type:	Condominium
Style:	Contemporary
Year Built:	2000
Stories:	2 Levels
Floor:	1
Area:	Northwood
County:	Orange
MLS#:	S548626
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

When we the taxpayers foot the bill for the excesses of the bubble, we are bailing out the lenders who enabled the behavior below:

• The house was purchased on 2/6/1998 for $183,000. There was a $173,500 first mortgage and a $9,500 downpayment.
• On 8/21/2002 they refinanced the first mortgage for $165,500. They actually paid down their debt.
• On 3/12/2003 they opened a HELOC for $50,000, just in case… Their first taste of kool aid.
• On 2/13/2004 they opened a HELOC for $226,000. The kool aid is flowing now.
• On 10/22/2004 they opened an Option ARM for $492,000.
• On 5/2/2005 they opened a HELOC for $75,100.
• On 10/21/2005 they opened a HELOC for $126,000.
• On 9/28/2006 they opened a HELOC for $150,000.
• Total debt on the property, $642,000 plus accumulated negative amortization.
• Total mortgage equity withdrawal, $468,500 including their tiny downpayment.

Basically, these people put $9,500 into the property and made $459,000 in 8 years.

Do you wonder if they realized they were pwned? I suspect they did not. Each refinance probably did not increase their payment, and although their HELOC debt was growing, they had plenty of cash to make the payments. They also probably believed their house value would increase forever and the debts would be paid off when they sold. Of course, they were pwned the moment they took out the Option ARM, just like everyone else. All Option ARM holders are pwned. Some of them know it, and some of them don’t, but they are all going to lose their homes eventually.

If this property sells for its asking price, and if a 6% commission is paid, the US taxpayer is going to lose $209,694.

Maybe we are the ones who are pwned…

.

I’m sick of all this waiting
And people telling me
what I should be
What if I’m not so crazy
Maybe you’re the one
that’s wrong, not me
So what you gonna do,
what you gonna say
When we’re standing on top
and do it our way
You say we got no future
You’re living in the past
So listen up, that’s my generation

I don’t need to say I’m sorry
I do what everybody wants to do
It’s not so complicated
‘Cause I know you want
the same thing, too
So what you gonna do,
what you gonna say
When we’re standing on top
and do it our way
You say we got no future
You’re living in the past
So listen up, that’s my generation

Generation — Simple Plan

Shopping — Pet Shop Boys

In the next week or two, Hank Paulson is going shopping with a $700,000,000,000 credit card courtesy of Congress and the Federal Reserve. What is he going to do with that money? How wisely will he spend it? He faces a dilemma that has no resolution. If he pays fair market value for the securities he buys, he will fail to recapitalize the banks, and the economy will continue its downward spiral into the crapper. If he overpays for the securities to recapitalize the banks, the taxpayers will lose a great deal of money, and he will be accused of favoritism by just about everyone. So what should he do? Look out for the taxpayers, flush the economy and plunge us into a depression? Or does he screw the taxpayers and enrich his buddies and save the economy? Is this a false dichotomy? I don’t think so. I am glad I am not the one making these decisions. In the end, all of his actions will be justified as “necessary” to save the economy, and the justifications may accurately characterize the situation. There will be no way to know. The severity of a problem you avoid is always an unknown open to speculation.

In yesterday’s post, I reminded everyone of the reasons we are in this mess in the first place. When you strip away all the complexities and look to the root of the problem, you find individual borrowers like today’s that took on more debt than they can handle. If this had not occurred, if people had not overpaid, HELOCed and generally over borrowed, prices would not have bubbled. Everyone would be making their house payments, and none of this would have happened.

Asking Price: $459,900

Income Requirement: $114,975

Downpayment Needed: $91,980

Monthly Equity Burn: $3,852

Purchase Price: $360,000

Purchase Date: 12/20/2001

Address: 18 Nuevo #9, Irvine, CA 92612

So how much shopping did today’s owner do? The property was purchased for $360,000 on 12/20/2001. The owner used a $312,500 first mortgage and a $47,500 downpayment. On 10/11/2002 she opened a HELOC for $42,000. It appears as if she spent about $25,000 because on 4/12/2004 she refinanced for $336,000. On 11/23/2004 she opened another HELOC for $50,000. On 5/1/2006 she took more of the free money with a new first mortgage of $492,000. On 7/18/2006 she opened a HELOC for $43,200. Total debt on the property was $535,200. Total Mortgage equity withdrawal was $222,700 which includes her $47,500 downpayment. If this property sells for its asking price, and if a 6% commission is paid, the total loss to the lender/investor will be $102,894. This is not a big loss by Irvine standards, as this owner was not a big-time HELOC abuser. No, this is a very average borrower who lost a very average property doing what all of her friends and neighbors were doing: shopping with free money.

Whenever I profile one of these HELOC abuse properties, there is a natural tendency to want to believe there was some outside event or medical problem that made them spend the money. Nobody wants to believe that someone could lose their house because they liked to go shopping. The reality is that major, life-changing events for which there is not available insurance coverage are very rare. Maybe 1 in 100 of these cases involve that, probably less. Most of these people did go shopping. They did tap their HELOCs every year to pay off the credit cards. They took the free money and spent it. Now they are losing their homes because of this behavior. To deny this reality is to miss learning one of the key lessons of the bubble. The people who own (or owned) the properties I profile are learning this lesson very painfully. Some take joy in this fact, and some feel compassion. In the end, learning from these mistakes benefits everyone.

.

We’re buying and selling your history
How we go about it is no mystery
We check it with the city, then change the law
Are you looking forward?
Now you want some more

We’re S-H-O-PP-I-N-G, we’re shopping
We’re S-H-O-PP-I-N-G, we’re shopping

Shopping — Pet Shop Boy

One Thing Leads to Another — The Fixx

Realtors are infamous for peddling the fallacies of housing leading to a housing bubble (The deception with tact). Of course, buyers want to believe in the fantasy of perpetual appreciation (If this is up, then I’m up). And few owners want to take responsibility for their decisions when their plans go astray (You run for cover and there’s heat). But they are not alone. The lenders do not want to take responsibility either, and we will end up paying for it (I’ve got to say enough’s enough, Bigger the harder he falls). Does anyone think the proposed bailout that is likely to be passed will solve all our problems? (But when the wrong antidote, Is like a bulge on the throat) It won’t save housing prices, and one can only speculate on whether or not it saves us from financial Armageddon.

So where does this all end? When do the bailouts stop? Each one of these bailouts has been sold to us based on the belief that the alternative was too dire to contemplate. One thing leads to another.

Let’s review the chain of cause and effect lest any of our politicians forget why these massive bailouts are necessary. Realtors peddle fantasies of unlimited wealth that leads to people wanting to overpay for houses. The desire for real estate at any cost provides an opportunity for lenders and mortgage brokers to make huge origination fees if they can lower standards and qualify more people. Appraisers use the comparative-sales approach which justifies current pricing based on the irrational behavior of buyers. Investors in mortgage backed securities enable the originations by purchasing any loan they can get. Default insurance companies like Freddie Mac, Fannie Mae and AIG provide false assurances to investors that they can insure their losses. Ratings companies provide dubious ratings that puts even more confidence into investor’s decisions. All of this together leads to a massive inflation of house prices. One thing leads to another.

Now, back to our buyers. People who overextended and overpaid for real estate cannot afford their payments. They are insolvent. This leads to defaults which leads to forced sales which leads to lower prices. The lower prices distresses more homeowners leading to even more forced sales and even lower prices. The defaults and resulting losses cause lenders to become cautious and tighten lending standards. This leads to fewer qualified buyers and a reduction in demand leading to even more price drops. The losses by lenders causes default insurance providers to pay claims. They have written more policies than they can cover, so they go bankrupt. The losses by lenders also lead to a depletion of their capital reserves which leaves them less money to lend. This leads to a massive credit crunch and widespread monetary deflation as the money created by lenders when they originated the loans disappears into the ethers. It also leads to a dramatic slowdown in our economy as the circulation of money slows and commerce dries up. All of this leads us to today where we are being forced to engineer massive bailouts of anyone who provided or insured loans. One thing leads to another.

So what comes next? A severe economic recession, more layoffs, less income, massive government debt, and lower house prices. Followed by increased personal savings, economic recovery and renewed (albeit tepid) house price appreciation. One thing leads to another.

Today’s featured property is another example of house speculation gone awry. We have a lot of foreclosing to do before the system is truly purged of these exotic loans and overextended owners.

Asking Price: $360,000

Income Requirement: $90,000

Downpayment Needed: $72,000

Monthly Equity Burn: $3,000

Purchase Price: $490,000

Purchase Date: 5/24/2004

Address: 51 Ardmore, Irvine, CA 92602

It looks to me like the realtor could not even be bothered to get out of his car.

The previous owner of this property — it is now REO — was a classic real estate speculator. The property was purchased on 5/24/2004 for $490,000. The owner used a $391,920 first mortgage a $97,980 second mortgage and a $100 downpayment. At least he had some skin in the game. On 5/12/2005 he opened a HELOC for $113,100, and on 12/30/2005 he opened another for $148,223. On 8/1/2006 he refinanced with a $444,000 first and a $111,000 second. The total debt on the property was $555,000, and the total mortgage equity withdrawal was $65,000. BTW, assuming the $550,000 was loaned based on a peak appraised value, this property is being offered for 35% off. The lender took the house back on 9/9/2008 for $451,933 and quickly listed it for sale at $360,000. If this sells for its asking price, and if a 6% commission is paid, the total loss to the lender will be $216,600. I can’t help wondering how many losses like this have not been recorded by the lenders and investors and will be passed on to us taxpayers when we buy their toxic paper.

.

The deception with tact
Just what are you trying to say
You’ve got a blank face, which irritates
Communicate, pull out your party piece
You see dimensions in two
State your case with black or white
But when one little cross
Leads to shots, grit your teeth
You run for cover so discreet
Why don’t they

One thing leads to another…

One Thing Leads to Another — The Fixx

Wyoming — The Barfeeders

This financial crisis is stressful. It makes me long for a quiet home on the plains of Wyoming. Of course, I would have to finance that house so the financial crisis I am seeking to leave behind would follow me wherever I go. There really is no escaping this problem. My industry has already been decimated by the fallout of the Great Housing Bubble, and now the seizure of the credit markets brought about by the excesses of the bubble is causing problems in every industry.

When lenders lose faith in the ability of borrowers to repay them, they stop loaning money. Right now, lenders are not sure if anybody can pay them back because nobody knows where all the toxic waste is hidden. Until these valueless securities are brought into the light out of the darkness of off-balance sheet special investment vehicles, lenders will not know who is solvent, and who is not. Under those circumstances, it is prudent not to lend. As long as that situation exists, the credit markets will remain seized up, and our entire economy will spiral into the abyss.

I have believed we were in for a very severe recession caused by a
credit crunch for some time. There have been several others who foresaw
the chronic problems caused by widespread borrower insolvency, but few
foresaw how acute the problems became recently. For the last few years, I have felt a bit like the character Sarah Connor from the Terminator series. She knew the Armageddon of the future and had to live with that knowledge for years while everyone else got to exist in blissful ignorance. The blissful ignorance of our nation’s insolvency problem is gone. We have eaten the Forbidden Fruit of the knowledge of evil in our financial system. Our national stress level will rise noticeably as a result.

Americans are resilient. The prognostications of our status as a third-world country are greatly exaggerated. We will get through this financial winter, and when we do what will emerge in the spring will be a stronger America. (Anyone else remember the recession of the early 80s?) This is not a trite recitation of bullish nonsense, but an observation of past history and a belief in the collective intention of all Americans to excel and be our best. We will never become a third-world country unless we give up and allow it to happen. That isn’t the behavior of Americans I know.

There has been much discussion on what it will take to get us out of this mess. Some point to stabilization of house prices, some point to purging the system of toxic loans, and some point to restoring confidence in our financial markets. It will require all three. Realistically, the first will not happen until prices drop to where people can afford a home and be financially solvent, the second is going to require the passage of time and/or a massive government intervention like the one being proposed, and the third will be the passive result of the first two. None of this will happen quickly.

House prices simply cannot be supported at current levels. The only way they got here was through the use of unstable exotic loan programs. The amount of debt supportable by people’s real incomes on a sustainable, solvent basis is too small to support today’s prices. Prices will fall to supportable income levels because they must. People will not be given the ability to bid prices any higher by lenders and investors. Without the big loans, we can’t have big prices. If anyone is bullish on house prices in these circumstances, please let me have some of what you are smokin’.

Today’s featured property was owned by an insolvent borrower. There was no way he could afford the debt he had accumulated on the house, and the market has purged itself of this problem with another foreclosure. Absent a massive government intervention (and perhaps even with one,) this is how the market will deal with the problem.

Asking Price: $674,900

Income Requirement: $168,725

Downpayment Needed: $134,980

Monthly Equity Burn: $5,624

Purchase Price: $402,000

Purchase Date: 3/21/2000

Address: 30 Wyoming, Irvine, CA 92606

Beds:	4
Baths:	3
Sq. Ft.:	2,200
$/Sq. Ft.:	$307
Lot Size:	3,447 Sq. Ft.
Property Type:	Single Family Residence
Style:	Spanish
Year Built:	1999
Stories:	2 Levels
Area:	Walnut
County:	Orange
MLS#:	S548333
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

All those exclamation points did get my attention; of course, it doesn’t make me think anything positive when I see it.

ammenities?

I think this realtor needs some help with Photoshop. The color balance seems just a bit off, wouldn’t you say?

The property records on this house are a bit hard to follow. It appears as if it was purchased on 3/21/2000 for $402,000, but in 2003, the name changed on the title without a sale being recorded: very strange. By 6/17/2003, there was a $500,000 first mortgage on the property. On 4/27/2004, a HELOC was opened for $94,000, but it looks as if this money was not immediately spent because on 6/30/2004, the first mortgage was refinanced again for $500,000. On 12/8/2004, the owner opened another HELOC for $200,000, but he only took out part of the money.

The big cash-out came on 2/8/2006 when he refinanced with a $637,500 first mortgage and a $130,000 stand-alone second. The second was refinanced on 5/16/2006 for $175,000. The total debt on the property was $812,500. Total mortgage equity withdrawal was over $400,000.

If this property sells for its asking price, the lender stands to lose $178,094 after a 6% commission.

So what do you think is better for the economy, 4 or 5 years of foreclosures to purge the system, or massive government intervention to purge the system of toxic loans sooner? BTW, neither will have much impact on the bottom of house prices. Affordability is what it is, and prices will fall until houses are affordable either way.

And what do you think of bailing out a family of fraudulent flippers? Or more accurately, bailing out the bank who enabled them?

.

We were drunk and insane standing out in the rain
Telling stories from yesterday’s gig
Drew a face on my shoe and I knew it was you
Memories are my most messed up things
We were covered in water backfire and mud
Where the blood and coffee were smeared
As the rivers were rising I stood by your house
Soon discharging a gutful of beer
Wyoming’s got a ghost but it doesn’t have a coast
So the property’s next to nothing
It would blow me away to carouse there with you
And to feel the northern lights sing
So I get on the phone with the irresistible
But I find myself kissing the pig
So antie up your bladder and pile up the boones
I’ve got miles of living to do

WYOMING WYOMING but I’ve never been to WYOMING
WYOMING WYOMING but I’ve never been to WYOMING

Wyoming — The Barfeeder