Raindrops Keep Fallin’ On My Head — B.J. Thomas

In today’s market conditions, there are 4 types of market participants: 1. Renters, 2. Owners who bought before 2002 and did not abuse home equity lines of credit (HELOCs.) 3. Owners who bought after 2002, and 4. Owners who abused HELOCs. Obviously, when prices drop precipitously as they have over the last year, renters are the happiest of the group. Owners who bought before 2002 and did not abuse home equity lines of credit may be bummed that their illusory wealth is disappearing, but they will go on with life much as before. They have no particular reason to be stressed. Owners that bought after 2002 will probably go underwater, and the closer the purchase was to 2006, the further underwater they will fall. Owners who abused HELOCS have put themselves in the same situation as late buyers by increasing their mortgage balances mostly through foolish consumer spending. These last two groups will experience a great deal of stress once the veneer of
denial is stripped from them by the continuing decline in prices.

Stop for a moment and contemplate how large a group of people it is that purchased after 2002 and/or abused HELOCs. Given the degree of kool aid intoxication we all witnessed during the Great Housing Bubble, it is obvious that this describes many, many homeowners. The numerous posts I have done on HELOC abuse are a testament to the scope and scale of the problem. The behavior of these people is not the exception, it is the rule. How many of you know friends or family that fall in this group? Or perhaps the question should be how many of you do not know friends or family that fall into this group? I hope they are preparing themselves financially and emotionally for what is to come. It will not be a good time.

But there’s one thing I know
The blues they send to meet me won’t defeat me
It won’t be long till happiness steps up to greet me

Today’s featured property is a high-end Irvine property rolling back below its 2004 purchase price.

Asking Price: $1,150,000

Income Requirement: $287,500

Downpayment Needed: $230,000

Monthly Equity Burn: $9,583

Purchase Price:
$1,200,000

Purchase Date: 8/27/2004

Address: 9 Raines Corner, Irvine, CA 92602

Beds:	5
Baths:	3
Sq. Ft.:	3,374
$/Sq. Ft.:	$341
Lot Size:	–
Property Type:	Single Family Residence
Style:	Mediterranean
Year Built:	2002
Stories:	2 Levels
Area:	Northpark
County:	Orange
MLS#:	S537735
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

When did asterisks become periods? Is there something wrong with periods? Is the asterisk supposed to catch my attention in a positive way? I think it just makes realtors look stupid.

Why Is Every Word Capitalized? I suppose it is easier to read than ALL CAPS, but it is just as unnecessary.

There is an interesting subplot to this property. The current owner purchased the property from someone who paid $638,000 on 8/12/2002. In two years, that owner made $562,000. It is a good thing the greater fool came along because he was abusing his HELOC before the sale. I followed this owner to a property in Woodbury where he opened a HELOC for $100,000 shortly after buying a new house with a small downpayment. I don’t know what he did with the $562,000 he made, but it isn’t serving as equity in the new property. HELOC abuse is everywhere. There are so many people who are so screwed…

When this property was purchased in summer of 2004, the borrower put $60,000 down on a $1,200,000 purchase. In the summer of 2006, the borrower took out a HELOC for $90,000 and drained all his equity. The total debt on the property is $1,230,000. If this property sells for its asking price and a 6% commission is paid, the total loss on the property will be $149,000. The borrower will make $30,000 while the lender loses $149,000, assuming of course that the house sells for its asking price.

There has been much speculation about the apparent resiliency of the high end. If any of you have been going to Piggington.com, you have seen what has been going on in San Diego.
It hasn’t been pretty. I have forecast a 40% decline in prices here in
Irvine. The low end of San Diego’s market is almost there already. Ours
is not far behind. The low end of the market leads prices higher or
lower (see The Plankton Theory Meets Minsky.)
When prices are rising at the low end, sellers are flush with cash from
the sale of their property and use this money as downpayments on larger
homes which push those prices higher and so on through the housing
market. When prices are falling at the low end, sellers do not have
significant (or any) equity to move up to a larger property. This
depresses prices up the housing scale in the same way higher prices
boost them. The sharp decline of prices at the low end of the market
will act like an anvil weighing down all prices. Part of the greater resiliency of the high end is that subprime loans were not concentrated there. The Alt-A and Prime borrowers still used toxic financing, and their loans will blow up, but many will have greater holding power after their mortgage explodes, and they are not scheduled to explode until 2009-2011. In short, the high end
will fall, it will just take a bit longer.

Thus concludes another week at the Irvine Housing Blog. Come back next week as we continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.

😉

.

Raindrops keep fallin’ on my head
And just like the guy whose feet are too big for his bed
Nothin’ seems to fit
Those raindrops are fallin’ on my head, they keep fallin’

Raindrops keep fallin’ on my head
But that doesn’t mean my eyes will soon be turnin’ red
Cryin’s not for me
‘Cause I’m never gonna stop the rain by complainin’
Because I’m free
Nothin’s worryin’ me

Raindrops Keep Fallin’ On My Head — B.J. Thoma

I Hate You — Slayer

I get surprisingly little hate mail. Some of the pieces I have received came after HELOC abuse posts. On one of them, I had several women from a support group relay a sob story to me attempting to justify the serial HELOC abuse of their friend. I replied that a group pity-party that enabled and justified their friend’s behavior was not doing her any favors. They were not impressed. So today’s featured song is dedicated to me — it comes from all the realtors, HELOC abusers, disgruntled homeowners, and anyone else who does not fully appreciate the public service we are providing here at the Irvine Housing Blog.

Today’s featured property is another pretender who made themselves look rich by spending the equity from their home in a spiral of ever-increasing debt. I wonder how much HELOC money is under that tree?

Asking Price: $750,000

Income Requirement: $187,500

Downpayment Needed: $150,000

Monthly Equity Burn: $6,250

Purchase Price:
$326,000

Purchase Date: 5/1/2001

Address: 4591 Lori Ann, Irvine, CA 92604

Rebuilt in 2004? I suppose that is where the half million dollars went… not.

This is a classic HELOC abuse story requiring the bullet-point recap:

• The house was purchased on 5/1/2001 for $326,000. The buyer put 20% down ($65,200) and borrowed $260,800
• On 10/10/2001 they opened their first HELOC for $50,000.
• On 1/29/2003 they refinanced with a $310,000 first mortgage.
• On 4/17/2003 they opened two HELOCs for $38,000 and $82,000 respectively.
• On 2/25/2004 they opened another HELOC for $107,000.
• On 11/29/2004 they refinanced with a $650,000 first mortgage.
• On 2/14/2005 they opened two HELOCs for $66,000 and $125,000 respectively.
• On 2/15/2007 they refinanced into an Option ARM with a 1% teaser rate for $744,000
• On 4/3/2007 they opened two HELOCs for $93,000 and $57,000 respectively.
• Total debt on the property is $894,000.
• Total Mortgage Equity withdrawal of $633,200 including their original downpayment.

If this property sells for its asking price and a 6% commission is paid, the total loss on the property will be $189,000. Wells Fargo will be absorbing most of that loss with its two HELOCs. Express Capital Lending originated the first mortgage and may be liable for some of the remainder.

Question of the day: Who was acting more foolishly, the lender or the borrower?

.

You were just a waste of sperm
They way you look
Makes my stomach turn
The way you think
Is no way at all

I hate you aint it true
I hate you and everything you do

I Hate You — Slayer

Please Don’t Stop The Music — Rihanna

When I first moved to Irvine, I lived in Oak Creek. It is still one of my favorite neighborhoods. My wife has given me her parameters for what she desires in a home, and today’s featured property perfectly fits her description (now if I could just afford it…) It is in Oak Creek near the elementary school, it has a large yard, it is an open plan, the wood is a medium tone, and the surfaces are a medium tone granite, there is a downstairs den/bedroom, and the home itself is spacious. When prices get to the affordability range, this is the kind of property I will be bidding on.

Today’s featured property is a story of of the Ponzi Scheme / Musical Chairs aspect of the real estate bubble coming to an end. The owner of this property is the one without a chair. I suspect she wishes the music would not have stopped playing.

Asking Price: $999,999

Income Requirement: $249,999

Downpayment Needed: $199,999

Monthly Equity Burn: $8,333

Purchase Price:
$1,194,000

Purchase Date: 4/11/2005

Address: 2 Palmwood, Irvine, CA 92618

moding?

Check out the sales history of this property:

The first owners doubled their money in 5 years. Now that is timing the market.

The second owners made $159,000 in less than one year of ownership. Great trade!

The third owner… well, she didn’t get quite so lucky. She purchased the property in 2005 with a $955,200 first mortgage, a $119,400 second and she put 10% down. She managed to refinance into an Option ARM for $1,088,000 just before the credit crunch in early August 2007. Brilliant move, refinancing into an Option ARM — not. I suspect her plan was to lower her payments and wait out this “minor correction.” Unfortunately, the music is not going to play again, and she either cannot make the payments, or she has realized it is hopeless, and she is getting out of the transaction. Either way the $119,400 she has in the property is gone, and this is going to be a short sale, so her credit is gone too. If this property sells for its asking price, the total loss on the property will be $254,000. I guess the distress in the market is not just at the low end.

Another day, another quarter million dollar loss.

.

Please don’t stop the music, music, music, music, music, music.
Please don’t stop the music, music, music, music, music, music.

It’s gettin late
I’m making my way over to my favorite place
I gotta get my body moving shake the stress away
I wasn’t looking for nobody when you looked my way
Possible candidate (yeah)
Who knew
That you’d be up in here lookin like you do
You’re makin’ stayin’ over here impossible
Baby I must say your aura is incredible
If you don’t have to go don’t

I wanna take you away
Lets escape into the music
DJ let it play
I just can’t refuse it
Like the way you do this
Keep on rockin to it
Please don’t stop the
Please don’t stop the music

Please Don’t Stop The Music — Rihanna

Every Rose Has Its Thorn — Poison

Northwood II is speculator central. I have heard that the builder was requiring owners to have downpayments and good credit to purchase in this development. Perhaps they knew we were near a peak of the bubble and didn’t want to face lawsuits when prices crashed. There are many homes for sale in this neighborhood, and most of the properties are distressed. Some knife catcher will step up and buy this one — at least the lenders hope so. They are already looking at close to a half a million dollar loss.

Do you ever stop to ponder the massive losses the lenders are absorbing? It is difficult to get to worked up over the losses from faceless corporations who conjure money out of thin air, but these loss figures are simply staggering. I am amazed none of our major banks has declared bankruptcy yet.

Today’s featured property is a beautiful, high-end domicile. When the price gets down to $650,000, it will be a good buy. I wonder if someone will step up and take the next $300,000 loss? I think I will wait.

Asking Price: $950,000

Income Requirement: $237,500

Downpayment Needed: $190,000

Monthly Equity Burn: $7,916

Purchase Price: $1,161,000

Purchase Date: 7/19/2006

Address: 59 Fire Thorn, Irvine, CA 92620

Beds:	5
Baths:	4
Sq. Ft.:	3,070
$/Sq. Ft.:	$309
Lot Size:	5,350 Sq. Ft.
Property Type:	Single Family Residence
Style:	Contemporary/Modern
Year Built:	2004
Stories:	2 Levels
Area:	Northwood
County:	Orange
MLS#:	R806000
Source:	SoCalMLS
Status:	Active
On Redfin:	1 day
New Listing (24 hours)

That is a well-written description. There are a few sentence fragments, clichés and minor errors, but it did not pain me to read it.

This owner has already “put” this property to the lender. The property was purchased near the peak for $1,161,000. The owner took out a first mortgage for $870,478, and got a HELOC approved for $450,000 the same day. If he borrowed this money, he cashed-out $159,478 at the closing. On 4/23/2007 Chevy Chase Bank loaned him $1,065,000 and National City Bank gave him a second mortgage for $284,000 leaving a total debt of $1,349,000. The total MEW was $188,000. Not bad for a guy who bought at the peak. I wish I knew how he got his loans approved. If this property sells for its asking price, and if a 6% commission is paid, the total loss on the property will be $456,000. The brilliant lenders who made these loans just over a year ago are eating a huge loss while this owner walks away with $188,000.

I have to remember to screw the lender at the top of the next bubble California inflates…

.

We both lie silently still
in the dead of the night
Although we both lie close together
We feel miles apart inside

and now I hear you found somebody new
and that I never meant that much to you
To hear that tears me up inside
And to see you cuts me like a knife
I guess

Every Rose Has Its Thorn — Poison