Country House — Blur

The posts we do on over-the-top HELOC abuse are gripping because the dollar amounts are so large. However, focusing only on the extreme cases gives the impression of HELOC abuse is an unusual behavior of a few spectacular cases. HELOC abuse is not unusual or uncommon: it is widespread, and it is going to pummel the middle class.

What possesses people to borrow and spend so much money that they lose their homes? The simple answer is that they didn’t think they would lose their homes. Most believed their house values would go up forever and their house would pay off all their debts. All they had to do was continually refinance with very low interest rates and service the debt will a little of their work income. It never occurred to them that they might actually be required to pay down this debt with their wage income. But even if people drank the kool aid and believed this pathological nonsense, why did they take the money out and spend it? Why not let it accumulate and build wealth? Our song today is about being caught up in the “rat race” and leaving it all behind for a house in the country. Many people who spent their equity were caught up in the rat race trying to “keep up with the Jones’s.” It is sad really.

I received an email from a reader some time ago telling the story of what happened to his group of friends during the bubble. A few of his buddies really drank the kool aid and began separating themselves from the rest of group. They were spending beyond their means acting rich and feeling superior to the members of their old clique. The remaining group that either rented or lived within their means remained friends and watched with amazement as their former friends spent lavishly entertaining the “in” crowd and worked to increase their social status. As you might imagine, the bills are now coming due and the housing ATM has been turned off. The illusion of wealth and status these people created is disappearing as well. Not surprisingly, the fiscally responsible members of the old circle of friends are responding with a mix of sadness and schadenfreude. Stories like this are more the rule than the exception.

Today’s featured property is a typical, middle-class Irvine house. Perhaps a little above median, but certainly the kind of home a family making $125,000 a year (middle class in Irvine) should be able to afford. It is another sad and common story of HELOC abuse on a middle-class scale.

Asking Price: $675,000

Income Requirement: $168,750

Downpayment Needed: $135,000

Monthly Equity Burn: $5,625

Total Property Debt: $688,750

Purchase Price: $298,409

Purchase Date: 8/27/1999

Address: 6 Cabot, Irvine, CA 92620

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Like many stories of this type, it started during a time of fiscal responsibility and sane lending practices. The property was purchased in 1999 for $298,409 with 20% down. These people did not take their first sip of kool aid until 2003 when their refinanced their first mortgage and took out about $20,000. It must have tasted good because two months later they opened a HELOC for $85,750. Then in December of 2003 they opened two HELOCs for $137,000 and $10,000 respectively. In 2004, they succumbed to the full effects of kool aid intoxication and refinanced their first mortgage for $440,000. It is unclear whether or not this paid off the HELOCs. In 2005 they took out an Option ARM for $475,000, and three months later opened a HELOC for $100,000. Finally, In January of 2007, they took out a $580,000 Option ARM with a $108,750 stand-alone second. When they were done with these refinancings, the total debt on the property was $688,750, and the total mortgage equity withdrawal was $449,950 ($688,750 – $238,800 = $449,950.)

When you look at the photos if this property, I don’t think a reasonable argument can be made that these people spend nearly $450,000 on property improvements. With the frequency and size of the withdrawals, I think we can rule out investment or family catastrophe. It certainly looks like these people spent themselves out of their home.

So how widespread is this phenomenon? I don’t have any statistics. Perhaps someone can find out how many short sales or foreclosures actually sold for a profit. I do know that I have no trouble finding examples of these properties here in Irvine. I could profile one every day. Most of them are the ordinary HELOC abuse patterns like today’s sellers. It is widespread enough to force many distressed properties on the market and drive prices lower, and as prices fall, the problem will get worse as more and more properties become distressed by the falling values.

Do any of you have acquaintances, friends or relatives who have spent themselves into financial oblivion? What is their story?

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(so the story begins)
City dweller
Successful fella
Thought to himself:
oops, Ive got a lot of money
Caught in a rat race
Terminally
Im a professional cynic
But my hearts not in it
Im paying the price of living life at the limit
Caught up in the centurys anxiety

He lives in a house
A very big house
In the country
Watching afternoon repeats
And the food he eats
In the country
He takes all manner of pills
And piles up analyst bills
In the country
Oh, its like an animal farm
Thats the rural charm
In the country

Hes got morning glory and lifes a different story
Everythings going jackanory
Touched with his own mortality
Hes reading balzac, knocking back prozac
Its a helping hand that makes you feel wonderfully bland
Oh, its a centurys remedy
For the faint at heart
A new start
(try the simple life)

Country House — Blur