How many times must we tell the tale?

How many times must we fall?

Living in lost memory

You just recalled

Working on the sound of the band

Trying to get the music right

Two go out working

Three stay home at night

Thats when she said she was pretending

Like she knew the plan

Thats when I knew she was pretending

Pretending to understand

Pretending, pretending

Pretending, pretending

Pretending — Eric Clapton

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Human nature is to spend everything you make. It takes discipline to save money and accumulate wealth, and most people do not have it. When house prices were rising, every homeowner suddenly faced with a dramatic increase in their yearly “income,” if they drank the kool aid and learned to view appreciation as income. Many, many people did what human nature would compel them to do — they took this free money and spent it. Given the pressures in Orange County to look and act rich, the temptation of all this “unliberated equity” was too much for many to resist. Pretending to be making a great deal of money and being rich became a way of life to many in Irvine. It went on for so long, it became part of their identity. These people actually believed they were rich. The influx of free money through appreciation was considered an entitlement for homeowners; something that would go on forever.

Some have argued rampant equity extraction was not widespread, and it will not be the cause of many foreclosures. As an observer of human nature, I would argue this was very widespread; it had to be. The chart above illustrates the dramatic increase in mortgage equity extraction. It serves as a testament to the foolishness of many homeowners. Your average person cannot stay out of credit card debt, what would lead someone to believe they would treat mortgage debt any differently, particularly when they believed their house would go up in value and pay for it?

Often times the lessons we learn in youth stay with us for a lifetime. When these are good lessons, they serve us well for our lives; when they are bad lessons… I did not pay much attention to mortgage matters in my household growing up, but I know my parents never overextended themselves to buy a house, and they never took out equity to spend on things. In fact, it would have never even occurred to them to do so. Perhaps it is my Midwestern upbringing, or perhaps it is just not growing up in a bubble market where such things are possible, but when I see the financial behavior of people during the bubble, I am simply astonished.

Perhaps the big picture is easier to grasp when you see specific examples of this phenomenon in action. Today’s post is a profile of two pretenders: people who faked being rich for several years by living off their appreciation through mortgage equity extraction. Sometimes I cannot decide which is more amazing, that people would do this at all, or that they could sustain this lifestyle for so long.

Asking Price: $799,000

Income Requirement: $199,750

Downpayment Needed: $159,800

Purchase Price: $328,000

Purchase Date: 12/6/2001

Address: 4032 Northpark Circle, Irvine, CA 92604

Beds: 5 Baths: 3 Sq. Ft.: 2,088 $/Sq. Ft.: $383 Lot Size: 5,500 sq. ft. Type: Single Family Residence Style: Other Year Built: 1971 Stories: Two Levels View(s): Pool Area: Walnut County: Orange MLS#: P617353 Status: Active On Redfin: 8 days

Charming family home with an open floor plan. Enjoy the convinience of a main floor bedroom & bathroom. Inviting living room with high ceilings and fireplace. Remodeled kithchen with granite counters and a center island. Cozy family room is adjacent to the kithen and it boasts wood floors. Master bedroom is extra spacious and it has its own balcony. Enjoy your own swimming pool and still lots of space to enjoy gardening and entertaining outside. Front, back and side yard are landscaped and hardscaped with lots of fruit trees. Inside laundry for your convinience. Wonderful location is central to shopping, schools, and library; all within walking distance.

convinience? kithchen? kithen?

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So how did these people manage their mortgage debt? They bought the property in December 2001 for $328,000, and they had a $307,263 first mortgage. They put just over $20,000 of their own money into the deal. One year later, they opened a $80,000 HELOC. In 2004, they refinanced for $490,000 taking out about $180,000. Hopefully, they paid off the HELOC, at least temporarily. Later that year, they took out a new $30,000 HELOC. Then in July of 2005, they refinanced again for $650,000 with a 1% Option ARM. They have owned the house for less than 4 years at this point, and they have withdrawn $342,737. I guess this wasn’t enough, because later in 2005, they took out three more HELOCs for $24,000, $82,000 and $24,000 respectively. This property has at least $650,000 in mortgage debt, and assuming they took out and spent the HELOC money (it would be a continuation of their pattern,) they have over $750,000 in debt to pay off. So when you look at the $799,000 asking price, and think they are doubling their money, think again: if they don’t get their asking price, this is going to be a short sale.

$100K a year in consumer spending — pretending…

Asking Price: $599,000

Income Requirement: $131,225

Downpayment Needed: $149,750

Purchase Price: $291,000

Purchase Date: 2/19/1999

Address: 5 Altezza, Irvine, CA 92606

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Beds: 3 Baths: 2.5 Sq. Ft.: 1,500 $/Sq. Ft.: $399 Lot Size: – Type: Single Family Residence Style: Contemporary Year Built: 1996 Stories: Two Levels View(s): Trees/Woods, Has View Area: Westpark County: Orange MLS#: P617433 Status: Active On Redfin: 7 days

SHORT SALE PROPERTY. Cozy fire place in Living room, Step to School, Park. Close to major FREEWAY (5 & 405,Toll Rd), shopping center, professional offices and restaurants. Custom window coverings, Custom Office, Built in closet organizer, spacious Patio next to kitchen. Former MODEL HOME W/ low HOA.

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The price is double what they paid, but it is a short sale. There is only one way to do that: borrow and spend your equity. This seller is an example of someone who tried to be good, but they were seduced by the dark side. They bought the place in 1999, and they put $58,200 down. For three and a half years, they were fiscally responsible and did not expand their mortgage. In late 2002, they gave in an refinanced for $300,000 taking out their downpayment and a few dollars more. Apparently, this “equity liberation” was rewarding because they opened a $90,000 HELOC in the spring of 2003. At this point, kool aid intoxication had set in and their journey to the dark side was complete. The refinanced in late 2003 for $390,000 apparently paying off their first HELOC, but they opened another one for $100,000. That one only lasted until summer of 2004 when they refinanced again for $497,000 to pay off their other mortgages. Having not learned their lesson, they took out another $88,000 HELOC a few months later. By spring of 2006, they were broke again, so they refinanced for $547,000 and took out another $100,000 HELOC. From 2002 to 2006, they took out and spent $414,200 assuming they spent the final HELOC. So now they have $647,000 in debt on a property they paid $291,000 for. A sale at $600,000 will not pay off the debt, and it will be a short sale. It was a great run, wasn’t it? They had 4 years of pretending they were rich.

So what do you think about this behavior?

Think about the impact this money had on our local economy, and think about what it will mean when this money disappears. Do you see why I contend we will have a severe local recession?

Pretending…

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I would like to take this opportunity to thank Brittney for researching these properties and providing me with this information. Without her hard work, I would not be able to bring these stories to you, and these stories need to be told. Some people feel our work here is an invasion of privacy (despite all the information being public record.) These people and those who behaved in a similar fashion deserve to be exposed to the general public. This behavior should be scrutinized for what it is: irresponsible. If these owners find it humiliating, then perhaps they won’t do it again… No, who am I kidding? They will do it again.