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Irvine Housing Blog

Irvine Housing Blog

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Housing ATM Empty: HELOC Abuse Hits Record Low

Posted: 04 Aug 2010 03:30 AM PDT

The market has a funny way of dealing with financial folly: crashing house prices have turned off the housing ATM and stopped HELOC abuse... for now. 


Irvine Home Address ... 43 LEUCADIA #76 Irvine, CA 92602
Resale Home Price ...... $539,000

She dreams of cheap land, children, 
Towels labeled his and hers 
Plaster ducks in pairs 
Flying up the stairs 
Some of that piggy bank lovin' 
Some of that piggy bank lovin' 
Some of that piggy bank lovin' 
Piggy bank love 
Piggy bank love 

The Bonzo Dog Band -- Piggy Bank Love

Everyone in California loves that Piggy Bank in their house. Most people here are so kool aid intoxicated that they take the free money for granted. It is just another California entitlement. 

Americans Tap $8.3 Billion in Home Equity, Least in a Decade

Americans in the second quarter tapped the smallest amount of home equity in a decade, showing households are focused on repairing tattered finances.

No. It shows that households don't have any home equity left and that the housing ATM has been turned off. The writer of this article is implying the lack of mortgage equity withdrawal is a prudent choice of wise financial managers. Do any of you believe that?

Owners took out $8.3 billion while refinancing prime home loans as borrowing costs dropped from April through June, down from $8.4 billion in the previous three months and the least in 10 years, according to a report today by McLean, Virginia-based Freddie Mac. Twenty-two percent chose to reduce loan principal, matching the third-highest rate since records began in 1985.

Hurray! People are paying down their mortgages. Paying down debt is always the wisest choice. Debt is not tool, and sophisticated people do not use it to finance their daily lives. Posers do.

Instead of extracting cash to binge on everything from cars to vacations as in previous recoveries, owners are refinancing to improve terms and reduce mortgage payments. The mending of household balance sheets means consumers will be in a better position to join the recovery once employment picks up.

“It’ll put consumers on firmer ground going forward,” said Michael Bratus, an economist at Moody’s in West Chester, Pennsylvania. “It’ll give consumers more confidence.”

If it were only true. In reality, it will provide a litte more capacity to hold and service debt which is what most fools will do.

A report yesterday from the Conference Board in New York showed confidence dropped in July to a five-month low on concern about jobs and wages. Americans may eventually become less pessimistic as they repair balance sheets and their financial situation improves.

So-called cash-out loans, in which borrowers increase their loan amounts by at least 5 percent, accounted for 27 percent of all refinanced loans in the three months to June, capping the lowest three-quarter share on record. Cash-out refinances peaked at 88 percent in mid 2006.

OMG! Eighty-Eight percent of refinances took out cash in 2006. Does anyone still doubt that we had a HELOC Economy?

No ‘Cash-Out Boom’

“This is a rate-and-term refinance boom as opposed to a cash-out boom,” said Michael Larson, a housing analyst at Weiss Research in Jupiter, Florida. “Five years ago you had people liquidating equity to finance debt-fueled consumption. Now, refinancing gives them breathing room.”

Figures from the Mortgage Bankers Association signal the drive to take advantage of record-low mortgage rates has accelerated this month. The group’s refinancing gauge for the week ended July 16 reached the highest level in a year. Refinance applications accounted for 79.4 percent of all mortgage requests, the most since April 2009.

This is a misleading use of statistics. There has been no acceleration in refinances. The reason refiance applications accounted for a higher percentage of total applications is because applications for purchase are at record lows. That is also why interest rates keep falling. The supply of money available exceeds the number of applicants that demand it, so competition to put that money to work is forcing interest rates lower.

Ron Keating, a 50-year-old federal employee in Woodbridge, Virginia, said he lowered his monthly mortgage payment by about $150 after refinancing.

“The less I pay, the better,” he said in a telephone interview.

Borrowing Costs

The average rate on a 30-year fixed mortgage fell to a 4.56 percent in the week ended July 22, the lowest since Freddie Mac, the second-biggest buyer of U.S. mortgages after Fannie Mae, began keeping records in 1971. At that rate, monthly payments for each $100,000 of a loan would be about $510, down about $40 from a year ago when the rate was 5.2 percent.

The median homeowner cut their mortgage rate by 0.9 percentage point in the second quarter, according to Freddie Mac. On a $200,000 loan, that would lead to a savings of $1,300 in the first year.

The money will contribute to a pickup in growth over the next two years, according to a forecast by economists at Moody’s They project consumer spending, which accounts for 70 percent of the economy, will grow 3 percent in 2011 and 4.5 percent the following year. Purchases are likely to climb 2.1 percent this year.

I would be remiss if I didn't point out that not everyone thinks that consumer spending is 70 percent of GDP.

The effect of HELOC abuse -- and now the lack thereof -- has been obvious here in California. The chart below from Calculated Risk shows just how dramatic the decline in MEW has been:


U.S. “Home Equity” Loans Revealing

A Bloomberg headline today read “Americans Tap $8.3 Billion in Home Equity, Least in a Decade”. This is indeed a very news-worthy figure. Sadly, you won't learn anything about this issue from reading Bloomberg's ridiculous “spin” of this news.

At the peak of the U.S. housing-bubble, Americans were initiating more than $800 billion/year of such loans. They are now on a pace to take-out loans amounting to less than 5% of that gargantuan figure...and yet this same, propaganda-machine talks about a “recovery” in the housing market.

Wow! A 90% reduction in MEW. No wonder the economy is sputtering.

It'll put consumers on firmer ground going forward. It'll give them more confidence,” quotes Bloomberg, from an “economist” named Michael Bratus. Note the use of contractions to make his statement sound like a “cheer”. The only thing he forgot to add was “Rah! Rah! Rah!”

If only Americans were getting on “firmer ground”, and thus had any reason to be more “confident”. Here's what is happening in the real world. After going on the most insane borrowing-binge in the history of our species, based upon all the “home equity” which Americans thought they had, that “equity” has all evaporated – but the trillions in debt remain.

The result: Americans hold less “equity” in their homes than at any time in history: not during the Great Depression, nor at any other time. Indeed, for the first time in history U.S. banks hold more equity in U.S. residential real estate than American “homeowners” themselves. U.S. “home equity” loans have collapsed not because Americans are “repairing their balance sheets” (as the Bloomberg propaganda suggests).

Instead, U.S. homeowners (except for the small minority with full-ownership of their homes) are leveraged-to-the-hilt with debt – and can't afford to borrow one more penny. Secondly, the banks won't lend these over-leveraged consumers any more money. And third, there is no “equity” to borrow against. You can call this process “repairing balance sheets” - as long as you include the observation that it will take a full generation to “repair” the damage of the Wall Street-induced credit-stampede (for those homeowners who survive the process).

Then Bloomberg gets plain silly. “This a rate-and-refinance boom as opposed to a cash-out boom,” quotes Bloomberg, this time citing a suit-stuffer named Michael Larson (identified as a “housing analyst”).

Hello” Mr. Larson! Home-equity loans collapsed to less than 5% of their peak, which at least 95% of English-users would describe as a “crash”. One can only wonder what numbers it would take to cause this “housing analyst” to use the word “crash” instead of “boom”. One might even suspect that this “housing analyst” makes more money in a strong real estate market – and so his characterization might be a tiny bit biased.

The only truth in Larson's statement was his observation that the only activity taking place this in this market is respect to the (small number of) credit-worthy borrowers who are able to take advantage of the zero-percent-panic-interest-rates to refinance a minute piece of this mountain of debt (no more than 1%). Other than that, this market is dead.

The problem is that these over-leveraged “homeowners” are now about to face a worse, and much, much longer collapse in the U.S. housing market – which will make the collapse after the first housing-bubble look like nothing but a passing, bad-dream. What is ahead will be nothing less than a waking nightmare. There are no surprises here. A second collapse of the U.S. housing market was always 100% certain - but the Obama regime can be "thanked" for making it worse, courtesy of the second "bubble" they created in this market.

All of this has been detailed in recent commentaries, so I won't bore regular readers by re-hashing it. Instead, it is time to once again remind readers where this is leading. As I have maintained since shortly after the U.S. housing burst, and hidden facts began to emerge, this was a deliberately manufactured bubble (i.e. a deliberate scam) – which was designed to do exactly it has done: to rapidly accelerate the transformation of middle-class, Americans to poor, 21st century serfs.

Indeed, we are already very close to the definition of a “serf”: someone who toils for a mere “subsistence” living – where all they are able to do is barely buy enough food to survive, while they pay “rent” to their “landlords” (the banks).

The banks “own” these homes, not the “homeowners”. For at least 25% of these “homeowners”, the balance owing is either so large that they could never pay-off their mortgage, or only do so through ultimately paying two or even three times what these homes are worth. The extremely modest number of “mortgage modifications” only seek to stretch-out the length of these mortgages. While that results in lowering current, monthly payments (and may make it possible to “service” the mortgage), it can add up to $100's of thousands of dollars (in extra “interest”) on what the “homeowner” must pay – to actually become a homeowner.

In short, for a rapidly growing segment of the U.S. population, they can either never become true “homeowners” (and are thus destined to always be “serfs”); or, their “freedom” from their banker/landlord can only be “purchased” by paying many times what these homes are really worth. Now, with the “second bubble” having burst, this trend is going to accelerate exponentially: as housing prices fall, “equity” continues to evaporate, loan-terms get stretched-out, wages continues to fall, and more and more simply lose their jobs; the transformation from “homeowner” to “serf” will progress relentlessly.

I love that rant. I have nothing to add.

I am not quite as bearish and as pessimistic as the author of that piece, but I share his attitude toward debt and the impact this mountain of debt is having on our economy and our society. Besides writing about the perils of debt, I do the only thing I can -- I don't have any.

Another HELOC implosion

  • The previous owner of today's featured property paid $520,000 on 12/1/2003. She used a $389,925 first mortgage, a $77,985 second mortgage, and a $52,090 down payment.
  • On 11/2/204 she obtained a $145,000 HELOC.
  • On 4/15/2005 she refinance with a $487,500 Option ARM.
  • On 6/24/2005 she got a $102,900 HELOC.
  • Total property debt was $590,400.
  • Total mortgage equity withdrawal was $122,490.
  • Total squatting time was about 18 months.

Foreclosure Record
Recording Date: 07/24/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.

Foreclosure Record
Recording Date: 03/16/2009
Document Type: Notice of Default

The flipper that bought this property was probably counting on a further bump in prices this summer. It didn't happen. They have been lowerin their price and reducing their margins. Like the another property they bought in Irvine, they did nothing to improve it. We are still a pergraniteel market, and flippers who don't make the necessary improvements don't get the prices they want. 

If you would like to learn how you can get involved with trustee sales, please contact me at  


Irvine Home Address ... 43 LEUCADIA #76 Irvine, CA 92602

Resale Home Price ... $539,000

Home Purchase Price … $465,600
Home Purchase Date .... 5/25/2010

Net Gain (Loss) .......... $41,060
Percent Change .......... 8.8%
Annual Appreciation … 60.0%

Cost of Ownership
$539,000 .......... Asking Price
$107,800 .......... 20% Down Conventional
4.60% ............... Mortgage Interest Rate
$431,200 .......... 30-Year Mortgage
$106,579 .......... Income Requirement

$2,211 .......... Monthly Mortgage Payment

$467 .......... Property Tax
$120 .......... Special Taxes and Levies (Mello Roos)
$45 .......... Homeowners Insurance
$282 .......... Homeowners Association Fees
$3,125 .......... Monthly Cash Outlays

-$371 .......... Tax Savings (% of Interest and Property Tax)
-$558 .......... Equity Hidden in Payment
$186 .......... Lost Income to Down Payment (net of taxes)
$67 .......... Maintenance and Replacement Reserves
$2,449 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$5,390 .......... Furnishing and Move In @1%
$5,390 .......... Closing Costs @1%
$4,312 ............ Interest Points @1% of Loan
$107,800 .......... Down Payment
$122,892 .......... Total Cash Costs
$37,500 ............ Emergency Cash Reserves
$160,392 .......... Total Savings Needed

Property Details for 43 LEUCADIA #76 Irvine, CA 92602
Beds: 3
Baths: 3 baths
Home size: 1,826 sq ft
($295 / sq ft)
Lot Size: n/a
Year Built: 2002
Days on Market: 50
Listing Updated: 40374
MLS Number: S620673
Property Type: Condominium, Residential
Community: Northpark
Tract: Mont
TURNKEY STUNNER IN HIGHLY SOUGHT AFTER NORTHPARK COMMUNITY! Can close in 30 days or less. Not a short sale or REO. Freshly painted throughout and NEW carpet. The room design of the living room, kitchen and dining area allow for maximum enjoyment of this open floor plan with soaring ceilings. Enjoy preparing meals in your gourmet kitchen with an abundance of cabinet space and breakfast bar. NEW 18x18 Ceramic tile in Kitchen, bathrooms and upstairs laundry room. Master suite boasts walk-in closet, vanity area, dual vanities, large oval soaking tub and separate shower. Laundry room conveniently located upstairs. Within walking distance to Beckman High and Northpark square Plaza for shopping! TUSD schools share an excellent reputation for education and have a top notch staff. Association Ammenities include, Basketball Court, pool, Children's play areas, park, picnic and barbecue areas!

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