» Posted by Martin Weil on November 26, 2007

The property was purchased in January 2005 for $1,157,000. The combined first and second mortgages totalled $1,156,730 leaving a downpayment of $270.

By April, the owners were able to find refinancing through Countrywide with a $999,999 first mortgage. This mortgage was an Option ARM with a 1% teaser rate. Also in April of 2005, they took out a simultaneous second mortgage for $215,000 pulling out their first $58,000...

So look at their situation: They are living in a million dollar plus home, making payments less than those renting, and they "made" $58,000 in their first 4 months of ownership.

Apparently, these owners liked how hard their house was working for them, so they opened a revolving line of credit (HELOC) in August 2005 for $293,000. In December of 2005, they extended their HELOC to $397,990. In June of 2006, they extended their HELOC to $485,000.

In April of 2007, the well ran dry ...

So by April 2007, they have a first mortgage (Option ARM with a 1% teaser rate) for $999,999, and a HELOC for $491,000. These owners pulled $333,000 in HELOC money to fuel consumer spending. Assuming they spent the entire HELOC and assuming the negative amortization on the first mortgage has increased the loan balance, the total debt on the property exceeds $1,500,000. ... if the property actually sells at this [$1,149,000 asking] price, the lender on the HELOC (Washington Mutual) will lose over $300,000.

These owners will probably just walk away. I doubt they have any assets. They never put any money into the deal, they pulled out $333,000 in cash, and they got to live in Turtle Ridge for 3 years. Not a bad deal -- for them.

from The Irvine Housing Blog

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