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. Let’s just call it 100% financing.
By April, they 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. The minimum payment would be $3,216 per month.
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 in Turtle Ridge 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. Did they spend it all? I can’t be sure, but the following certainly suggests they did.
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 as they did their final HELOC of $491,000. I bet they were pissed when they couldn’t get more money.
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 (does anyone think they didn’t?), and assuming the negative amortization on the first mortgage has increased the loan balance, the total debt on the property exceeds $1,500,000. The asking price of $1,249,000 does not look like a rollback, but if the property actually sells at this price, the lender on the HELOC (Washington Mutual) will lose over $300,000.
I think it's a mistake to assume you know they were just pulling the cash out to support a fun lifestyle. For all we know they were dealing with expensive family emergencies or something. But nonetheless they had no problem pulling out their entire household equity, taking on obviously unsupportable levels of debt, because God and Nature determined that housing prices can only go up and therefore the lender would be sure to get it back if only through foreclosure.
And this illustrates that this isn't just a "subprime" problem. Million+ mortgages aren't subprime.