The Housing Bubble

The Union Tribune reports from California. “San Diego County housing prices dropped in 2006 for the first time in 11 years, apparently driven by a weak condominium and new-housing market, DataQuick reported. The overall median stood at $490,000 for the year, 0.8 percent below 2005’s $494,000. It was the first time since 1995 there was a year-over-year drop.”

“The new-housing category, which saw 11,481 sales, saw a 6.7 percent drop, from $476,000 in 2005 to $444,000 in 2006. Included in this group were numerouslower-priced condo conversions which outweighed higher-priced new construction.”

“The single-family median was $540,000, down 1.8 percent from December 2005; resale condos was $380,000, down 2.6 percent; and new construction and conversions, were $460,000, down 14.7 percent.”

The Orange County Register. “O.C.’s sellers and buyers of homes started the year on a slow note, says the math of Steve Thomas at Re/Max Real Estate Services in Aliso Viejo.”

“It would take 7.78 months for buyers to gobble up all the houses and condos for sale at the current pace, vs. 7.51 months two weeks earlier, BUT still way above 4.85 months a year ago.”

“Thomas notes: ‘We are already starting the year with 4,000 additional homes on the market. There are going to be a number of unsuccessful sellers and the market time should remain above the five-month mark, which is equilibrium. At today’s 7.78 month inventory, we are already experiencing a buyers’ market.’”

From a press release. “The Temecula law firm of Ackerman, Cowles & Lindsley filed a 1.2 billion dollar claim against what are alleged to be the perpetrators of a vast real estate and currency exchange scheme taking place in Southern California.”

“Riverside County Superior Court Case No. RIC463483 was filed by an investor who claims to have suffered $3,000,000 in damages on her case alone. The plaintiff seeks to have the matter certified as a class action later this year because there are another alleged 400 investors in the alleged scheme.”

“The amended complaint, filed on January 12, 2007, alleges that the operators of the Jovane Investment firm of Murrieta, and related businesses, engaged in a real estate scheme involving perhaps as many as 5000 home loans in the Southern California region.”

“It is alleged in the complaint that defendants allegedly involved in the scheme would artificially inflate the values of the homes, complete 125% loan to value mortgages in certain cases, give escrow kickbacks to sellers who received as much as $100,000 more than an asking price, and sell the investors on the idea of giving up excess proceeds out of the sale to investment companies for a great profit over a period of years.”

“In some cases, $50-60k-a-year salaried employees had mortgage obligations that were more than $20,000.00 a month because they ‘owned’ 5-8 homes. The defendant companies are alleged to have taken money from other investors to pay the mortgages on behalf of plaintiff and others. The scheme is alleged to be a traditional Ponzi scheme.”

The Houston Chronicle reports from Texas. “Is Houston facing a slowdown in the condo market? One sign could be that condo converters who turn apartments into for-sale units are offering buyers valuable perks to purchase condos in their buildings.”

“The developer of Rise, a Midtown building that was converted last year is offering free association dues for a year and help with closing costs. A project near the Texas Medical Center is promoting 100 percent financing on its units, which started out as apartments and were converted before the development was completed. And the Oak Lane Garden Condominiums near River Oaks touts 100 percent financing, as well as a $2,500 incentive for Realtors.”

“Developer Mike Atlas said he’s sold about half of the 56 units in one section of the Oak Lane Garden Condominiums and sold the remaining 160 units to a company planning to build new apartments there. ‘In the condo market, you have to be patient,’ he said.”

“Houston’s had its own boomlet, and competition is mounting. Still, no one’s predicting a Florida situation, where many conversion projects are being turned back into apartments. Developments that sell best have something extra, said Sandra Gunn, a real estate agent active inside the Loop.”

“‘Absorption has slowed down some, but people still want to buy that product,’ she said.”

“A federal judge sentenced Lawrence Randall Benham Friday to a little more than eight years in prison in connection with his guilty plea to wire fraud and mail fraud. U.S. District Judge Ewing Werlein Jr. also ordered Benham to pay restitution of $412,800.”

“Benham was convicted of running a mortgage fraud scheme in which he found homes for sale and then used others with strong credit as buyers of the properties for his benefit, prosecutors said. Prosecutors said Benham found homes for sale and then used the credit and identifying information of so-called ’straw buyers’ on loan applications and also exaggerated the buyers’ incomes. He then arranged for the straw buyer to buy the home at an inflated price, prosecutors said.”

“The indictment alleged that Benham was able to take out more than $8.9 million in loans in other people’s names. Benham admitted to making between $1.5 million and $2 million via mortgage fraud since 2002 and using the money for his business and to buy a Land Rover and a plasma TV, among other things.”

The Dallas Morning News. “Thanks to relaxed lending standards, in recent years borrowers with bad credit, such as a bankruptcy or a delinquent loan on their record, found it relatively easy to get home mortgages. Such ’subprime’ borrowers generally have to fork over higher interest payments to compensate the lender for the added risk of default they represent.”

“So lots of subprime borrowers kept their house payments lower by taking out exotic mortgages such as adjustable-rate, interest-only or negative-amortization mortgages. Now, with interest rates and home foreclosures rising, the lending industry is dealing with the fallout of its creativity.”

“‘It’s tightening up a lot,’ said Eddie Carmona, branch manager at Homewood Mortgage in Carrollton, a mortgage broker that deals with subprime borrowers. ‘Almost every single subprime lender has done dramatic changes. It’s all recent.’”

“Gary Akright, a mortgage broker in Dallas, said tougher requirements for a down payment recently priced one of his credit-challenged clients out of a home purchase. ‘The loan program was going to allow for 5 percent down, and they just came down with new guidelines to require 10 percent down,’ Mr. Akright said. ‘It took him out of being able to purchase.’”

“Mr. Carmona said down payment requirements are the biggest change he’s seen. ‘Before, you didn’t have to bring a down payment,’ Mr. Carmona said.”

“Other changes: Higher credit scores. Previously, borrowers with a FICO credit score as low as 570 (out of 850) could qualify for a single loan financing 100 percent of their home purchase, Mr. Carmona said. ‘Now, across the board, it’s jumped up to a 600 FICO score for an 80/20 loan,’ Mr. Carmona said.”

“During the housing boom, borrowers and lenders took comfort in the fact that home prices rose and rose, with no signs of slowing. But with home prices falling in many parts of the country, that safety net has been eliminated.”

“Unfortunately, some lenders who made those risky loans were driven by their own self-interest, Mr. Carmona said. ‘I believe some loan officers are much more concerned with producing than with the client’s best interest,’ he said. ‘There is a big difference between the ability to qualify and the ability to afford, and there are borrowers and loan officers who ignore that simple truth.’”

“Investors who buy those bonds are among the forces creating the current backlash against lenders. ‘Investors are starting to look at their books with a more jaundiced eye and seeing loans aren’t performing the way they want,’ said Keith Gumbinger, an analyst at HSH Associates, which publishes mortgage information. ‘Investor demand for certain of the most liberal products is drying up to a degree.’”

“Locally, Sebring Capital Partners LP, a Carrollton-based subprime lender, said it was shuttering its operations. The company’s general counsel, Michael Waldron, attributed the company’s demise to ‘a combination of market conditions.’”

“Mr. Carmona said he’s often had to tell clients that he ‘personally would not help them get the loan for which they could qualify. I will instead show them how to better position themselves in the next six to 12 months to comfortably afford their home when they are truly ready,’ he said. ‘I might lose a commission here and there because of this, but I have found that the referrals I get because of this stance are really strong.’”

The Press Gazette reports from Wisconsin. “A big part of a bank’s profit source is the difference between what it pays people to give it money and what people pay to borrow it. That difference, these days, is tiny. ‘This is probably the most difficult banking environment I’ve ever seen,’ said Paul Beideman, president and CEO of Associated Banc-Corp in Ashwaubenon.”

“Beideman said a lot of homebuyers acquired adjustable-rate mortgages, even when rates were at historic lows. ‘They are starting to suffer a little now as higher interest rates lock in,’ he said.”

“The flat yield curve is an indication of immediate concern. Flat or inverted yield curves are often followed by recessions, which may have something to do with the long-term pessimism, but Fed Governor Susan Bies said last week that outside of the automotive and housing industries, the economy seems to be running at full steam.”

“Bob Atwell, president of Nicolet National Bank, Green Bay, said the local real estate market has experienced less speculation than some areas of the country. ‘We clearly have signs of some of the excess activity here. What we didn’t have was this bubble effect of rising prices,’ he said.”

The Gazette Extra from Wisconsin. “It started innocently enough. A red-hot housing market. Attractive adjustable rate mortgages. Mailboxes overflowing with offers of easy credit from far-flung lenders.”

“But for a growing number of area homeowners, the piper has called, and the result is likely a foreclosure record in Rock County. Last year, the Rock County Sheriff’s Department auctioned off 352 properties, a 17 percent increase over those sold in 2005.”

“‘If we could point to one reason, we would attribute it to the huge interest in adjustable rate mortgages several years ago,’ said Rose Oswald Poels, senior VP of the Wisconsin Bankers Association.”

“‘It’s inexplicable to me that ARMs were so popular given that the conventional rates were so low,’ Oswald Poels said. ‘But there was exuberance in the economy and people were motivated to buy the biggest house they could at the very ends of their means.’”

“Vicki Schleisner, a Janesville attorney who concentrates a large part of her practice on bankruptcies, said many homebuyers failed to see the big picture. ‘I think some banks are now stepping back, but for a while they were pretty loose with the money,’ Schleisner said. ‘That’s not to say they were loose in a criminal way. Money was cheap.’”

“‘But a lot of the debtors who are now defendants didn’t have as much knowledge as they should have had. They were just thinking of the (initial) monthly payments, saying ‘I can afford that.’ But they weren’t thinking about what would happen when the rates go up,’ Schleisner said.”

“‘Many people were put into homes they simply can’t afford,’ said Mary Herrmann, a counselor for Consumer Credit Counseling Service. For that, Herrmann looks no further than the rapid advancement of national lenders into the local market. The sheriff’s department scheduled foreclosure auctions in October, November and December involved 36 different lenders. Only a handful involved locally based institutions.”

“‘It used to be that only the very qualified could get a mortgage,’ Herrmann said. ‘But now, so many lenders have gotten into the market, and many are offering first and second mortgages, some as high as 125 percent of the value of the home.’”

The Detroit News from Michigan. “Construction of new homes in southeast Michigan, which reached record levels just two years ago, fell dramatically in 2006. Total housing permits for the nine counties in the region fell to 9,873, a 48 percent decline from 2005 and more than 60 percent off the all-time high in 2004, according to data released Sunday.”

“Scores of homes are languishing on the market as residents flee the area for jobs in other states or take early retirement and move south. Foreclosures and personal bankruptcies are soaring.”

“As a result, home values in Metro Detroit are dropping faster than in almost any other part of the country. Some new and existing homes are being sold at auctions.”

“‘You’re clearly seeing a bit of a shakeout in the market,’ said Lee Schwartz, executive VP for government relations for the Michigan Association of Home Builders. ‘Those builders who haven’t been through something like this and built a lot of spec homes are being affected pretty severely.’”

“For the first time in nearly two decades, Metro Detroit families are seeing a significant decline in the value of their homes, according to the National Association of Realtors. The median sales price for a single-family home fell to $154,100 in the third quarter of 2006 from $172,000 in the third quarter of 2005. It was the largest drop in value of any market in the nation.”

The Chicago Sun Times from Illinois. “There’s something rotten in Chicago neighborhoods, and it looks a lot like condo fraud. ‘In the past two to three years, we’ve been looking at 97 buildings with 770 units where we feel the sales prices exceed the value, based on the condition of the units,’ said Angela Maurello, VP of a pooled-risk lender.”

“Our crooked developer doesn’t need a loan of any kind. He buys a 6-flat for $300,000 and he pays cash. He doesn’t bother with a construction loan because he’s not going to replace the plumbing, roof or mechanicals, or make any structural changes to the building. Instead he’ll spend maybe $5,000 per unit skim-coating the building, putting in cheap new windows or redoing the porches so from the outside, the building looks like something’s been done.”

“Our crooked developer is now ready to sell each condo at the market rate of $280,000, but he’s invested only $55,000, the purchase price, plus rehab, in each unit ‘conversion.’ Who’s going to buy a condo for $280,000 that from the inside looks like an unimproved Chicago apartment unit? A phoney buyer, of course.”

“And who is going to arrange for a mortgage for this phoney buyer? You guessed it, a crooked mortgage broker. And who is going to see a $280,000 condo where there is really a an unimproved Chicago apartment, an appraiser tending toward criminal overstatement.”

“Let’s see, $280,000 per unit, minus $55,000 equals $225,000. Multiply that by 6 units, and you have $1.35 million, or a profit of about 300 percent!”

“Our real estate boom has complicated this matter even more. These days it’s quite usual for the mortgage lenders to be in other states, and it’s quite usual for each unit to be attached to a different lender. As the mortgages foreclose, the lenders look at the state of things from a remote location. Assessing the worth of the condos online and through databases, they figure they will sell the foreclosed properties at a loss, for say, $200,000 each at the Sheriff’s fire sale.”

“That’s the minimum bid accepted. When neighborhood people show up to bid and get a deal on what they know to be an unimproved unit in an eyesore building, they walk away when they realize they’d have to pay $200,000 for the unit. Nothing sells.”

“‘Because multiple lenders are involved and they are often out of state, it’s difficult to bring these buildings to fruition,’ Maurello said.”

Some housing bubble news from Wall Street. “Tempe-based Clear Choice Financial Inc. announced Friday that it is insolvent, in default on several obligations and has laid off 120 of its 150 workers nationwide. The company, with corporate headquarters near Southern Avenue and McClintock Drive, also announced that it closed its mortgage-lending subsidiary, Bay Capital, which has offices in Maryland and California.”

From Broker Universe. “At least two more midsized subprime firms, both non-depositories, hurt by buybacks, are considering selling their shops. (One, we’re told, is owned by a large publicly traded company.) We’re still checking out the particulars and hope to have confirmation next week. As one SoCal mortgage executive told us late last week: ‘If you don’t have liquidity, you’re gone.’”

“Also in Monday’s NMN a story about Clayton Holdings advising on $7 billion in loan buybacks and an article by Brian Collins on Congress holding hearings on the subprime industry and foreclosure. One due diligence expert told us wholesale lenders should hold their loan brokers responsible for their buybacks. He believes brokers have been getting away with too much for too long.”

“With all the cutbacks, restructurings and failures in the subprime industry, there are a ton of account executives looking for work. CMG Mortgage president Chris George told us recently that many AEs ‘are in play.’”

From Bill Fleckenstein. “A former top executive at a subprime lender told me that serious issues are developing, and that large companies like New Century Financial, Accredited Home Lenders and NovaStar Financial will, in his words, ‘hit the wall’ very soon.”

“He writes: ‘We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built…in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000.”

“‘The market topped out, and now most of the seven homes are vacant, worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.’”

“‘The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.’”

National Mortgage News. “The latest statistics from the Federal Bureau of Investigation confirm that mortgage fraud is on the upswing. ‘We can’t find a chart that doesn’t show up in a big way,’ special agent Bill Stern said at the Mortgage Fraud Conference.”

“And even worse news, the FBI’s mortgage fraud coordinator in Washington said, is that the trend is moving away from rogue individuals who pull off the scams and toward members of organized crime.”

The Kansas City Star. “Mortgage fraud is being called the country’s fastest-growing white-collar crime. It costs lenders more than $1 billion a year and has turned increasing numbers of federal agents into experts on real estate paperwork. These days, they quickly crack cases that once took years to work, experts say.”

“Two Kansas City politicians recently learned just how quickly. When then-Jackson County Executive Katheryn Shields and her husband signed paperwork selling their home, an FBI agent notified them they were the targets of a criminal investigation involving the sale.”

“The documents purportedly showed that the $475,000 house they purchased in 1999 somehow was worth a $1.2 million mortgage in 2006.”

“Agents also wrapped up an investigation of City Councilwoman Saundra McFadden-Weaver just months after she unsuccessfully tried to refinance a $400,000 Lee’s Summit home. According to prosecutors, McFadden-Weaver had purchased it even though she had no plans to live there or make payments.”

“Mortgage fraud reports nearly doubled between 2003 and 2004, according to a Treasury Department study. That increase continued a longer-term trend that saw a 1,411 percent jump in reports between 1997 and 2005.”

“Testifying before a Senate committee last month, FBI director Robert S. Mueller III estimated the loss to lending institutions at more than $1 billion a year. Others called this a conservative estimate because much of the mortgage industry was not required to report fraud.”

“‘We’re in our infancy in being able to quantify the problem,’ said Corey Carlisle, senior director for government affairs at the Mortgage Bankers Association.”

The New York Times. “In recent years, borrowers have flocked to riskier mortgages that gave them the means to keep up with an overheated housing market. Now some advocacy groups say that as delinquencies and foreclosures mount, so too will lawsuits against lenders.”

“‘I think a class action is coming,’ said John Taylor, the chief executive of a Washington group that is an advocate for low-income borrowers. ‘It’s a storm cloud that’s waiting to really open up and rain on the lenders’ parade.’”

“Many of these borrowers essentially bet that the value of their houses would climb quickly enough for them to be able to use the accumulated equity to refinance with a more affordable loan. Mortgage lenders argue that if borrowers made those kinds of speculative bets, they did so willingly.”

“Ken Markison, senior director of the Mortgage Bankers Association, said lenders generally have not given payment-option ARMs to subprime borrowers and that those with better credit have used such loans successfully. ‘We don’t believe there would be a basis for such suits,’ he said.”

The Telegram reports from Massachusetts. “The market for single-family homes and condominiums is in the midst of a correction that has seen sliding sales and prices. ‘Realtors are not hungry, they’re starving,’ said Vaios Theodorakos, who owns about 400 rental units around Worcester County. ‘The phones aren’t ringing. I see listings getting pulled. You’re not seeing people on waiting lists anymore.’”

“Sandra Katz, president of the Worcester Property Owners Association, said she has seen good units remain vacant for three months or more, like those in a house on Bourne Street in the Greendale section, advertised at $800. The owner eventually rented them at $700 and $650 after three months, she said. ‘The notion that Worcester has turned the corner is mistaken,’ she said.”

“Mr. Theodorakos said that during the housing boom before the start of 2006, many renters purchased properties. Some, he suspects, had insufficient finances who used subprime loans that have low interest rates in the initial years.”

“‘We had some tenant flight to ownership with the A properties,’ he said. ‘There’s too much product out there in C. There are a lot of people bleeding. During the housing boom it became fashionable to own property. We’re getting novice people becoming landlords because they think it’s easy.’”

“‘Worcester is overbuilding,’ he said. ‘There is a glut of apartments going up. Old warehouses are being renovated to condos and apartments. But those people who would rent them are not here any more.’”

The Times Herald Record from New York. “Foxtons’ withdrawal from the mid-Hudson comes at the outset of what many observers see as a year of retrenchment in the local real-estate industry. The Orange County Association of Realtors, for instance, has budgeted for a net loss of members in 2007. CEO Ann Garti can’t recall the last time that happened.”

“And ripples are rolling through related industries, from lenders to building-supply companies and contractors. Country Siding and Windows in Goshen was on the way to its best year ever in 2006. Then the bottom fell out. The company went into the year expecting 20 percent to 30 percent growth and ended up watching sales drop 4 percent to 5 percent.”

“‘To go negative 5, it’s kind of a bummer,’ said General Manager Steven Pawlowski. ‘I really don’t see anything right now that indicates this year will be anything different.’”

“He said more and more customers are looking to the company for financing, perhaps a reflection of the less-favorable interest rates available on home-equity loans these days.”

“About a year ago, second-generation builder Angelo Ferrante co-founded Hudson Valley Remodelers in Goshen. ‘We kind of saw the writing on the wall,’ said Ferrante. ‘We’d been through a couple cycles, and we knew what was coming.’ The new construction market, Ferrante said, looks ’scary.’”

“Still, he hopes to build 10 or 15 houses this year, about half a normal year’s output. He also hopes to finally unload a home he built in Sullivan County in 2005. ‘I can’t give it away at what it cost me,’ he said.”

Newsday from New York. “This is a year when home buyers should continue to enjoy an advantage over sellers. There’s still a year’s worth of homes on the market right now. As a result, expect this year to be a slow one for residential real estate. Inventory is expected to stay high, since many buyers remain on the sidelines, and some home sellers still aren’t pricing their homes low enough, experts say.”

“‘We want to see the sales increase,’ said Joseph Mottola, the CEO of the Long Island Board of Realtors. ‘I am not concerned about the pricing, but when the sales increase it’s better for the economy. Higher sales volume is good for the economy and for Long Island.’”

“Residential housing inventory has risen to 13,313 homes in Suffolk from 9,847 a year ago. In Nassau the number of houses on the market jumped to 9,457 from 6,786. The Island’s economy generated an anemic 1,500 new jobs in the 12 months ending in November, as opposed to 11,000 only three years earlier. The local economy is not expected to generate many more jobs in 2007.”

“The sales of luxury and ultraluxury markets on Long Island, those above $1.5 million, have increased, though in some cases the prices are lower, according to Emmett Laffey, the CEO of Century 21 Laffey Associates in Greenvale.”

“Laffey said it’s still up to sellers to price their homes right, and some are still looking for a price that’s simply too high. There’s still a ‘tremendous amount’ of price adjustments in the market, as sellers find they can’t get the first price they ask for and have to lower it a few times to find the right one. Indeed, only one of every three homes is selling in its current six-month listing period, Laffey added.”

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