The Housing Bubble

The Fresno Bee reports from California. “In the first half of this decade, Silicon Valley residents sought refuge by the thousands in the central San Joaquin Valley. The wave of high-income refugees from the Bay Area and Southern California helped fuel the San Joaquin Valley’s real estate boom, in which home prices more than doubled in a five-year period.”

“Last year, however, the flow screeched to a halt, local market watchers say. ‘There’s probably not as much panic about moving out of the Bay Area now because housing prices there are stabilizing,’ said London Properties CEO Dan Conner. ‘The panic of getting out of there and getting something affordable is not there anymore.’”

“Clovis Community and Economic Development director Michael Dozier conducted surveys of new residents in 2003 and 2006 and found big changes that bear out Conner’s point.”

“In 2003, three out of 10 newcomers to Clovis who responded to Dozier’s survey said they had moved there from the Bay Area. In 2006, only one out of 10 said they came from the Bay Area.”

“Rama Ambati, a relocation specialist, said that she used to get at least 25% of her customers from the Bay Area. Now, she says, ‘it has dwindled off.’”

“Guarantee Real Estate owner Joan Eaton said that a second factor in recent years was the number of outsiders buying homes here as an investment, sometimes with no intention of ever moving here. Those numbers aren’t reflected in the IRS data, which track where people file their tax returns. But it still added fuel to the boom.”

“‘During those years, we had increasing numbers of home buyers from outside the area,’ Eaton said.”

The Sierra Sun. “Despite rent increases across most of the West, landlords in North Tahoe and Truckee say residential rent has remained stable to keep housing occupied.”

“‘It is hard to fill up properties when [landlords] are aggressive on the price,’ said Tyler O’Neal, property manager on the North Shore. ‘People couldn’t afford to live and work here. A lot of owners try to accommodate the renters. They might come down on the rent to get the right person in there.’”

“Area property managers interviewed said that they encourage landlords, who are mostly second homeowners, to be reasonable with prices because it is expensive to live in Tahoe and Truckee.”

“‘If you price yourself out of the market, you won’t have anyone,’ said Ken Degney, owner of Assist 2 Sell in Kings Beach and Incline Village.”

“Debbie Milani, property manager in Tahoe City, said there used to be a ‘waiting list of renters’ seeking a long-term rental, but that now it takes longer to fill up vacant rentals. ‘Our workforce here is dwindling,’ Milani said.”

The Daily Press. “It’s no secret that construction has slowed on new homes in the Victor Valley and workers are feeling the pinch. ‘Since the beginning of the year, our lobby’s been full,’ said Robert Lovingood, president of (a) local staffing firm. ‘We have a steady stream of people looking for work…especially those in the construction trades.’”

“Few semi-skilled workers, especially those who have been working on mass-produced tract homes, are equipped to transfer over to commercial work. ‘They’re programmed to do one thing in every house,’said Chris Cox of Cox Plumbing. ‘They’re set up to do one particular phase of plumbing, and that’s all they know. It’s electricians, it’s framers, it’s everything. They only get the opportunity to do just ceiling fans, just switches and plugs.’”

“For workers who know houses, life is bound to be tough at least until summer, possibly another year, said economist John Husing. ‘You have to work off the inventory of new homes that was just completed,’ he said. ‘A lot of builders kept right on building up until December because they didn’t want vacant lots on their books.’”

“Another factor, Husing said, is homeowners who got into interest-only loans and cannot refinance because their homes did not appreciate enough. Third, speculators who tried to flip houses one-too-many times are trying to get out of the market.”

“Those three factors have put inventory of both new and existing homes at its highest point in years. For existing homes, the amount of homes for sale in the Victor Valley tripled in December 2006 compared with December 2005; from 1,123 homes to 3,455, according to the local MLS. And existing homes are competing with new homes as buyers hunt for bargains.”

“Some construction workers are transferring over to warehousing work, said Gloria Stanton, manager of the Victorville office of Select Personnel Services. ‘I’m hearing, I’ll do anything,’ she said, not only from construction workers but from educated professionals such as paralegals and accountants.”

“Cox said out of 10 housing contractors he used to work for, he is only working for two at the moment. ‘It’s a cycle. It’s like anything else,’ he said. ‘You ride the wave until it dies and wait for it to pick back up.’”

Some housing bubble reports from Wall Street. “Countrywide Financial Corp. said the U.S. housing slowdown caused fourth-quarter profit to decline 3 percent, and projected 2007 earnings that fall short of most analysts’ forecasts. The largest U.S. mortgage lender said it expects a ‘challenging’ 2007 as loan demand and margins fall and homeowners miss more payments.”

“CEO Angelo Mozilo said 2007 ‘will likely be the trough year of the current housing cycle,’ but that Countrywide may benefit as weaker lenders exit the market. He also said Countrywide has ‘made progress’ in plans announced in October to lay off more than 2,500 employees to help slash annual costs by more than $500 million.”

From MarketWatch. “Looking to 2007, Countrywide said it expects continued pressure on margins as mortgage origination volumes decline. The Calabasas, Calif.-based company’s also preparing for increased borrower delinquencies and continued credit deterioration. ‘The company believes the industry will experience continued pressure on volumes, margins and housing prices, as well as increased defaults and foreclosures,’ Countrywide said.”

“The company missed its loan servicing target by about $200 million because of a residual write down of $74 million, higher than forecasted hedge losses of $44 million and steeper than forecast amortization expense (realization of cash flows) of $94 million.”

The New Zealand Herald. “A town of less than 800 people is set to lose 99 jobs, after a sawmilling company announced yesterday it would close. The United States-owned mill focuses on producing housing materials for the American market.”

“Mill site manager John Crane said the company’s hand had been forced. ‘It is just a fact that the market has caved in, in the States, and the higher dollar has translated to lower US dollar receipts,’ he said.”

The Associated Press. “Building supplies company USG Corp. said Monday an expected drop in new housing construction will dampen 2007 earnings. USG, which supplies homebuilders with gypsum wallboard, rode the housing boom that peaked in 2005 to big profits last year, but demand has eroded as the housing market remains flush with a glut of unsold inventory.”

“‘The drop in housing starts will further reduce wallboard demand from the near-record levels achieved in 2006,’ the company said. ‘It is too early to determine where demand levels will find a firm foundation or how our competitors will respond to the current imbalance between supply and demand.’”

“Subprime mortgage lender Fremont Investment and Loan on Monday said it severed ties last quarter with some 8,000 brokers whose loans were responsible for some of the highest delinquency rates in the industry.”

“Such moves to improve loan quality have helped trim the number of early defaults on Fremont mortgages to a 3 percent rate from almost 6 percent in mid-2006, (said) Mike Koch, a Fremont VP. The so-called early payment defaults were close to 1 percent in 2005.”

“The brokers ‘released’ were ‘highly correlated’ to the sudden rise in defaults on Fremont loans, he said in response to questions from investors.”

“A surge in defaults across the industry from low levels in 2003-2005 came as subprime underwriters loosened standards to help maintain volume in a shrinking market. The loans, most destined for the $575 billion home-equity, asset-backed bond market, are being returned by investors at an alarming pace.”

“Koch was reluctant to call the brokers ‘bad’ because some may have simply specialized in loans that Fremont has cut back on, such as eighty-twenty loans. However, some of the brokers were ‘pushing appraisals’ to make a home appear more valuable, he said.”

From Broker Universe. “If there is one lesson that mortgage brokers can take away from the SourceMedia Mortgage Fraud Conference is that they will be under greater scrutiny from their wholesale investors in this area. Part of this is just a natural consequence of the numbers.”

“Fraud losses topped $1 billion in 2005, noted Jeffrey Taylor, the managing director of Digital Risk LLC. He quoted data from the Federal Bureau of Investigation, which showed 80% involves collusion by industry insiders.”

“A pair of panels encouraged mortgage lenders to go after parties through the legal system to recover monetary damages for mortgage fraud.”

“There are a number of potential legal causes for lenders to go after any third party in the transaction, including unjust enrichment, said Bob Simpson, the president of IMARC. ‘If you are not doing anything to recover that loss, you are letting them get away with it,’ he said.”

“The number of vacant homes waiting to be sold surged 34% to 2.1 million at the end of 2006 compared with the end of 2005, by far the fastest increase ever recorded, the Census Bureau reported Monday.”

“A year ago, 1.57 million homes were vacant and awaiting a sale. The vacancy rate for owned units jumped to a record 2.7% from 2.0% a year earlier. From 1965 to 2005, the homeowner vacancy rate had never been above 2%. The long-term average is 1.4%.”

“‘We have more than a million housing units of excess supply,’ said James O’Sullivan, an economist for UBS. ‘If you are looking for evidence that the worst is over for housing, you’re not going to find it in this report. This argues that housing starts need to go down more.’”

“Home-price appreciation weakened to its slowest pace in more than 10 years in the 12 months ending in November, MacroMarkets and Standard & Poor’s reported Tuesday. Home prices fell in 17 of 20 cities in November compared with October.”

“The last time prices were rising so slowly was in late 1996, at the end of a six-year period of flat or falling prices. A year ago, home prices were rising about 16% year-over year.”

“‘Countrywide, home-price declines appear to show no signs of slowing down,’ said Robert Shiller, chief economist for MacroMarkets, in a press release.”

The St Petersburg Times reports from Florida. “Bulldozers and cranes are again making noise along Clearwater Beach, as builders work to complete major condominium projects they started years ago when the market was booming. They’re discounting prices for early bird buyers, offering upgrades at cheaper rates and throwing in other incentives.”

“From his newly remodeled sales center, businessman-turned-developer Uday Lele says he’s cutting 20 percent off the price for the first 50 buyers in his massive Enchantment beach development. That’s a hefty discount, he says, for a condo that can cost up to $2-million.” “Also, Lele says, he’ll throw in an extra parking space, another $50,000 to $70,000 savings.”

“Steve McAuliffe, with JMC Communities, says his company is offering pre-construction costs for condos at the Marquesas Ovation in St. Petersburg. The VP of sales and marketing says the first 74 units at Marquesas will cost buyers $70,000 to $200,000 less if they buy now.”

“JMC is also offering pre-construction rates and ‘decorator allowances upwards of $100,000′ for condos at Ovation.”

“This is a far cry from two years ago, when sales were so hot that buyers were flipping units, sometimes a day after buying them. ‘At this point, it’s a function of the market,’ said (developer) Kirit Shah. ‘When the market is soft, some developers discount it further.’”

The Bradenton Herald. “The stories are from homebuyers and investors caught in the failure of Coast Bank and Construction Compliance Inc. home loans in southern Sarasota and northern Charlotte counties. Like the story of a Bradenton man and his partner who were approached by American Mortgage Link to buy investor packages that included the house, lot and mortgage through Coast Bank.”

“Last summer, he received a letter in the mail from one of the subcontractors about nonpayment. He called Coast Bank and told them not to give the developer any more draws on the project. Bank officials assured him that he didn’t need to worry.”

“The next thing the investor realizes is that more money has been handed out by the bank to CCI, despite his warnings. Today, he has a home that is 95 percent complete but has at least four liens filed against it by subcontractors who haven’t been paid by CCI. This month he made a $1,600 interest payment on his unfinished house.”

“‘At the time I thought it was going to be a good deal,’ he said. Today, his three-bedroom, two-bath home sits empty, awaiting completion and a buyer.”

The Herald Tribune. “Just a week before Bradenton-based Coast Financial Holdings revealed $110 million in problem loans involving Construction Compliance Inc., the bank handed the St. Petersburg home builder’s founder $413,100. The loan to Jesse B. Battle III was a second mortgage on an undeveloped residential lot in St. Petersburg.”

“Battle’s $413,100 second mortgage was made against a 6,400-square-foot parcel in St. Petersburg that the home builder bought in April 2005 for $199,500, Pinellas County property records show. Battle originally financed the purchase of the land with a $199,500 loan from Coast. He paid that loan off in early 2006, and replaced it with a $499,950 loan from Coast.”

“On Jan. 12, Coast handed Battle another $413,100, raising his total debt on the property to $913,050, records show. The Pinellas County property appraiser values the property at $185,200.”

“Port Charlotte attorney Glenn Siegel and others representing customers of Coast and Construction Compliance Inc. say that Coast ‘had a fiduciary duty to ensure that work was done before they distributed payments’ to CCI.”

“Coast also could have problems if it chooses to foreclose on properties, said Siegel, who besides homeowners represents subcontractors with $1 million owed to them by CCI.”

“Foreclosure, the bank’s ultimate tool if a borrower stops paying a loan, must be an ‘equitable proceeding.’ If the bank failed to monitor its loan disbursements, foreclosure could be barred, Siegel said.”

“Basically, the borrower could say to the bank: Why should you get my property since your lack of internal controls contributed to the creation of this debt?”

“Meanwhile, other lawyers said it would be difficult for their clients to accept the plan outlined by Coast last week to transform some of the borrower’s construction loans into longer-term mortgages.”

“Port Charlotte attorney Thomas Carrero is representing about 25 investors, many of whom are elderly or retired and not in a position to assume long-term obligations. ‘Some have no choice; they can’t accept a hit like that,’ Carrero said.”

The Sun Sentinel. “Given how slow South Florida’s housing market is, sellers should prepare to make huge concessions on price and commission, lest they want the properties to sit unsold for months, said (realtor) Stephen Bartlett. ‘I think this is going to be the norm from now on,’ Bartlett said.”

“Many sellers have tried to attract the attention of agents in this soft market by offering large commissions, bonuses, cruises and other perks. Some agents share those perks with their clients. But Debbie Anderson in Coral Springs and other agents say they doubt 10 percent commissions will become more common. ‘Sellers need to be giving incentives to buyers, not their agents,’ Anderson said.”

The New York Post. “The number of New Yorkers forced into foreclosure is skyrocketing, especially in Nassau County, where foreclosures have jumped a stunning 82 percent in the past year. According to RealtyTrac, the number of city foreclosures went up 15 percent in 2006 from the year before, while Long Island jumped 55 percent. The national rate surged by 42 percent.”

“‘People in general are living outside of their means,’ said wealth manager J.J. Burns. ‘This generation wants everything now. People are not saving for the rainy day.’”

“In the city, Staten Island led the pack with a 47 percent rise in foreclosures, usually initiated by banks when homeowners can’t pay their mortgages. Foreclosures in Brooklyn and The Bronx rose about 25 percent each and Manhattan saw a 4 percent increase.”

“Foreclosure increases are higher in the suburbs - Westchester jumped 44 percent, Suffolk County shot up 32 percent and Nassau County rose a shocking 82 percent.”

The Boston Globe. “Petitions to foreclose on Massachusetts homeowners rose nearly 70 percent in 2006, and the number of distressed properties that went to auction increased 46 percent, a report said today.”

“In Suffolk County, which includes Boston, petitions to foreclose jumped 79 percent in 2006, the report said. In 2006, mortgage lenders filed 18,926 petitions to foreclose, compared with 11,155 in 2005, the Warren Group said; lenders announced 6,729 foreclosure auctions in 2006, versus 4,620 in 2005.”

“‘As housing prices decline, people who had borrowed 90, 95, or even 100 percent of the value of their home now find themselves owing more than their homes are worth,’ the Warren Group’s chief executive, Timothy Warren Jr., said.”

The Boston Herald. “Banks auctioned off nearly twice as many Boston homes for mortgage nonpayment during 2006 as they did in 2005, new figures show. The Warren Group reported yesterday that lenders advertised 1,007 foreclosure auctions in 2006 for Suffolk County, which primarily consists of Boston. That’s up from just 521 auctions in 2005. ‘This certainly indicates a lot of pain for (Boston) residents,’ Warren Group CEO Tim Warren said.”

“Warren attributed the increased auction activity to 2006’s chilly housing market. He said that during the recent housing boom, people who got into financial trouble could easily refinance or sell properties and avoid foreclosure. But no more.”

“‘You can’t take out another home-equity loan when prices are falling, because there isn’t enough equity left to solve your problems,’ Warren said.”

“Advertised foreclosure auctions also rose sharply in other Eastern Massachusetts locales during 2006. Warren reported big gains for Middlesex County (up 58.2 percent), Bristol County (54.3 percent), Worcester County (53.8 percent) and Essex County (52.2 percent).”

The Telegram. “The decline in housing sales and prices followed a red-hot housing market in Massachusetts, when the median price of single-family homes had increased for 12 consecutive years. The booming housing market, combined with low interest rates, enticed many people to buy homes through attractive loan offers.”

“When the housing market fell and interest rates went up, many homeowners were caught in the middle, said Barry Bluestone, dean of Northeastern University’s School of Social Science, Urban Affairs and Public Policy. ‘There were significant numbers of people who were able to get mortgages who wouldn’t have qualified before,’ said Bluestone.”

The Standard Times from Massachusetts. “In New Bedford, there were 422 foreclosure petitions in 2006, a 128 percent increase from 2005, when there were 185.”

“In explaining why more people are in danger of losing their homes, analysts and mortgage brokers pointed to a complex ‘perfect storm’ of factors. They cited rising interest rates that keep new lenders from entering the market and make it harder for current homeowners to sell. Meanwhile, home values and sales have been depreciating since 2005, leaving homeowners who signed adjustable rate mortgage agreements two years ago paying higher rates and stuck with houses they now cannot afford.”

“Paul Matos, owner of SouthCoast Mortgage, said many homeowners who purchased houses from 2003 to 2005 expected to turn around and sell their houses for big profits. ‘Everybody was thinking easy money,’ he said. ‘Everybody was buying houses. It was absolutely crazy. People were buying houses that were worth $35,000 (more) a year later, and all they did was mow the lawn.’”

“But when the housing market ground to a halt in late 2005, Mr. Matos said many homeowners were stuck with houses they obtained through adjustable-rate mortgage agreements that now have higher monthly payments. ‘It happens when people get into adjustable rates,’ he said. ‘The market corrects, and you no longer have the equity.’”

“Eric Gedstad, a spokesman for a statewide affordable housing bank, pointed to what he labeled ‘exotic’ mortgage packages popular during the housing bubble. ‘Several years ago when the housing market was strong, these products were more manageable. People could refinance them and get a new loan,’ Mr. Gedstad said.”

“‘Now, we’ve got this perfect storm that is brewing in the mortgage industry and with home prices falling, people who took out these riskier mortgage loans can’t escape them the way they used to,’ Mr. Gedstad said.”

“He noted one particular example — known as ‘negative amortization,’ that has come back to haunt thousands of homeowners. ‘With a lot of these types of loans, a lot of people didn’t know what they were getting into,’ Mr. Gedstad said. “The mortgage loan process is very confusing. There is a lot of paperwork, and frankly, a lot of people don’t read the fine print.’”

“Jeremy Shapiro, president of ForeclosuresMass.com, said many homeowners overextended themselves during the housing bubble. ‘Homeowners looked at their options, and said, ‘Heck, if I go for the adjustable rate, I’ll have a bigger home,’ Mr. Shapiro said.”

The Eagle Tribune from Massachusetts. “Police Chief John Romero has launched an investigation into mortgage broker scams, focusing on the involvement of local lawyers who he says took ‘under-the-table money’ from home buyers who got duped into taking out loans they couldn’t afford.”

“‘We are looking into a situation brought to us by members of the legal profession, which involves a few unscrupulous lawyers who were just out to make a quick buck,’ Romero said.”

“The ‘kickbacks’ Romero was referring to were checks totaling up to $20,000 written by the lender to the home buyer, which were immediately cashed and turned over to the broker and lawyer involved in the suspected scam. Those brokers and lawyers, police say, charged the fee to assist loan applicants with fudging financial information, like monthly income and expenses, so poor people could qualify for home loans.”

“‘These unscrupulous lawyers and mortgage brokers are finding people who in some cases are desperate to get a loan,’ said police Detective Michael Simard. ‘They switch them to a high-interest, hard-money loan. They claim it’s only going to be for a short time, and it’s not going to cost them a lot of money, when in reality, it does. When the loan is applied for through the lender, the mortgage broker and lawyer will overstate the needed amount. That’s where their cash profit comes in.’”

“‘Something that can only be described as a cash kickback is certainly severe and would raise eyebrows. You hear whispers about things like this, but it’s a very hard thing to prove,’ said Boston lawyer David L. Yas, publisher of Massachusetts Lawyers Weekly. ‘For a lawyer to be collecting a kickback like this, it boggles the mind to think that’s happening. As long as there is a nefarious sect of the bar of lawyers - which is a very small minority - there will be practices like this.’”

“‘With all of the foreclosures going on in Lawrence right now, we’re concerned about the potential for arson,’ police Capt. Michael Driscoll said. ‘A lot of the arson in the ’90s was attributed to people who could no longer afford their properties and were looking for a way out. We don’t want to return to that kind of situation.’”

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