The Housing Bubble

The Santa Cruz Sentinel. “Patricia Beckwith couldn’t help whooping with joy when she heard the median price of single-family homes in Santa Cruz County dropped again. The median price in January was $702,250, the lowest for any month since December 2004 and down from a peak of $775,000 in July.”

“A month ago, she saw a ‘dinky’ home near the Polo Grounds reduced from $575,000 to $535,000 and thought it would be ridiculous to pay $3,000 a month for a mortgage on such a small house. Her best chance, she figured, would be to find a home that went into foreclosure when the owners couldn’t make the payments.”

“‘I’m taking my little $500,000 offer and looking at some properties,’ Beckwith said. For Beckwith, the good news is that more homes are being listed for less than the median price. Beckwith said she plans to look at listings priced over $500,000 and see if sellers will take her offer.”

“Sellers no longer have the advantage they had a year or two ago. For those ready to sell, they face a lot of competition. The number of homes on the market is the highest in 10 years for this time of year, 842 listings, 5 percent more than a year ago, and 97 percent more than two years ago. Sales are near a 10-year low for January.”

“The median price for condos was $489,444, a two-year low for the month of January. That’s based on 24 sales. Listings remain high, with 211 condos for sale, the most in 10 years for the month of January. That’s 15 percent more than a year ago and 189 percent more than two years ago.”

The North County Times. “In its monthly HomeDex report Friday, the North San Diego County Association of Realtors reported that the amount paid for single-family homes dropped 12.3 percent from a year ago, reflecting the 6.7 percent drop in the number of homes sold. Elsewhere, the median price slid from $543,000 a year ago to $516,900 last month.”

“North County condos sold for a median price of $378,000 in January, a 6.7 percent drop from $405,000 one year ago. In other parts of the county, sales prices slid an average of 6 percent, to $356,700 last month from $380,000 in January 2006.”

“Dan Maloney, a Vista real estate broker, said the relative instability of North County town-house prices was a reflection of last year’s influx of condo conversions, and comes down to simple supply and demand. ‘There’s just more to choose from, and lower prices are being offered,’ he said.”

“Sales are down in large part because ‘flippers’ who were buying up homes left and right and selling them for profit are no longer making offers, said Marc Zimmerman, a real estate agent in Encinitas. ‘A big portion of our market was investors, and investors are looking at other places than real estate to get a return on their investment now,’ he said.”

“Several dozen families are being asked to leave the houses they rent, a mass eviction that makes them the latest group of people touched by an alleged real estate scam centered in Murrieta.”

“The houses belong to about 20 plaintiffs who have signed on to a class action lawsuit that accuses three Murrieta men and their companies of running a vast pyramid scheme. According to the suit, the defendants suckered investors into buying overpriced houses with 100 percent financing.”

“But the loans went into default late last year after the defendants stopped making the payments, the suit alleges, with more than 100 homes set to be auctioned or seized by the lenders sometime this year.”

“Vicky Reiss alleges that she borrowed about $3 million to buy the houses. Eduardo and Soledad Carrillo bought seven houses. They borrowed about $4.4 million to finance the purchases.”

“In addition to Reiss and the Carrillos, 17 other plaintiffs own between 100 and 140 houses that are now going into foreclosure, attorney Richard Ackerman said.”

“In most cases, owners say they bought houses with little or no down payment. Depending on how the lawsuit and negotiations with the lenders turn out, those buyers could take the biggest hit in terms of wrecked credit instead of large cash losses, Ackerman said. But many investors were also duped into other bogus investments, the suit alleges.”

“Reiss said two of her tenants told her they would quit paying rent for their last few weeks in the houses. One explained his decision by saying that she had broken the lease and in any case wasn’t making mortgage payments, according to separate interviews with Reiss and the tenant.”

“‘I’m $3 million in debt,’ Reiss said. ‘What can I go after him for?’”

The Fresno Bee. “‘We’re hoping we found a bottom,’ said Steve Lutton, regional VP of Lennar Homes in Fresno. ‘We actually have a plan to raise prices in a couple communities — our first price rise in a year and a half.’ Lutton said the price hike will be limited and not across the board. ‘It’s just a nudge as a test,’ he said. ‘And just in certain areas.’”

“Prices, however, aren’t likely to increase appreciably until the glut of houses for sale drops more. On Friday, 5,223 homes were for sale in the Fresno area, which was a reduction from 5,843 in October. But that is more than four times what it was when the market was red hot in 2004 and 2005.”

“Zoltan Richter toured models at a Granville Homes tract in Fresno recently. The good news was that Richter said he was preparing for a possible purchase in the near term. The bad news was that he wasn’t compelled to act immediately. ‘We’re looking right now,’ he said. ‘We have time.’”

Readers suggested a topic about the changes in the subprime lending world this past week. “My topic suggestion, with all the bad news in the sub-prime sector will we ever see a return to more conventional lending with the old school lending practices or are these garbage liar no doc, no money down things here to stay?”

One said, “I think liar loans etc. are here to stay, because there is no way to support current home prices without them. At least in Europe, with a return to lending standards of 15 years ago, the housing market would crater.”

A reply, “That’s not what will determine liar loan viability. Investor appetite for these loans, and the price they’re willing to pay, will determine their staying power and usage. Housing prices will be the secondary effect, one way or the other.”

One looked at the secondary market. “Take a look at the MBS bonds. The MBS buyers don’t care if you lose $50k on your house. They do care if they lose $50k. I expect an overcorrection. We’re already seeing the sub-primes demanding 5% and 10% down payments and taking the hit in the turn rate.”

One pointed to the industry panic. “The government’s War on Subprime continues, and the kingpins are running for the hills. No kingpins, no local dealers, no new future subprime debt addicts.”

From Bloomberg. “Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected. ‘It’s kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,’ said Brian Horey, general partner at Aurelian Partners, which has sold short shares of New Century. ‘If you could fog a mirror, you could get a loan.’”

The Orange County Register. “Stock of Irvine’s New Century Financial lost more than one-third of its value Thursday, as investors digested news that it will restate past earnings, make fewer loans this year and report a fourth-quarter loss. Analyst Richard Eckert said investors are upset the company will restate earnings for the first three quarters of last year.”

“‘Restating earnings is like telling your investors you lied to them,’ Eckert said.”

“Standard & Poor’s said Friday that it downgraded its credit rating of Irvine’s New Century Financial Corp. and might downgrade it further. The agency cited New Century’s increasing buy backs of bad loans from investors and the possibility that the company breached certain agreements with creditors, ‘which would pose a liquidity challenge.’”

“Roy Jacobs & Associates announces that it has filed a class action lawsuit on behalf of purchasers of the common stock and other securities of New Century Financial Corp.”

“During the Class Period defendants knew but failed to reveal that New Century was being forced to buy-back substantially more loans than originally had been expected. Despite knowing of the surge in forced loan repurchases, the defendants failed to properly account for them. In addition, the Company failed to write-down the value of the loans reacquired, even though these troubled loans had materially declined in value.”

From Brokers Universe. “In some quarters it’s being called a liquidity crisis, the likes that haven’t been seen in the subprime sector since 1998. On Friday, National Mortgage News Online reported that Merrill Lynch was making margin calls on certain warehouse customers, asking these non-depositories for more capital.”

“We’re also told that some Wall Street firms are getting ready to trim back their warehouse lending operations. Which Wall Street firm will be the first to run screaming from the industry, shouting, ‘What have I done? What have I done?’”

“Lenders Direct CEO Mike McQuiggan had this to say about the subprime carnage: ‘I see our industry in true recession right now. It’s touching everybody.’ LD closed its wholesale platform on Thursday.”

“One source who’s been in the industry for 30 years told us that loan buybacks could affect, at worst, 10% of subprime production this year. If B&C lenders fund $600 billion, that would be $60 billion.”

The Street.com. “The recalcitrant agencies, Moody’s, Fitch and Standard & Poor’s, have quietly abetted (blessed) the mushrooming of very aggressive subprime lending that has allowed the Wall Street firms selling these mortgage products to prosper.”

“This week’s Grants Interest Rate Observer calls attention to a 13-month-old, $350 million asset-backed pool of mortgages, MABS 2006-FRE1. Foreclosures now stand at 9%, delinquencies at 10.5% and real estate owned at 3.5%.”

“In other words, about 23% of the loans are problematic, and neither Fitch nor S&P has downgraded the issue. No doubt investors in MABS 2006-FRE1 (hedge funds, brokerages, institutions, etc.) mark the issuance to par (since it has not been downgraded).”

“Among other mortgage lenders, Fremont General Corp. fell 3 percent, Accredited Home Lenders Holding Co. declined 5.3 percent and American Home Mortgage Investment Corp. dropped 5.4 percent.”

“‘It’s not that they didn’t understand the risks,’ said interest rate strategist Kevin Jackson. ‘These guys saw the opportunity to originate products that were more risky for more return, and now it’s backfiring on them.’”

From Inman News. “HSBC began to discover its losses — began — from playing on the American subprime freeway. This is the first indication of trouble in piggyback second mortgages. Until now, the Street has confessed only to trouble with subprime loans, and only those made in 2006, saying terms offered then had become too easy.”

“Nice try. 2006 was just the first year with flattening home prices. Loans made in earlier years had no tougher underwriting; they were merely protected by rising home prices. Not for long.”

“Appearing soon: gradual but horrifying knowledge that ‘A’-quality first mortgages were infected by the illusion of the Street’s risk distribution. If in 1999 we sent to any human FHA underwriter a loan application with no borrower savings, a gift of down payment, $10,000 in credit-card debt, stable employment, decent credit, rent history at $800, and a proposed new payment of $1,500, that loan would have been declined every time.”

“Since 2001, that loan and all of its Fannie and Freddie and private MBS cousins have been approved by Street-calibrated software. Approved every time.”

The LA Times. “As much as $800 billion of adjustable-rate mortgages will reset to higher payments this year, and 1 of 11 home loans is both adjustable and sub-prime, according to the Mortgage Bankers Assn.”

“‘There could be a good chunk of borrowers with nowhere to go to get loans,’ said industry analyst Zach Gast. ‘It means a lot of people are going to lose their homes.’”

Thw Wall Street Journal. “Antonio Papa, a construction worker, took out an option ARM with a 1 percent introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6 percent in September 2005 and has since climbed to 7.5 percent.”

“‘I was looking to refinance to have more stability,’ he says. He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months’ of interest if he refinances within the first three years.”

“Michelle Thompson in North Glenn, Colo., pulled out $30,000 when she refinanced her mortgage last year. She would like to refinance again, but when she went to apply for a new loan, she discovered that her mortgage debt exceeded the home’s value.”

“Charlotte Keyes in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10%, Ms. Keyes is looking to refinance. She owes more than the home is worth.”

“With ARMs, ‘the tag line you always hear…is you can refinance with no problem,’ says A.W. Pickel, a mortgage banker in Overland Park, Kan. ‘But it is a problem.’ The appraisal for Ms. Keyes’s last loan was inflated, he adds.”

The Star Telegram reports from Texas. “Home sales are down for the eighth month in a row, compared with the same month last year, according to figures released by the North Texas Real Estate Information System. Sales of existing homes are suffering as the market contends with an oversupply of housing stock, said housing analyst Ted Wilson in Dallas. Those homes were built when the housing market was roaring with record home sales.”

“‘The inventories haven’t been outrageous, it’s just that there’s so much inventory that it’s hard to get attention,’ Wilson said. ‘There has been no pressure on housing, because there has been so much inventory out there,’ Wilson said.”

The Dallas Morning News. “At the end of January there was almost a nine-month supply of pre-owned homes for sale in the Dallas-Fort Worth area, according to statistics.”

“‘Some may be seasonal, but I also suspect some is due to a real slowdown in the market,’ said Jim Gaines, a researcher with Texas A&M University. ‘If sales volume doesn’t show marked improvement over last year, I suspect we’ll see a very definite shift toward a buyer’s market with longer sales times,’ he said.”

“Almost 43,000 pre-owned homes are on the market, 7 percent more than a year ago. Median home sales prices in January were down 1 percent from a year ago to $139,950. Condo sales and prices were also down last month. Sales fell 6 percent from January 2006 and median prices were off 2 percent.”

“In the Dallas - Fort Worth area, 12,000 completed, unsold new homes are up for sale, according to the latest estimates. That’s almost double the number on the market a few years ago.”

“Local builders seem to have gotten the message about sharply cutting back on starts. In December, single-family building permits in the Dallas area were down 48 percent from a year earlier, according to M/PF YieldStar. And November building permits in the area were down 33 percent from the previous year.”

“‘The reality of whether the ugliness is behind us will not become evident until the spring sales market unfolds further,’ said Ted Wilson.”

From Inman News. “The Dallas/Fort Worth housing market slowdown deepened in January, as sales and prices of single-family homes continued to decline, according to preliminary statistics.”

“The median sales price of these homes was down 4.4 percent from $146,400 in December. With the new year came a flood of new single-family listings, 13,892, which marks a significant 53 percent increase from December’s 9,062 new listings.”

The American Stateman. “The number of Californians who moved into Hays, Travis and Williamson counties in 2005 jumped 32 percent from the previous year, and real estate agents helping many of the transplants buy homes here said the numbers did not decline in 2006.”

“Stephanie and John Landers moved from the Laguna Beach area of California to Austin with their two young sons in February 2005, leaving behind a bluff-top home overlooking the Pacific Ocean. ‘Everybody made a lot of money on real estate out there, but it’s kind of like golden handcuffs,’ Stephanie Landers said. ‘If you don’t leave the state, you can’t move anywhere else.’”

“The tremendous amount of money from real estate gains coming out of California helps explain why this relatively small group is often blamed or credited for rising housing prices in Central Texas, even though the majority of California transplants have median incomes no higher than those in the areas into which they are moving.”

“(Realtor) John Rosshirt said California buyers are accustomed to much higher home prices and generally are prepared to pay more than buyers from Texas. This has a ripple effect on the market, Rosshirt said, because buyers who lose out on one house to a California buyer with a higher bid often are willing to pay more the next time.”

The Express News. “San Antonio has recently lost three mortgage lenders, while several other companies have made it tougher for first-time home buyers and borrowers with shaky incomes or credit to get loans. The shrinkage and belt-tightening reflect the nationwide retrenchment in the mortgage industry as defaults rise.”

“Twelve of the largest mortgage lenders have closed recently. Delinquencies on subprime loans jumped 17 percent nationwide in the past 12 months, based on the most recent figures compiled by the Mortgage Bankers Association.”

“‘A lot of lenders are dropping like flies,’ said Rudolph Timpte, an underwriter for a local mortgage banker.”

“In San Antonio, subprime lender Classic Home Lending and wholesalers Harbourton Mortgage Investment Corp. and Mortgage Lender Network closed in December.”

“‘I got a call (in late January) from one of the competition who said, ‘Hey Jack, I’ve got two loans approved with Harbourton Mortgage Investment Corp. and they just pulled out of the market. What am I gonna do?’ said Jack Shull, co-owner and loan officer at Sonterra Mortgage Capital.”

“The belt-tightening started about six months ago when mortgage lenders began to see rising default rates as home values dipped in some regions.”

“‘We didn’t see it in the past because rapid price appreciation meant that if you couldn’t make the mortgage payment, then you could sell the home and get from under the loan,’ said Patrick Gillock, co-owner and lending officer at Sonterra.”

“In December, Dallas-based Sebring Capital Partners collapsed in ‘a really scary event,’ Shull said.”

“Sebring, one of the first and largest subprime lenders in Texas, had been known for its conservative loan policies. It apparently had been forced to buy back many loans from investors because of rising defaults.”

“This month, Wells Fargo increased the minimum down payment by 5 percentage points on borrowers in 150 riskier counties, including Goliad, Victoria, Calhoun and Cameron counties in Texas.”

“Many lenders have reacted like NovaStar Mortgage Inc. In January, the Kansas City, Mo.-based mortgage bank raised its minimum credit score to 620 for San Antonio borrowers who want to finance 100 percent of a home’s value, according to NovaStar’s Terry Burge. That was the second 20-point increase in five months and prevented borrowers in the lowest credit tier from qualifying for 100 percent loans.”

“NovaStar recently began scoring borrowers based on the amount of time in their current job, length of time at their current residence and debt-to-income ratio to weed out those most likely to default.”

“‘We anticipate somewhere between 12 percent and 15 percent of our loans will be affected,’ Burge said. ‘But we feel that’s the right loans to lose if they won’t be with us a year from now anyway.’”

“New Century Mortgage Corp. is requiring first-time buyers to have three active credit lines or utility accounts in good standing, and rental payments don’t count. ‘I used to be able to count rental payments as a trade line, but we have cut that out,’ said Marcia Messer, San Antonio account executive for the Irvine, Calif.-based subprime lender. ‘We’ve really cracked down on first-time home buyers.’”

“Most lenders also are requiring commissioned workers, such as car sales staff and real estate agents, to show greater proof of cash flow via bank records before approving mortgages with limited income documentation, called alternative A, no-documentation or stated-income loans.”

“‘It’s no longer liar’s poker on those stated-income loans,’ underwriter Timpte said.”

“Industry consolidation is likely to continue. The owners of Option One Mortgage Corp. and Argent Mortgage, which make loans in San Antonio, are actively seeking buyers.”

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