The Housing Bubble

The Santa Cruz Sentinel reports from California. “There’s been a notable jump in the number of home foreclosures in the county. ‘I have clients who are on the road to foreclosure, and nothing’s going to stop that train,’ said Pamela Simmons, a Soquel attorney with a specialty in mortgage lending law who works statewide. She estimated that 20 to 30 of her 150 clients in mortgage trouble are from Santa Cruz County.”

“Foreclosure sales in 2007 have more than tripled from the same period a year ago, from 11 to 41. Compare that to the number of single-family homes sold last year, an average of 159 per month. The Santa Cruz Record, a legal publication that tracks foreclosures, has expanded to 20 pages, mostly due to foreclosure-related activity.”

“Investors who planned to sell homes got caught as the housing market cooled and they couldn’t find buyers. Home prices are so high, last year’s median was $744,000, that it’s near impossible to rent a house at a price that will cover the mortgage and the property taxes. A three-bedroom, two-bath home might fetch $2,000 a month in rent, not enough for a mortgage payment that tops $4,000.”

“Buyers eager to become homeowners opted for new types of mortgages that put them at risk, such as mortgages offered with initially low rates that increased after a certain period of time. Buyers who focused on the monthly payment without devising a plan to pay higher rates are now in trouble.”

“Simmons gave an example of a farmworker making $15,000 a year who had a loan requiring payments of $60,000 a year.”

“Ronnie Trubek, an agent with 28 years in the business, said she has seen ’short sales,’ where a lender takes less than what is owed to close an escrow.”

“Simmons, who specializes in mortgage lending law, recommends people who are behind on their payments consider whether to quit fighting. ‘I’ve had to have that talk with a lot of clients,’ she said, noting that some feel better once they let their house go.’”

“For those who can’t afford payments, it’s not possible to keep the home, she said. A new loan won’t improve the situation, and the borrower will simply end up paying more fees.”

“Trubek recommends consulting a tax professional because losing a property through foreclosure is ‘a taxable event.”

From USA Today. “Here’s an alarming fact about Sacramento’s housing market: About one of every five existing homes on the market is a ’short sale.’ That means the home is worth less than the value of the mortgage, and the lender is willing to accept less than full repayment of the loan to avoid foreclosure, says Tracey Saizan, president of the Sacramento Association of Realtors.”

“That, in turn, puts pressure on the remaining 80% of sellers, who have equity in their homes, to cut prices. ‘Sellers are having to give concessions and cut prices,’ Saizan says. ‘It’s all about making the house show the best it can and aggressive pricing.’”

The Contra Costa Times. “Homeowners should know that although debt can be forgiven, it’s never forgotten. When a short sale, deed-in-lieu agreement or foreclosure occurs and a residential lender loses money on a loan, the lender will most likely file the loss with the IRS, and the former homeowner may end up owing thousands of dollars in taxable income.”

“‘That’s probably where we see kind of the biggest surprise on the part of our clients,’ said Jackie Pearlman, senior tax research coordinator for H&R Block. ‘Not only are they not aware it existed but are very surprised to understand that it’s income. The concept is really alien to many people.’”

“‘We all know intuitively that if you borrow money you don’t have the income,’ said Bill Purdy, a Soquel-based attorney in Santa Cruz County who represents clients with home lending problems and foreclosures. ‘If you don’t have to pay it back, it can become income.’”

“But if the lender takes a loss selling a property, let’s say $100,000, the company will file with the IRS, and the client will receive a 1099-C for the amount.”

“Purdy said many people try to ignore the problem. ‘The problem is that people do nothing,’ he said. ‘They freeze like deer in headlights.’”

“But none of this matters to the IRS, which knows only that a 1099-C was distributed as taxable income. ‘They will assume it’s taxable until informed otherwise,’ he said. ‘And you don’t want to wait for that notice in the mail.’”

“Adarsh Sangani, director of residential lending for Fremont Bank, said his bank doesn’t issue many 1099-Cs to its customers. ‘Only if a customer doesn’t respond to collection calls, a letter and a collection agency,’ he said.”

“Sangani said homeowners defaulting on mortgages aren’t an issue for the bank. ‘The majority of our loans are done with 20 percent down,’ he said. ‘We’re an A-paper lender. … If we were subprime lenders, there would probably be more.’”

The Denver Post reports from Colorado. “Brian and Selah Davenport were two days away from closing on a townhouse in Parker when their mortgage broker called on Valentine’s Day. Their lender, Las Vegas-based Silver State Financial Services, one of the country’s bigger subprime lenders, had ceased operations. That forced the couple, who were looking for a zero- down loan, to scramble to find another lender and save the purchase.”

“‘I didn’t know a lender could shut down all of a sudden and there would be nothing for you as a consumer,’ said Selah, who hopes to close Friday.”

“Subprime loans accounted for 18 percent of all home mortgages in Colorado, compared with 13.6 percent of all home mortgages in the U.S., according to the Mortgage Bankers Association. At the end of the third quarter, nearly 13 percent of all subprime mortgages in the U.S. and 10.4 percent of subprime mortgages in Colorado were delinquent, according to the association.”

“‘You are starting to see the repercussions of bad decisions,’ said Mike Thomas, managing partner with mortgage provider Hyperion Capital Group in Aurora. ‘These lenders are having to eat these loans that they made on 100 percent financings.’”

“The solvent lenders still serving the market are setting aside large loss reserves and warning mortgage brokers that stricter loan-qualification guidelines are on the way. ‘Their underwriting criteria are tightening and their price is going up,’ said Chris Holbert, president of the Colorado Mortgage Lenders Association.”

“One of the first products expected to disappear are zero- down mortgages, known as 80-20s, made without verification of income to borrowers with impaired credit ratings.”

“Tim McDonald, who oversees subprime lending for a 10-state region on behalf of Wells Fargo, said most in the industry understood a day of reckoning was coming. But what has surprised him is how quickly some of the more reckless lenders have been forced out of business.”

“‘What is going to happen is that 25 percent to 30 percent of the subprime market is gone,’ he said. Borrowers who took out riskier adjustable-rate and option ARM loans on spoken assurances that they could easily refinance in a year or two also need to be careful. That’s because many of the mortgage brokers and lenders who made those promises may not be around.”

The Pueblo Chieftain from Colorado. “So why does Pueblo have so many foreclosures? Pueblo County has the seventh highest foreclosure rate in Colorado, according to recent state statistics, and Colorado itself leads the nation in people starting to lose, or losing, their homes to foreclosure.”

“And, gauging from January’s foreclosure filings and the comments of Pueblo experts, this year is going to have even more. ‘I think it’s going to get worse before it gets better,’ said Judith Lopez, head of the economic crimes unit at the Pueblo District Attorney’s office.”

“Rita Godfrey, a loan education specialist at Neighborworks of Pueblo, works with people facing foreclosure and said many of them had the adjustable-rate loans. ‘Two years ago the interest rates were really low,’ she said. ‘Since it was at a bottom, the only way rates were going to go is pretty much up. People are starting to realize their mortgage payments are increasing more than $100 a month.’”

“Some of the foreclosure problem has been driven by fraud, misleading loan officers and complicit real state agents and appraisers. ‘We still see it happening, to a degree,’ said Pat Flanigan, supervisor of residential appraisals at the Pueblo County Assessor’s office.”

“Even without outright fraud, there is a lot of pressure on real estate professionals to find a way, any way, for someone who wants a home to buy one. Local appraiser Ivor Hill said there is no other way to explain why foreclosures are increasing when interest rates are still fairly low.”

“‘You have one or two real estate agents, you have a loan officer and an underwriter for a lender, you have a buyer and a seller, and all those people are dependent on that (house) sale closing to get paid,’ he said.”

“Kevin McCarthy of U.S. Bank said many buyers who used adjustable-rate loans also were borrowing as much as 100 percent of the cost of the home, plus other expenses. The cumulative effect is that the buyer has little or no equity, McCarthy said, little incentive to save the home and a huge-and-growing amount of money to pay off.”

“‘Anytime you borrow too much money it’s harder to pay it back,’ he said.”

“Mortgage broker Sean McCarthy (no relation to Kevin) said part of the problem is that lenders set their lending requirements much too loosely during the last few years. ‘You have a bit of a perfect storm,’ McCarthy said. The industry is learning its lesson now, he said, but it will be a painful one, both for buyers and the lenders who lose money on each foreclosure.”

“‘The market is healing itself,’ McCarthy said. ‘But it takes a year or two of bloodletting.’”

Newszap.com reports from Arizona. “A report released earlier this month showing area real estate resale numbers at their lowest hits close to home for Pinal County resident Brian Schumann. He lives in the northern portion of Pinal County, just outside of Queen Creek and has had his house on the market since May 2006.”

“‘It wasn’t working with a Realtor. We had dropped the price so much,’ he said.” “The home is now on the market, for sale by owner, but there has not been too much interest shown. ‘We have some people call,’ Mr. Schumann said. ‘Sometimes investors call, they want to know if that’s our lowest price.’ He is not alone.”

“Pinal County’s total home sale transactions reached 6,115 in 2005. The 2006 total dropped to 3,860. The median price for homes in Pinal County decreased as well; from $220,000 in the last quarter of 2005 down to $191,500 in 2006.”

“‘Each month has been a little bit lower,’ said Jay Butler, director of Realty Studies. ‘(It has been) progressively going down from a year ago. Pinal (County) was such an aggressive market, it would be expected to come down,’ Mr. Butler said.”

“Real estate agent Bill Smith has experienced the downturn first hand. He works in the Queen Creek and Pinal County area and said the challenges for those looking to sell are many. ‘I think a lot of it is that people who built in 2004-05, they may owe what the house is going to sell for right now,’ he said. ‘The market’s down right now and Pinal County has been hit.’”

“Besides not seeing the big profits from years ago, Pinal County sellers must compete with builders who can offer new homes with multiple incentives. ‘They’re still building new homes,’ Mr. Smith said. ‘Some of them are considerably less than the same homes they built last year.’”

“‘I’m seeing some of the properties on the market as long as a year,’ said broker Bob Russell. He said the competition with builders is immense and has seen price reductions up to $90,000 with $40,000 in incentive packages.”

“‘It’s tough. People unrealistically are thinking their house is worth more than it is because they’re personally involved with it,’ he said.”

“Mr. Smith feels home sale prices in Pinal County have gotten as low as they can and also sees a rebound coming soon. His advice for now is to stick it out. ‘Stay in it until 2008, because the market already is starting to show life,’ he said.”

“Mr. Butler is not so sure another boom is in on the horizon. He said the key aspect to the first housing explosion in the area had to do with a high number of investors looking for inexpensive properties. Those investors have since left the area, he said.”

“‘Pinal County was sold on affordability,’ said Mr. Butler, adding the prices steadily increased, taking away one of the major incentives to buy in the area. ‘You add to it, the not fully developed infrastructure … that just builds more issues for the housing market to deal with.’”

The Hillsdale Daily News reports from Michigan. “Since 1994, sheriff’s foreclosure deeds have been rising steadily. In 2006, 194 sheriff’s deeds were filed and only 14 individual owners redeemed their properties. In the month of January 2007 alone, 25 sheriff’s deeds were filed. Three of the houses to be auctioned Tuesday are located in Hillsdale County.”

“‘We’re seeing just the tip of the iceberg, with the foreclosures (on record),’ said (broker) Don Helton. ‘Those sheriff’s deeds reflect just the foreclosures that are completed. There are a lot more people out there — where the (final) letter could come any day.’”

The Herald Times from Michigan. “According to Lesa Jarski, who serves as secretary/treasurer of the Water Wonderland Board of Realtors MLS Board, the 338 Otsego County homes sold in all of 2006 numbered 53 fewer than the 391 sold in 2005.”

“While the number of homes sold and total sales volumes were down last year, a 13-percent drop from the previous year, Jarski said the fact waterfront home sales were down 33 percent in 2006 indicates home sales of primary residences were not that bad. ‘Secondary homes have taken a hit and the waterfront homes which are selling are the more expensive ones.’”

“Overall sales volume in 2006 was down by approximately $7 million from the previous year, when a home was on the market an average of 164 days. Jarski said the 2006 average, 152 days on the market, can be somewhat deceiving when compared to 2005. ‘This doesn’t take into account the houses that had been listed two or three different times.’”

“‘There always seems to be a lot of peaks and valleys in real estate and while you could look at the 1990s in the county as being a kind of boom in the market, I think we’re holding our own,’ Jarski said.”

The Toledo Blade from Ohio. “Home sale prices dropped 7 percent last year in the Toledo area, twice as much as the decline nationwide, and they are lower than they were three years ago, a new study shows.”

“The local drop seems to run counter to local real estate experts’ statements that the market seldom goes up or down by much.”

“Still, local agents are optimistic. ‘We’re trying to keep consumer confidence and motivation up,’ said Ray Henderson, president of the local Realtors’ group.”

“Selling prices in Ohio dropped 10 percent from the end of 2005 to the end of 2006, to $263,400. They were down in Michigan by 7 percent to $177,600. Both prices were down significantly from 2004. Allen Green, president-elect for the local trade group, said prices sagged last year because more properties on the market as houses waited longer for buyers.”

The Cincinnati Enquirer. “It was not the bursting of a bubble, but the selling price of existing homes did more poorly in the Tristate last year than all but 18 of the nation’s 149 biggest markets. Ohio was a big reason for the drop in the Midwest. Of the 19 worst-performing markets in median home-value changes, seven were in Ohio.”

“‘It’s been a buyers’ market,’ said Don Freels, CEO of the Ohio Association of Realtors. ‘They’re submitting lower bids and, in some cases, they’re getting them. It tends to drive prices down.’”

“Real estate professionals in the region say that record home sales in 2005 and peaking resale prices made it difficult for the industry to shine in 2006. ‘You’re coming off a record year when interest rates were at a 40-year low,’ Freels said. ‘People were bidding with each other for the same home.’”

“Steve and Jenny French learned firsthand how cold Cincinnati’s real estate waters were in 2006. Their two-story, three-bedroom house on trendy Conroy Street in Fairview Heights was on the market most of the year, but they couldn’t find anyone willing to pay their $199,000 asking price.”

“‘We had plenty of window-shoppers and people who said they were serious,’ said Steve French, ‘but in the end, when I followed up with them, they said they wanted to buy a new house and not have to do anything with it.’”

“Conroy Street has several newer homes that were part of the Over-the-Rhine Tour of Homes in 2004. French’s house has a two-car garage, an extra lot and a panoramic view of downtown Cincinnati but still awaits a new owner.”

“‘Existing homes suffered badly in 2006,’ French said. ‘We felt the house was fairly priced based on the square footage and number of bedrooms. We even offered a lease-to-own option.’”

The Pioneer Press from Minnesota. “In an unusual about-face, a Prior Lake woman at the center of an ongoing federal investigation into mortgage fraud will bare her soul in an upcoming issue of Minnesota Realtor magazine.”

“Jill M. Lehn, who pleaded guilty to one count of wire fraud and one count of money laundering in December, tells all in a four-page article she wrote for the magazine due out March 1. The article details her misdeeds while working as a closing agent at First Advantage Title Co.’s Burnsville office, which has since closed. ‘It’s a very hard lesson,’ Lehn told the Pioneer Press.”

“Lehn has admitted to preparing fraudulent documents in more than 60 real estate transactions between December 2004 and August 2006 where home values had been inflated. Lehn said she had nothing to do with inflating the home values, but was responsible for dispersing some $3 million in extra money concealed from lenders, by cutting checks to buyers and sellers.”

“According to her plea agreement, the buyers knew in each case that they were signing fraudulent documents she had prepared, in order to get the pay out.”

“”Lehn said she clearly recalls the first instance, about three years ago. A particular loan officer requested a favor, she said, to get a homebuyer extra cash back to improve the property. ‘It’s something I did as a favor to people that has come back to bite me in ways I never imagined,’ Lehn said. ‘I foolishly said yes once and opened up that pathway.’”

“One of Lehn’s clients, Isadore Stewart, a real estate investor who lives in Bloomington, has also pleaded guilty in the scheme. Stewart pleaded guilty to one count of wire fraud in relation to three properties he purchased at inflated prices last year, including one house in St. Paul’s Frogtown neighborhood.”

“Phillip Resnick, the Minneapolis attorney representing Stewart, described described the ongoing probe as wide and ‘pretty extensive.’ ‘[Lehn's] got dozens, if not hundreds more than just him,’ Resnick said. ‘My sense is that it goes beyond just her. That there are people that are higher up than she is.’”

The Press Herald reports from Maine. “A mortgage broker recently left a message on Jennifer Richardson’s home answering machine suggesting it was time to refinance again. This time, she didn’t call back. Since she bought her one-level ranch in Lewiston six years ago for $73,000, she has refinanced five times and has incurred $58,000 in fees and penalties.”

“She said she now understands that brokers sometimes give people advice that is not in their best interest. ‘I have been misled and taken advantage of,’ said Richardson.”

“Since the housing market began to decline last year and the number of defaults has risen, investors have begun to lose interest in risky loans. The industry has begun rapidly tightening credit standards.”

“Several states, including Massachusetts, Rhode Island, North Carolina, New Mexico and Ohio, have recently imposed ‘onerous’ new restrictions on loans, and that has also hurt the subprime market, said Jim Demers, president of the New England Financial Services Association. He said the Maine Legislature has to take a ‘balanced’ approach so that lenders don’t abandon the subprime market.”

“‘Your highest risk people,’ he said, ‘are going to find less credit options available because lenders won’t make those loans.’”

The Concord Monitor from New Hampshire. “A cooling real estate market, rising energy prices and stagnant wages have pushed more homeowners into foreclosure in the past year. The number of foreclosures nearly doubled last year in Merrimack County, jumping from 56 in 2005 to 100 in 2006, according to Merrimack County Register of Deeds Kathi Guay.”

“The numbers aren’t looking too good so far this year either, she said. As of mid-February, 29 foreclosures had already been recorded in the county. (In all of 2004, just 32 foreclosures were recorded.)”

“Adjustable rate mortgages with a fixed payment for the first two years looked attractive when the real estate market was still booming and interest rates were low. But now that those fixed rates are ending.”

The Taunton Gazette from Massachusetts. “Have we or have we not hit bottom? That continues to be the real estate question of the hour. Asked to predict when the market might hit bottom, the symbolic point when sellers’ asking prices have fully adjusted to market conditions and begin to rise again, (broker) Gail Carter refused to speculate. ‘Oh boy, I have no idea,’ said Carter, in Assonet.”

“Massachusetts Association of Realtors president Doug Azarian said regardless of the drop-off in sales and selling prices last year things could have been worse. 2006, he said, turned out to be the third best year for sales recorded by MAR.”

“But the record sales pace of 2001 to 2004, he cautioned, should be considered a thing of the past. ‘I suggest that the seller price property to the current market, and not be concerned with what they could have gotten a year ago,’ Azarian said.”

The Connecticut Business News Journal. “When it’s completed, the 310,000-square-foot structure along I-91 in Wallingford will be a showpiece. But in the first weeks of February, workers took down signs trumpeting the future owner of the building; Middletown-based Mortgage Lenders Network (MLN).”

“Even as hardhats braved freezing temperatures, Mortgage Lenders filed for bankruptcy, then revealed its intentions to liquidate.”

“Poor underwriting and risky financial moves have added to the woes of many mortgage lenders, says Allen Puwalski, senior financial analyst at the Center for Financial Research & Analysis in Maryland.”

“‘It’s a combination of a lot of competition in the sub-prime lending space during 2005 and ‘06,’ Puwalski says. ‘They started loosening their underwriting standards - the kinds of loans they were underwriting became dependent on home prices appreciating at a pretty rapid pace. When that stopped, the underwriting issues came back to haunt many of the players.’”

“One former employee, who asked not to be named because he’s still looking for a job, says the company’s problems were evident much earlier. ‘They just played with the numbers - that’s the feeling I got,’ says the worker, who began working at MLN in 2005. One sign of trouble, he says, was that MLN could close only on a very small percentage of the prime mortgage applications he submitted.”

“For homeowners, the failure of firms like Mortgage Lenders Network means it’s going to be that much harder to buy a house if your credit is less than stellar. ‘It’s going to bring some pricing power back to the larger remaining lenders,’ says Puwalski. ‘It’s going to cost more for the sub-prime homeowner to have a mortgage.’”

The Nation News. “An unusual housing crisis is affecting Barbadians in New York, often causing them to lose homes they bought less than two or three years ago. According to mortgage brokers, court officials, elected representatives and real estate agents in the city, Bajans and other West Indians are among the hardest hit.”

“Take the case of a Bajan who was on Cloud 9 in New York two years ago. She had just bought a multiple-dwelling house, a ‘real bargain”, complete with rental apartments, low mortgage payments and a two-bedroom unit into which she moved with her children. ‘It was my way of living the American dream,’ she said recently.”

“Now, that dream may be turning into a nightmare. The adjustable mortgage rate she negotiated with the bank allowed the financial institution to change it in two years, but when that happened the rental income was so low that it hardly made a difference now that the monthly payments have skyrocketed. ‘I am in real danger of losing the property,’ she confided.”

“That story is being heard repeatedly in New York City these days. ‘It’s a real crisis in our community,’ said New York state senator John Sampson of Brooklyn. ‘Real estate agents and some mortgage finance companies are taking advantage of the desire among West Indians to acquire a piece of property.’”

“A city court officer who requested anonymity because he wasn’t authorised to speak on the matter, said that foreclosures were a serious problem in the Caribbean immigrant community. ‘We see them almost every day,’ he said. ‘It’s something that needs attention. It’s at crisis stage. People are losing their life’s investments.’”

The Asbury Park Press from New Jersey. “Homeowners who had been using the rising equity in their homes as the foundation for building wealth couldn’t be too happy with the new quarterly report on home prices in the Shore area.”

“The median selling price for homes in the region that includes Monmouth and Ocean counties fell 4.2 percent in the fourth quarter of last year, according to the National Association of Realtors. That’s the biggest dropoff since 1991.”

“Fourth-quarter numbers compiled by the Otteau Valuation Group for Monmouth and Ocean counties were even worse than those provided by the Realtors association.”

“The numbers shouldn’t have come as any great surprise. The softening of the market had been apparent for months, a fact underscored by the epidemic of ‘For Sale’ spreading throughout many neighborhoods in New Jersey. Many of those signs have faded with age.”

“Has the market bottomed out? Most analysts believe the worst is over, even though the unsold inventory of homes remains high. ‘The positive may well be that people are finally reducing the prices in order to sell their homes, and ultimately that’s going to set the stage for renewed expansion in housing,’ said economist James Hughes at Rutgers University.”

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