The Housing Bubble

The North County Times reports from California. “The nation’s troubled housing and mortgage markets will decline even further before they rebound, a prominent mortgage executive told a gathering of real estate agents at Cal State San Marcos on Friday.”

“Robert A. Camerota, Sr., senior VP and manager of GMAC’s Mortgage group in Coast Mesa, sketched a bleak forecast for the housing industry: falling home prices, increased foreclosures, more failed mortgage companies and increased revelations of mortgage fraud.”

“‘We’re all going to be struggling, struggling more than we are today,’ he said. ‘We’re headed halfway down the mountain, and we’ve got a ways to go.’”

“Camerota, who is also chairman of the California Mortgage Bankers Association, said that guidelines proposed Friday by federal regulators to tighten mortgage lending requirements and reduce problems in the ’subprime’ mortgage market were necessary. But, he added, they would dramatically decrease the number of new mortgage loans issued, as well as mortgages refinanced.”

“Revelations of mortgage fraud, the use of bogus income and tax documents by borrowers to obtain large loans, will increase, Camerota predicted. ‘We need to go to the attorneys general and the district attorneys. We don’t need more laws. We need more enforcement,’ he said.”

“Realtors in attendance noted that the booming real estate market of recent years created a ‘perfect storm’ for problems now surfacing: low interest rates, rising property values and lenient lending standards led to buyers taking on larger homes and bigger mortgages than they could afford.”

The Union Tribune. “Mary Maloney of San Elijo Hills Realty said the problem doesn’t lie with lenders and real estate agents but with consumers who demand more than they can financially manage.”

“‘They say, ‘No (to lower expectations) – supersize me,’ Maloney said. ‘They want to keep up with the Joneses. You can counsel all day, but they want it and if I don’t sell it to them, she will,’ nodding to a fellow agent sitting at her table.”

“Robert Brown, an economics professor at the campus who also analyzes real estate data for the realty group, said the distribution of prices among resale homes indicated increased activity at the lowest end of the price spectrum.”

“He wondered whether the trend signals a more general price decline this year. ‘We’ll have to see what that means,’ Brown said.”

“Under mounting pressure from investors and consumer groups, federal banking regulators yesterday strongly urged lenders to tighten their standards for issuing subprime loans to home buyers.”

“Edward Leamer, director of the UCLA Anderson Forecast, called the guidance a response by Wall Street to spiking foreclosure rates.”

“‘I think people were encouraged to buy homes that they could not afford,’ Leamer said. ‘It is unfortunate that the financial community supported those kinds of acquisitions. In a way, it is greed. I would say it was a desperate search for yield in a low-yield environment.’”

“Zoltan Pozsar, an economist for Moody’s Economy.com, said the guidance was expected by those who closely follow the lending industry. ‘Subprime is perceived as increasingly risky,’ he said. ‘The real risk in the near-term outlook is if we see some big investors getting hurt. That could lead to a lot of fear in financial markets about how big the problem is.’”

“‘Trading could freeze up; that is a very real risk. If trading stops, the funds stop flowing. This week was scary,’ he said. ‘The U.S. is the epicenter of the subprime worry.’”

“G.U. Krueger, an Irvine economist who specializes in housing issues, said loose underwriting standards are a key issue. ‘I think this is happening because some of the subprime loans turned into foreclosures or notices of default very quickly, especially during 2006,’ Krueger said. ‘The standards may have been too loose for some consumers.’”

“According to the DataQuick, lenders sent notices of default, the first step in the foreclosure process, to 37,273 California homeowners during the fourth quarter. In San Diego County, there were 1,621 foreclosures on residences during 2006, compared with 212 in 2005, DataQuick reported.”

“Lennar Corp., San Diego County’s top home builder last year, is asking its framers, plumbers and other contractors to reduce their bills by as much as 20 percent for work under way or already completed or face exclusion from bidding on future jobs for the next six months.”

“The action was compared to extortion by Cees Molenaar and Beth Curran, executive directors, respectively, of the San Diego and Orange County-Inland Empire chapters of the California Professional Association of Specialty Contractors.”

“So far, according to Lennar, most of the builder’s contractors are going along with the requested cuts in invoices. ‘This is a business proposition,’ said Lennar’s southwestern U.S. regional vice president Jeff Roos. ‘For an immediate reduction, you will continue to stay on our bid list. If you’re not interested, we’re happy to pay you.’”

“Construction and real estate layoffs helped push San Diego County’s unemployment rate to its highest point since last July. More significant were the cuts in the real estate industry, continuing a five-month decline. January’s job cutbacks included 2,500 construction workers, 700 real estate workers and 1,100 workers at furniture and home-improvement stores.”

“‘The housing sector is really starting to have an impact on our overall year-to-year job numbers,’ said Alan Gin, economist at the University of San Diego.”

“Gin worried that the real estate downturn is affecting the retail market. From January 2005 to January 2006, 2,500 retail workers lost their jobs, mostly in department stores. ‘When you’ve got fewer people working in construction and fewer people buying homes, you’ve got fewer people shopping in the community, and that can translate to fewer retail jobs,’ Gin said.”

“In January, the state took in about $8 billion in income taxes – $1 billion less than previously forecast. Howard Roth, chief economist for the California Department of Finance, said that part of the drop was due to declines in the money earned by real estate brokers and professionals in related industries.”

“‘The slowdown in the California and national housing sectors is not yet over,’ Roth told a meeting of San Diego’s Chartered Financial Analysts on Thursday. ‘And it has turned out to be worse than was expected.’”

The Sacramento Bee. “Roth said troubles in the housing market are being offset by continued strength in commercial and public-works construction. Nevertheless, he said he’s puzzled that the numbers aren’t weaker.”

“‘Why weren’t more construction workers laid off?’ he asked.”

“The answer could be that the layoffs are just beginning. Chris Thornberg, an economic consultant in Los Angeles, said he thinks the economy will really feel the effect of the housing slowdown this year.”

“‘Housing really hasn’t hit the ropes yet,’ said Thornberg. ‘You’re going to start to see the weakness in construction jobs.’”

“The numbers show Sacramento’s job market already is being affected by the housing market’s downturn. The region lost 2,700 construction jobs in January, despite weather that was conducive to home building, the fifth straight monthly decline.”

Readers suggested inventory as a topic. “How about inventories? I have been expecting them to grow, but in Baltimore, inventories are flat or falling in many areas. Not falling by much, but not growing either. Are sellers a bit gun-shy and are going to hold off as long as they can, or are they just holding out until April and May?”

“It’s taking well over 75 days to sell a home in many areas here (on average), so listing now will sell half the homes by the middle of May. Do sellers realize this, and understand it will be even longer if they’re not reasonable on their price?”

“Inventory is MUCH higher now then this time last year (14800 vs 10600, +~40% higher), but is considerably down from it’s Sept 06 peak of almost 18,000. I suppose it’s unrealistic to see the rate of inventory growth we saw last year repeat, but I’m still anticipating surpassing the Sept peak. Of course, I check my zip codes this afternoon and there’s been a nice bump in listings.”

Another added, “I’m seeing invetories surprisingly flat here too, in Loudoun Co. It *might* be due to the two recent big winter storms though (not being facecious actually). Now that we’re finally getting into more spring-like weather we’ll see what happens.”

“Inventory’s still a little higher than last year at this time, just that it’s starting it’s spring rise a little later than the last couple of years.”

One from the northwest. “Inventories haven’t budged here in Portland Or. or in Boise. I track both on a daily basis and it has been basically flat to slightly down over the last month.”

One looked at the situation of the sellers, “Look at the alternative channels of distribution — Classifieds, FSBOs, Auction Houses, REO departments, and so on. If under water serfs cannot sell to pay off their mortgage and the realtor commission, they are going to try selling on their own for break-even OR give the home back to the lender OR continue serfing.”

One agreed, “Inventory itself is not so significant as must-sell inventory or, at least, really-want-to-sell inventory, consisting of foreclosures, empty houses etc. Both foreclosures and the vacancy rate of houses for sale have increased a lot since last year. On the other hand, some of the inventory last year might have been supplied by sellers who wanted to cash out on the top of the market or simply test the market. We might see less of those this year.”

The Rocky Mountain News. “Mortgage broker Jim Spray said it is easy to tally how many bad loans are in the Denver area. ‘Just look at the 19,000 foreclosures,’ he said.”

“On Wednesday, Spray counseled a woman who was about to lose her home because of an ARM that she could no longer afford. ‘I did something I have never done in 30 years in the business,’ Spray said. ‘I put her on the phone with her minister so they could pray.’”

“Ed Jalowsky, a real estate broker who specializes in selling distressed properties, said that 90 percent of these deals had ARMs, many of which are adjusting upward by thousands of dollars.”

“‘It’s too easy to get into these ARMs. They get you in with these low rates, but in a year or two, you can’t afford them,’ said Jalowsky.”

“Real estate broker Carolyn Sandberg specializes in ’short’ sales for lenders, in which the lender takes less than the mortgage amount in exchange for the house. When homeowners miss payments, some lenders don’t hesitate to play hardball with them, she said.”

“Sara Hays, a broker associate in Greenwood Village, works with Sandberg on short sales. ‘Every single short sale we have done has been with someone with a bad ARM,’ Hays said.”

“She said the problem is that when the lender explains that the monthly payment will be low for only two years, buyers aren’t listening. ‘All they are hearing is that their monthly payment will be $740,’ Hays said. ‘Two years comes around fast.’”

“Hays believes that buyers should only be using about 30 percent of their gross income on their mortgage. Often, buyers meet that ratio when they get the ARM with teaser rates, but the lender doesn’t explain to them that they will be much more financially strapped when the payments rise, she said. ‘And some people shouldn’t be homeowners,’ Hays said.”

“People who buy homes with little or no down payment are at the greatest risk of losing their homes, said Lou Barnes, co-owner of Boulder West Financial Services. If home prices had been rising, the loan type would have far less impact, he said.”

“‘We have had flat to declining prices in the foreclosure belt north and east of Denver,’ Barnes said. ‘Prices today are basically where they were at Christmas 2000.”

“Barnes said other formerly hot real estate markets such as California, Nevada and Florida could be facing the same kind of foreclosure crisis as the Denver area. But it won’t happen overnight, he said.”

“‘One of the best lessons of Colorado for the rest of the country is that our real estate market went flat in 2001, but we did not really start to see the rise in foreclosures until 2003,’ Barnes said. ‘Since 2003, foreclosures have been compounding 30 percent or 40 percent each year.’”

A report from the New York Times. “Federal prosecutors and securities regulators are investigating stock sales and accounting errors at the New Century Financial Corporation, the biggest mortgage company that specializes in lending to people with weak, or subprime, credit, the company disclosed in a corporate filing yesterday.”

“The company also warned that a delay in filing its financials may put vital financing into jeopardy. New Century wrote $33.9 billion in mortgages last year. New Century now appears to be facing a credit crunch similar to the one it encountered in the late 1990s.”

From MarketWatch. “New Century Financial Corp. said late Friday that it’s facing a federal criminal probe and will likely breach a major lending covenant with its financial backers, bringing into question the survival of the second-largest U.S. subprime-mortgage lender.”

“The mortgage lender said it expects that it won’t report at least $1 of net income for the two quarters ended Dec. 31, as stipulated in covenants with its lenders.”

“‘Subprime lenders without deposits depend on their warehouse lines,” said analyst Zack Gast. ‘If New Century’s lenders do not grant the requested waivers, the company is likely to be forced to sell or shut down.’”

“Indeed, New Century warned that if it can’t get waivers or covenant amendments from enough of its financial backers, the company’s auditor, KPMG, will conclude ‘that substantial doubt exists as to the company’s ability to continue as a going concern.’”

The LA Times. “Federal regulators have leveled civil accusations against the No. 2 independent sub-prime lender, Fremont General Corp. of Santa Monica. Fremont disclosed Friday in an SEC filing that the Federal Deposit Insurance Corp. would sanction its bank subsidiary, Brea-based Fremont Investment & Loan, for failing to control the risks inherent in sub-prime lending and in its second major business, commercial real estate construction loans.”

“The company said it had decided to quit sub-prime lending entirely.”

“The FDIC said Fremont failed to make proper allowances for its ‘large volume of poor quality loans’ and operated with inadequate capital. The regulator said Fremont had increased defaults by selling loans with low ‘teaser’ rates without verifying whether borrowers could afford the eventual full payments.”

“Fremont said it expected to agree to a cease-and-desist order from the FDIC that would severely restrict its control over the sub-prime business. It said it would report a loss because of increased provisions for bad loans, but hadn’t yet determined the size of the deficit.”

From Bloomberg. “Fremont plans to report a net loss from continuing operations in the fourth quarter after setting aside more money to buy back loans that defaulted, the company said in a regulatory filing.”

“‘It just shows there was a lack of principles and standards,’ said analyst David Hendler. ‘There was no real major guardian of conservative standards anymore, and that’s a danger to the safety of the market.’”

“Two other California lenders, Impac Mortgage Holdings Inc. and Accredited Home Lenders Holding Co., said today they won’t be able to file their financial reports on time. Shares of both tumbled.”

“Impac found a ‘material weakness’ in its cash-flow reporting, the Irvine, California-based company said today in documents filed with the SEC. Accredited Home, based in San Diego, delayed its report until March 16 because of ’sizable demands upon the company’s management and staff,’ including a recent merger that may cause a writedown.”

From Reuters. “U.S. homeowners who bought using 100 percent financing, and those who took out ‘home equity’ loans against the value of their properties, even though they have good credit ratings, could be the next to cause problems in the U.S. housing market.”

“Many recent home buyers bought through 100 percent financing programs known as ‘piggyback’ loans, which relied on one mortgage for 80 percent of purchase price and other financing for the remaining 20 percent.”

“‘Piggyback loans could be the next skeleton to fall out of the mortgage industry closet,’ said Howard Glaser, an independent mortgage analyst. ‘These 80-20 loans give the borrower the illusion of being able to afford more house than they really have the funds for.”

“From mid-2005 to mid-2006, 29 percent of new mortgages involved no deposit by the purchaser to create some equity in the property, according to the National Association of Realtors. ‘When we went out to visit our clients on the West Coast, this was a prime area of concern,’ said Frederick Cannon, a mortgage industry analyst.”

“Another type of financing which could cause problems in the housing sector is the ‘home equity’ loan, taken out by a homeowner against the net value of the property to finance home improvements or other consumer spending. Home equity lines of credit, or HELOCs, grew from $151 billion to $559 billion from 2000 to 2005, according to the FDIC.”

“In a regulatory filing Thursday, Countrywide said 2.9 percent of its prime home-equity loans were at least 30 days late at the end of 2006, up from 1.6 percent a year earlier and 0.8 percent at the end of 2004.”

“‘Second lien holders and second lien HELOC lenders to prime borrowers are in as much of an ‘at risk’ position as subprime mortgage lenders,’ said said Josh Rosner, a housing analyst. ‘The recognition of their problems is just ahead of us as they will default more slowly.’”

“Lenders must disclose more information about products such as adjustable-rate mortgages to people with poor credit histories and make sure borrowers are able to repay the loans, according to guidelines issued in Washington today by the Fed, the Federal Deposit Insurance Corp., and other U.S. regulators.”

“The intention is ‘to limit risks to both the borrower and the lending institution,’ Federal Reserve Governor Randall Kroszner said in a statement. Borrowers need ‘clear and balanced information on the risks associated with these loans.’”

“Banking regulators expressed concern that lenders are approving adjustable-rate loans without ‘appropriate documentation’ of the borrower’s income, according to today’s guidelines.”

“The Mortgage Bankers Association, a Washington-based trade group, said the recommendations go too far and lender closings show the market is fixing itself.”

“‘A number of firms, which made weaker loans, have been forced out of business simply because the loans didn’t perform as they proposed,’ Doug Duncan, the group’s chief economist, said in an interview. ‘The guidance has the potential of overreaching and constraining credit availability to people who need it.’”

The Boston Globe. “Recently, CEO Michael Geoghegan explained that massive losses in HSBC’s home mortgage lending business were caused by the mistake of ‘going for volume.’ Investors forget that for every ‘bad’ loan in their portfolio, there is a family facing foreclosure on the other end. Indeed, last month Massachusetts broke an all-time record with lenders notifying 2,207 families of impending foreclosure, nearly double this time last year.”

“No doubt much of the bout of pain in mortgage lending is due to the slowdown in real estate sales. But it is not like the slowdown in the real estate market should have surprised anyone, especially mortgage lenders.”

“It is time to re think national credit policies. Leaders should learn at least three lessons from the latest shakeout in the mortgage lending business. First, consumer protection laws not only protect borrowers, but also the economy. Second, it is time to hold middlemen responsible for transferring ill-advised loans from unsuspecting borrowers to unsuspecting investors.”

“Third, waiting will not make this problem go away.”

“The Federal Reserve’s monetary-policy playbook hasn’t become obsolete because of the growing global nature of the U.S. economy, Ben Bernanke said in an address on Friday night.”

“The Fed chairman didn’t address this week’s market turmoil but he did comment on the concerns about the quality of debt in the subprime-lending market, saying the Fed is ‘obviously going to watch it very closely.’”

“‘Globalization has not materially affected the ability of the Federal Reserve to influence financial conditions in the United States nor has it led to significant changes in the process which determines the U.S. inflation rate,’ the central bank chief said.”

“But globalization has made it more difficult to assess domestic economic conditions, Bernanke said. ‘Effective monetary policy making now requires taking into account a diverse set of global influences, many of which are not fully understood,’ Bernanke said. ‘A clear resolution of the question of how global economic conditions affect domestic inflation may continue to elude us,’ he said.”

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