The Housing Bubble

The Sacramento Bee reports from California. “Growing consumer defaults have claimed the first home loan lender in the Sacramento area with the closing of Folsom-based Central Pacific Mortgage. The firm shut its doors last week and dismissed an unknown number of employees, the state Department of Corporations confirmed.”

“‘We know that it’s closed and the next step in the process may be that they voluntarily surrender their license,’ DOC spokesman Andrew Roth said.”

“John Courson, Central Pacific’s 17-year president and CEO, chaired the national trade group for mortgage bankers, the Mortgage Bankers Association, in 2002 and 2003. Currently, he is chairman of the board of the California Housing Finance Agency, the state’s affordable housing bank.”

“Details and impacts of Central Pacific’s demise remain sketchy, and no one from the firm, including Courson, could be reached for comment. ‘I really can’t comment on what happened to those guys. I do know they got involved in (riskier loans),’ said Michael McGee, president of Rancho Cordova-based Winchester McGee Financial.”

“‘I’ll bet that’s not the first one (closure) you’ll see, or the last,’ added Jeff Tarbell, president of Sacramento-based ATM Mortgage Corp. ‘You’re going to see more and more of that.’”

“The Folsom firm’s troubles play out amid a deepening crackdown on home loan lending after years of easy terms that helped fuel the nation’s housing boom. As the housing boom has turned into a slump, several mortgage companies have closed in recent months after secondary market investors forced them to repurchase troubled home loans.”

“Central Pacific, founded in 1977, has gradually grown itself into a national presence. On its Web site, the privately held firm says it originates home loans in 20 states. It remains unclear how those offices and others across California will be affected.”

The San Diego Business Journal. “In recent weeks, a surge in delinquencies and the mandated repurchases of problem loans have forced several lenders to file for bankruptcy. Some of the lenders are reporting heavier than normal losses due to problem credits.”

“‘A number of companies have exited the industry during the fourth quarter, and several more have followed during the first several weeks of 2007. Of those remaining, many are for sale or have recently been acquired,’ said James Konrath, CEO of Accredited Home Lenders Holding Co., on the release of the San Diego-based company’s 2006 financial results.”

“Accredited reported a net loss of $37.8 million in its fourth quarter, compared with a net profit of $43.3 million in the fourth quarter of 2005. It was the largest loss in the company’s 16-year history.”

“While the company attributed half the quarterly loss to higher expenses from its October acquisition of Aames Investment Co., a Los Angeles-based sub-prime lender, it also suffered a big increase in delinquent loans. As of Dec. 31, delinquent loans more than 30 days past due made up 8.26 percent of its $11 billion portfolio, compared with 5.45 percent as of Sept. 30.”

“‘No one, including those of us who follow the company, expected the size of the early payment defaults that they reported,’ said Richard Eckert, a senior research analyst with Irvine-based Roth Capital Partners who covers Accredited Home Lenders.”

“Eckert said he anticipates Accredited will continue posting losses at least through the second quarter and possibly into the third quarter.”

The New York Times. “Even in affluent Orange County, Calif., the growing wealth of executives and brokers in the booming mortgage industry was hard to miss. For Kal Elsayed, a former executive at New Century Financial, driving a red convertible Ferrari to work at a company that provided home loans to people with low incomes and weak credit might have appeared ostentatious, he now acknowledges.”

“‘You just lost touch with reality after a while because that’s just how people were living,’ said Mr. Elsayed, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. ‘We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.’”

“New Century has emerged as a poster child for the lenders that rode that boom to the top and are now in free fall. The company disclosed on Friday that federal prosecutors and securities regulators were investigating stock sales and accounting errors.”

“The latter could jeopardize billions of dollars in financing for the company, which issued $39.4 billion in subprime loans in the first nine months of last year.”

“The three founders of New Century, for example, together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial. They collected millions of dollars more in dividends, salaries, bonuses and perks.”

“It is not known whether the stock sales by the founders are among the sales being examined by federal investigators. Some of the sales occurred on the same day that the executives entered the plans.”

“The founders’ stock also rose in the social circles of southern California, the epicenter of the boom in subprime. Five of the 10 biggest providers of subprime mortgages last year had their headquarters in the region.”

“New Century’s disclosure of the federal investigations on Friday was the most serious in a string of shocks to have rocked the industry in the last three months. Industry officials say they are seeing an exodus of executives and salespeople as companies fold, cut jobs and push out early leaders.”

“‘Everyone has run for the hills,’ said William D. Dallas, whose company, Ownit Mortgage, filed for bankruptcy protection in December after it lost financing from Merrill Lynch and other banks.”

“Many of the problems that have surfaced thus far are not tied to the resetting of rates. Rather, they stem from a sharp and early spike in the default rates among loans issued last year.”

“For example, about 13.8 percent of the loans in a group of mortgages New Century sold to investors in April were behind in payments or in foreclosure by January.”

“For New Century, the early payment defaults pose significant financial problems. In the first nine months of last year, Wall Street banks and investors that it does business with forced it to buy back $469 million in loans it had sold to them, up from $240 million for the same period in 2005.”

“The company was able to sell back about half of those loans at a discount of 26.5 percent. How it handled the remainder, about $227 million, is now under scrutiny.”

“According to accounting rules the company should have valued the loans on its books for what they were worth today, not their previous face value. But it did not.”

“If it had, the company would have seen its earnings fall by about $60 million before taxes, wiping out most of its profit in the third quarter, according to Zach Gast, an analyst at a forensic accounting firm.”

“This is important, because the company’s financing agreements require that it not lose money for any rolling six-month period. On Friday, New Century said it did not expect to make a profit in the six months that ended in December.”

“‘They had losses sitting on their balance sheets,’ Mr. Gast said.”

“‘They walked into a niche industry at a time when everything was lining up perfectly for what they did,’ said W. Scott Simon, a managing director at Pimco Advisors. ‘In 2001, 2002 and 2003 the subprime business was just phenomenally profitable. Home prices kept appreciating and it seemed that no loans ever went bad.’”

A report from the Arizona Republic. “Marilyn Olinger can give you a tour of her house, but it won’t be the kind from a beaming new-home owner. Instead of bragging about the space or crown molding, Olinger sees only flaws: a peeling porch roof, flaking stucco, chipped doors, bowed walls.”

“She contracted for a new home more than a year ago and has spent countless hours calling the builder to get workmanship problems fixed. ‘I have been through hell and back for the last year,’ Olinger said.”

“Cheryl and Joey Gustafson are also fed up. Crushed ductwork when they moved in resulted in enormous electric bills during the hot months. The tile floor in the master bedroom has cracked, and a bowed wall has Cheryl concerned about the foundation.”

“‘We’ve spent no less than 100 hours of effort to repair and make phone calls,’ she said. ‘The stress was horrific. I told myself if I don’t relax, I’m going to kill myself.’”

“The Gustafsons have been reimbursed for repairs, but…calls to the builder left them feeling like they got the runaround or their home was subpar. The Gustafsons paid about $376,000, but ‘as far as I am concerned, these homes are worth substantially less than what we’ve all paid,’ Cheryl said.”

“‘A big piece of crown molding just fell on my head,’ said Eric Barna. ‘I was cooking and closing a cabinet and it just fell. That’s pretty crazy.’”

“Barna said the first night he moved in, he said, the plumbing was clogged up. Then there’s a wavy fence he’d like fixed, walls that aren’t level, scratches in appliances. ‘This has been a long, ongoing thing,’ Barna said. ‘They’ve worked on some stuff. At this point, I don’t think anything else is going to be done.’”

The East Valley Tribune from Arizona. “With once-massive waiting lists dried up and thousands of homes sitting empty in new subdivisions, Valley builders are trying to jump start sales by offering hefty financial perks to real estate agents.”

“The market turned, inventories shot up dramatically and homes began sitting on the market longer. It’s a cyclical process, said John Fioramonti, managing director of real estate research firm Hanley Wood’s Valley office. When the market is hot, builders don’t offer commissions or incentives, he said.”

“But when the market turned sour in 2006, they began giving 6 percent to 10 percent commissions, Fioramonti said. ‘That’s outrageously high to try to mend some fences,’ he said.”

“From a marketing standpoint, reaching out to real estate agents is more cost effective because they have instant pools of buyers to tap, Fioramonti said. Valley builders need to rid themselves of an estimated 12,000 to 14,000 homes.”

“It’s not just the builders who are offering incentives. Homeowners trying to sell existing properties are too, said Frank Dickens, president of the Arizona Association of Realtors.”

“Dickens isn’t convinced, though, that offering incentives to agents is a major advantage for sellers. ‘A good broker will do what’s best for a certain consumer,’ he said. ‘The last thing they look at is what the compensation package is.’”

The Review Journal from Nevada. “Home appreciation in Las Vegas has slowed dramatically from the torrid pace of two years ago and turned negative in some areas of the valley last year, a local housing market analyst said.”

“With nearly 18,000 homes for sale on the MLS and sales of existing homes down 24.1 percent in 2006, prices started to slide at the end of the year. The Greater Las Vegas Association of Realtors reported a 2.6 percent decline of median home prices in January to $302,000.”

“Kurt Lehman of Realty One Group found it ‘hilarious’ that consultant Steve Bottfeld predicted positive home price appreciation at the Crystal Ball 2007 housing seminar in February. Lehman said prices have to come down after the spikes of the past few years.”

“‘Simple economics says that 25 (percent) to 35 percent appreciation in housing asking prices doesn’t work when wages and salaries only go up maybe 3 percent,’ he said. ‘It’s an oversupply and an inability-to-buy thing. The market cannot bear these prices.’”

“The percentage of people who could afford a median priced home in Las Vegas dropped from 79 percent in 1999 to 14 percent in 2006, John Restrepo of Restrepo Consulting Group said. ‘We’ve had (price) adjustments here, but it’s not making homes any more affordable,’ he said.”

“Lenders were bending income-to-expense ratios three and four years ago to get people into 100 percent mortgages, literally more house than they could afford, Lehman said. Now Las Vegas has the second-highest foreclosure rate in the nation, he noted.”

“A local homeowner who asked not to be identified put his home on the market last year at $430,000 when comparable homes in his northwest neighborhood (ZIP code 89131) were $450,000. It sat for months. He kept lowering the price and recently sold it for $350,000.”

“‘I still do not know why this home did not sell in the $400,000 range,’ he said. ‘I have just about every conceivable upgrade in this house.’”

“Bob Hamrick, CEO of Coldwell Banker Premier Realty, said what happened in Las Vegas is not that properties are worth $100,000 less than they were a year or two ago, but they may not have been priced accurately then.”

The Las Vegas Business Press. “The modest increase in taxable sales last year indicates that, relative to Nevada’s population growth, discretionary spending is declining, an analyst said Thursday.”

“‘We’ve seen the per capita spending, in the aggregate, in decline,’ said Brian Gordon, a principal with Las Vegas consulting firm Applied Analysis.”

“The latest figures indicate that taxable sales fell in seven counties last December compared to the same month in 2005. They were Carson City, and Churchill, Clark, Lincoln, Lyon, Storey and White Pine counties.”

“Gordon said this decline in one of the state’s largest sectors proves consumers have been less eager to open their wallets compared to 2004 and 2005. The state is still rebounding from a housing market that did an about-face starting in late 2005.”

“‘We’re in the process of the real estate market finding a new equilibrium,’ he said. Many consumers have money tied up in real estate they can’t offload because of softening demand, Gordon said. He speculated others may be playing it safe now that their net worth is leveling out or declining.”

Some housing bubble news from Wall Street and Washington. “As troubles continue to roil the market for subprime mortgages, New Century Financial Corp. says that it’s technically in default with several lenders and is under investigation by federal regulators. Analysts cautioned it could spell the end of the Irvine, Calif.-based company, the second-largest player in the subprime industry.”

“‘New disclosure about additional shareholder lawsuits and a criminal investigation by the U.S. Attorney’s office likely reduces the likelihood that a rescue-buyer/liquidity provider will step in to bail the company out,’ Bear Stearns analysts wrote Monday morning.”

From Reuters. “New Century Financial Inc. shares fell more than 60 percent in early Monday trading. ‘We think there is further downside risk, possibly to $0,’ wrote Merrill Lynch & Co. analyst Kenneth Bruce. ‘Bankruptcy seems a likely course of action.’”

“New Century said its survival may be in question if it doesn’t obtain waivers from lenders. It said it is not in compliance with 16 financing agreements totaling $17.4 billion because it didn’t file its annual report on time. It also said just six of 11 lenders have waived a requirement that it be profitable for two straight quarters.”

From MarketWatch. “‘New Century is more likely to enter the death spiral we had feared, as filing delays, financial difficulties, likely restricted liquidity and regulatory/criminal investigations could conspire to limit its options outside of bankruptcy,’ Merrill Lynch analysts wrote early Monday.”

“Analysts at Stifel Nicolaus cut their ratings on shares of several mortgage lenders Monday as more bad news hit the troubled market for subprime mortgages. Aside from New Century’s woes, Fremont General Corp.’s stock plunged after the company said it plans to sell its subprime lending business after it received a proposed cease-and-desist order from the Federal Deposit Insurance Corporation.”

“‘Despite valuations that are well below book value, we see increasing evidence that this industry is now in a downward spiral whereby each negative development fuels additional deterioration in key fundamentals including origination volume, pricing, credit — and most importantly — funding,’ Stifel Nicolaus said.”

“‘With housing prices now falling nationwide … and almost daily evidence that the industry stressed underwriting too far, just how high delinquencies and losses go is very much unknown at this point, largely due to increased prospects for falling housing prices,’ the analysts wrote.”

“‘As credit deteriorates further, we expect underwriting to tighten even more and secondary market demand to remain volatile,’ they added.”

“Countrywide Financial Corp. fell 3% after Lehman Brothers downgraded the mortgage giant to equal weight from overweight on jitters in the subprime mortgage business. ‘Even the best operators can get pulled under by a strong undertow,’ analyst Bruce Harting said.”

From Bloomberg. “‘The rapid high-profile demise of the pure-play subprime lending industry has caused major, real dislocations in the market that should negatively impact the prime-oriented lenders’ earnings over the course of 2007,’ Harting wrote today. ‘Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages.’”

“Shares of Fremont General Corp. fell 24% at the open Monday, plunging as the company said that it intends to sell its subprime residential real-estate lending business. In a statement late Friday, Santa Monica, Calif.-based Fremont General said that the decision was ‘prompted by the company’s receipt on Feb. 27 of a proposed cease-and-desist order’ from the Federal Deposit Insurance Corp.”

National Mortgage News. “Traders and other mortgage executives tell us that secondary market bidders are offering between 15 and 25 cents on the dollar for delinquent HELOCs. We’ve heard the bid prices from three trusted sources. One investment banker said a large California lender wanted 65 cents for a recent pool of bad seconds. Needless to say, the sale never went through.”

“On Thursday one wholesale executive in Southern California told us that his two largest non-prime competitors had just raised their rates by 45 basis points each. This, of course, means that rates are going up for consumers.”

“Who gets hurt? The subprime consumer. Can anything be done about this? No. Some lenders believe credit impaired borrowers have benefited from great rates the past three years. And now, the gravy train is over.”

The Post & Courier. “The Federal Deposit Insurance Corp. has a warning for banks and thrift institutions: The recent slowdown in residential construction could reduce the demand for mortgages and commercial real estate and construction loans, all important factors in loan growth in recent years.”

“While employment and income trends are positive in almost every region, the effects of the slowdown in residential construction are ‘clearly visible,’ said FDIC Chairman Sheila Bair.”

The Register Star. “Matthew Bortoli, president of Quality Metal Finishing Co. in Byron, said there is unease in the manufacturing community.”

“‘There is a little weakness in future orders,’ said Bortoli, whose company employs about 250 workers who make zinc die cast component parts and decorative chrome plating. ‘It seems to be pretty widespread. A lot of it has to do with the slowdown in the housing market.’”

“When asked if he believed it was a cyclical dip or a sign of a larger slowdown in the economy, Bortoli said ‘you always have to worry.’”

“Service industries in the U.S. expanded at the slowest pace in almost four years last month, suggesting the housing slump may be filtering through to the broader economy.” “The Institute for Supply Management’s index of non- manufacturing businesses including banking, construction and retailing fell to 54.3 in February from 59 in January, the Tempe, Arizona-based group said.”

“Homeowners are finding it more difficult to use their equity as a source of cash after the yearlong housing slowdown put an end to rising property prices in many regions. ‘The housing market is unambiguously having a broader impact on the economy, including on the services sector,’ said economist Richard DeKaser.”

The LA Times. “As more Americans default on home loans, federal regulators and members of Congress are looking to place new restrictions on mortgages for people with shaky credit, a move that could make it harder for many people to buy homes or refinance their mortgages.”

“‘We think additional guidance is necessary to address abuses in the market,’ said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency. ‘But we also want to be careful not to impose a regulatory standard that goes too far’ and freezes out worthy borrowers, he added.”

“‘The challenge for regulators is to firm up standards without cutting off credit to the people who need it most–especially first-time home buyers and minority borrowers,’ said Howard Glaser, a mortgage industry consultant and former U.S. housing official. ‘Striking that balance could prove elusive.’”

“The politicians are not likely to stop anytime soon. Victims of predatory lending can tell heart-wrenching tales, a reality that was on display at a Senate hearing last month.”

“Delores King, a Chicago retiree, recalled how a telemarketer lured her into a mortgage refinance. At the time, she had a monthly payment of $798. Her new loan, which started out at $832, has since adjusted to $1,488 a month. ‘This is more than my entire monthly income,’ she told lawmakers.”

“‘The danger here is that, in an ultimately ironic fashion, the very people you’re trying to help are the ones you hurt the most,’ said Kurt Pfotenhauer, senior vice president with the Mortgage Bankers Association.”

The Boston Herald reports from Massachusetts. “The Bay State’s battered but slowly reviving residential real estate market is poised to enter its most crucial test in years. The number of homes and condos on the market as the spring season starts is up over last year, according to the MLS Property Information Network.”

“The number of condos for sale is up about 500, to 13,787, while the number of homes on the sales block has risen by about 1,000 to 25,026, MLS reports.”

“Out in the suburbs, Kay O’Brien’s trying to sell a starter colonial in Weymouth, reduced in price from $333,900 to $309,000, among others. ‘We have high hopes,’ O’Brien said.”

The Eagle Tribune. “The Newburyport Daily News reported Friday that the number of foreclosure filings were at the highest level in Massachusetts in the past 20 years.”

“‘In some cases you actually had negative amortization - people going deeper into debt over time, rather than paying off their mortgages,’ Chuck Withee, senior lender at Amesbury’s Provident Bank, told Daily News reporter Nick Pinto.”

“‘People get left without options,’ Withee continued. For example, he noted, there’s the plight of those who took advantage of adjustable rate mortgages: ‘When your mortgage payments suddenly shoot up and you can no longer afford it, and your home isn’t worth what it was when you bought it, what can you do?’”

The Boston Globe. “An explosion in overdue mortgages tailored to home buyers with less-than-sterling credit has driven foreclosure filings to record highs in Massachusetts.”

“Subprime mortgages were lauded for helping more Americans than ever buy homes during the housing boom earlier in the decade. But four years after their popularity took off, the loans are backfiring.”

“In 2006, lenders filed 19,487 foreclosure notices against Massachusetts homeowners, surpassing the record high of 17,000 filings in 1991, during the state’s severe recession.”

“New research by the Federal Reserve Bank of Boston found that while subprime loans make up 12 percent of all mortgages in the state, they accounted for more than two-thirds of foreclosure filings in the third quarter of 2006. Most delinquencies were high-interest subprime loans with adjustable rates, which increase payments as interest rates rise.”

“Homeowners hit the hardest were in the working-class cities of Brockton, Springfield, Lawrence, Fitchburg, and Lowell, the Fed said. The trend is very disturbing, said Richard Walker, Boston Fed vice president. ‘We’re monitoring it closely.’”

“Tammy Amado obtained two mortgages to buy her Dorchester two-family home in January 2005 from a subsidiary of California-based Fremont General Corp. and one of the largest subprime lenders in Massachusetts. Despite having a good job, she fell behind on her payments.”

“‘I’m trying the best that I can,’ said Amado, who found a second job last year.”

“The interest rate on the bigger loan, for $380,000, was initially 6.4 percent and would rise after two years, according to her loan documents; a second, $89,000 loan had a permanent 11 percent rate. Her combined monthly payment: $3,225, the documents show.”

“Amado said she paid her mortgage the first year and landed a tenant for the rental unit, but her budget became strained when her 11-year partner, father of two of her three children, moved out more than a year ago and stopped contributing to the mortgage.”

“A Jan. 6 letter from the company servicing her mortgage said the rate on her mortgage was scheduled to increase March 1 to 9.4 percent, pushing her payment up $755. Based on 2006 income of $45,519 on Amado’s tax documents, her loan ‘probably would’ve become problematic’ even with her partner’s help, said Jason Wheeler, national refinance director at a nonprofit housing advocate. Amado applied to the agency for an affordable, fixed-rate mortgage to refinance her loan and save her house.”

“Michael Fratantoni, chief economist for the Mortgage Bankers Association in Washington, cited specific local conditions for a spike in filings. ‘Massachusetts’ job growth rate is lower than nationally,’ he said, adding that ‘home prices there declined while nationally home prices are still growing.’”

“‘You would expect Massachusetts to look worse, particularly among borrowers with credit problems,’ Fratantoni said.”

“‘Wall Street encouraged these loans to be made, and it looks like homeowners are paying the price, and it looks like investors may pay the price,’ said James Campen, economics professor emeritus at the University of Massachusetts at Boston. Campen said that HR Block Inc.’s subsidiary, Option One Mortgage Corp., joined Fremont as the largest subprime lenders in the state.”

“In the past, home buyers applied to a bank, and either they qualified for a traditional 30-year loan or they were turned down. Those who qualified received a standard interest rate. Today, credit is easier to obtain from a broad range of poorly regulated mortgage companies, but at a price.”

“‘This is a whole class of mortgages that have never been tested in a down market,’ said William Apgar, senior scholar at Harvard University’s Joint Center for Housing Studies. ‘There’s a potential for quite a dramatic increase in foreclosures.’”

“The share of Massachusetts homeowners late on their house payments remains below the national average. But state foreclosures are ‘going up faster’ and the gap is narrowing, said Julia Reade, the Boston Fed senior research associate who prepared the report. ‘Certain neighborhoods are being hit really hard but don’t show up in the aggregate data.’”

“Since 2003, Brockton’s foreclosure filings have tripled. Chief assessor Bernie Siegel partly blames subprime lenders for a 10 percent slide last year in Brockton house prices.”

“First-time home buyers who get subprime loans don’t understand the ramifications of homeownership, he said. ‘It just becomes too much.’”

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