The Housing Bubble

The Denver Post reports from Colorado. “Sales and prices of existing homes in the Denver area continued to slide in February, largely a result of inclement weather and a high foreclosure rate. The number of homes sold last month dropped to 3,090, compared with 3,540 in January, according to statistics released Tuesday by independent real estate analyst Gary Bauer.”

“Competition from new homes also is negatively affecting the existing- home market. Homebuilders are now focusing on first-time buyers, Bauer said. ‘They’re offering some very attractive programs that give a good amount of upgrades,’ he said. ‘Until now, this hasn’t been a factor in existing-home sales.’”

“Another factor contributing to the declining market is the number of people taking the equity out of their homes to pay for vacations or expensive toys, said Larry McGee of The Berkshire Group. ‘If you use your house like an ATM it may be hard to sell it,’ McGee said. ‘Unless prices go up, you’re in trouble. It’s irresponsibility of the public.’”

“Foreclosures in Colorado soared 31 percent last year and have more than doubled since 2003, depressing Front Range home values, a new survey from the Colorado Division of Housing says.”

“‘One foreclosure begets another foreclosure. You have to ride that wave out and try to do what you can to minimize the damage to neighborhoods,’ said Zach Urban, director of housing counseling with Brothers Redevelopment in Denver.”

“There were 28,435 foreclosures recorded last year in the 43 out of 64 counties where the division obtained counts.”

“Unless new homebuyers move to the state in unexpected numbers, the areas hardest hit by foreclosures will probably suffer home-price declines before recovering within 18 months to two years, said Kathi Williams, director of the division.”

“About half of the homes that entered foreclosure in the state last year were lost in public trustee sales. About a third of the foreclosures started were withdrawn. Sandy Hume, Boulder County public trustee, estimates that many homeowners who withdraw their foreclosures still end up selling against their wishes.”

“‘Those withdrawals don’t mean that someone gets to stay in their house,’ Hume said.”

“‘A lot of people who are in problem situations are not subprime borrowers. They are borrowers who weren’t ready for a 2 percent hit on their mortgage rate,’ said Michael Thomas, managing partner with Hyperion Capital Group in Aurora.”

“Thornton homeowner Paul Hernandez blames officials too eager to win new housetops at any cost, even if means destroying the home equity of their current residents. ‘If you allow too much building, you are going to hurt the existing citizens of your community. It doesn’t take a lot of brains to figure that out,’ he said.”

“Homebuilders are expected to add 14,000 homes this year in the metro area, despite an eight-month supply of existing homes available for sale and more than 19,000 foreclosures last year.”

The Rocky Mountain News. “Foreclosures appear to have tempered the prices of homes sold in February in the Denver area, experts said Tuesday. ‘I think the number of foreclosures is definitely starting to impact the prices of homes, especially in some specific neighborhoods,’ such as parts of Aurora, Montbello and Green Valley Ranch, said Gary Bauer, who authors a monthly report based on Metrolist data.”

“Kirby Smith, a Metro Broker, agreed that foreclosures are driving down home prices. The drop in prices indicates that lenders are lowering prices of foreclosed homes for quick sales. ‘I think the biggest thing with foreclosures is that a lot of banks are getting serious about getting rid of this stuff,’ Smith said.”

“‘That is very good news for home buyers, sellers and investors,’ he said. ‘No home seller wants to be competing against overpriced foreclosures. I think it is good for everyone if the banks get rid of them quickly.’”

From KOAA 5/30. “In a county-by-county comparison, Pueblo County ranks 5th highest for per capita foreclosures and El Paso County ranks 8th. Local lender Roy Clennan, President of Freedom Financial Services says it’s not the loans that are the problem. Rather it’s the lenders.”

“‘These loans are good tools, all of the interest only, the adjustable rates they’re good loans and they’re good tools if right people get them,’ says Clennan. ‘If you put people in the wrong loan it can be devastating.’”

“Clennan says at least half of the customers he sees have borrowed more money than they can afford, usually from out-of-state lenders. But with little or no regulation of the mortgage industry in our Colorado, Clennan worries that more people will be taken advantage of.”

“‘Everybody wants you to buy the biggest house they can, because the real estate agent makes more money and the lender makes more money,’ says Clennan.”

From USA Today. “Since the start of the year, more lenders have been shutting their doors to people, just as those homeowners’ interest rates are rising. They’re slashing the ‘Bad credit? No problem’ types of loan programs, known as subprime, that helped fuel the housing boom. And they’re raising the bar for homeowners and first-time buyers to qualify for new loans.”

“The trend accelerated last week after federal regulators proposed stricter guidelines for banks that make subprime ARMs.”

“‘Some of these companies are yanking away six, eight (loan) products at a time, and the reps are just hanging on the phone with their mouths open, saying, ‘What are we going to sell?’ says Dave Tucker, owner of MileHighMortgage.com in Castle Rock, Colo.”

“That’s partly why he can’t help Anita Furakh and Bobby Pervez this time. Tucker helped them buy their first home near Denver two years ago with an ARM that covered 100% of the $195,000 purchase price. The young couple made their payments on time until December, when Pervez traded in his car for a new one. That month, they were late on their mortgage.”

“The timing couldn’t have been worse. They needed to refinance their mortgage before the rate started rising this month. But their home’s value hasn’t gone up, and their credit score has gone down.”

“‘I don’t know what I’m going to do,’ says Furakh, 24. ‘I’m trying to work on my credit, but sometimes you can’t be that good. I’ve got two jobs. I’ve got two kids. Sometimes, I am just late.’”

Some housing bubble news from Wall Street and Washington. “While an uncertain housing market anxiously monitors the spring selling season for hints of a turnaround, home-builder chief executives are keeping a close eye on their costs and the overhang of unsold homes on the market.”

“‘The key to the analysis of where home builders are is the amount of speculative inventory still remaining on the market,’ said Robert Toll, CEO of Toll Brothers Inc. ‘There’s the most speculation right before the market cracks,’ Toll said. Although the shakeout has driven many flippers from the market, ‘it’s remarkable we still have speculative investment in the market even today.’”

“Centex’s CEO Tim Eller agreed that the past few years have seen ‘an unprecedented level of speculative investing in housing,’ which is visible in the number of vacant homes on the market, both new and existing, which he estimated at about 1 million during the current correction.”

“With all the excess liquidity in the housing market and the amount of house-flipping, ‘the consequence was considerable excess.’ He estimated the housing market could be in the middle phases of a three-year correction.”

From MarketWatch. “Shares of subprime mortgage firm Accredited Home Lenders fell almost Wednesday, its second day of big losses as it became the latest target of sellers nervous about borrower defaults.”

“On Wednesday Piper Jaffray analysts expressed some surprise at how far Accreditied and rival New Century Financial had fallen. ‘While we understand that the subprime lenders are in trouble, we are somewhat surprised by the large gap between the current stock prices and last reported book values for the two,’ the analysts said.”

The Orange County Register. “KPMG, New Century’s auditor, believes that the company, the nation’s No. 2 subprime lender, could face insolvency unless it reaches new agreements with firms that lend it money to make loans. And New Century will report a loss for all of 2006 and not just for the fourth quarter, as it previously announced. New Century declined any comment Monday.”

“Impac Mortgage Holdings of Irvine has delayed the filing of its annual report, saying something was wrong with how it treated loan sales and cash payments between its own units on its 2004 and 2005 cash-flow statements.”

From Reuters. “Proposed guidance on subprime mortgages by regulators would likely pinch mortgage production of Countrywide Financial Corp., the company’s chief financial officer said.”

“Sixty percent of Countrywide’s customers seeking hybrid adjustable-rate mortgages, or ARMs, such as ‘2-28′ loans would fail to qualify under the guidance that urges lenders weigh the borrower’s ability to repay at the highest possible rate during the life of the loan, Countrywide CFO Eric Sieracki said.”

“The global junk bond default rate is expected to rise to 2.7 percent by the end of the year, Moody’s Investors Service said on Wednesday.”

“‘Defaults are primed for a potentially sharp rise going forward,’ said David Hamilton, Moody’s director of corporate default research in New York. Recent equity market volatility, weakness in subprime lending and expectations for slower economic growth all indicate weaker credit conditions, he said.”

The Washington Times. “In another sign the mortgage crunch is spreading, Lehman Brothers Holdings Inc. announced it is cutting the ratings of Countrywide Financial Corp., the largest mortgage lender, and other prime lenders as defaults surge.”

“‘Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages,’ analyst Bruce Harting said. ‘The rapidity, breadth and depth of the subprime sector meltdown has been extraordinary, even in the context of an environment in which most industry observers felt that major problems in the subprime space were inevitable and overdue.’”

From KHOU. “There’s a change in the Houston area housing market. You can hardly drive a city block without spotting a home for sale or some new construction, but getting into those homes is now much harder.”

“It’s not because of fewer buyers, but instead fewer banks willing to take the risk. That could mean the recent housing boom might become a bust for some lenders.”

“‘Our clients are not being approved. They’re not being approved,’ complained Realtor T.J. Jackson.”

“The U.S. Department of Treasury reports at least 20 major lenders have stopped offering home loans to borrowers with lower credit ratings. Jackson says, that’s hurting everyone.”

“‘We don’t know what’s to come, everything is based on your credit and I’m not making light of credit. (It) should be good but not everyone can help that,’ she said.”

“‘The 100 percent financing just won’t be a reality for them,’ said Matt Frings.’ Frings is in the mortgage lending business. In the last few weeks, he’s seen minimum credit scores for sub prime borrowers go from 580 to as high as 640. Meaning, if they don’t have at least 640, Frings is being forced to turn down application after application.”

“‘It hurts everybody for them to be, to be not be able to be financed,’ said Frings.”

Houston Real News. “National sub-prime mortgage lender Argent Mortgage is not alone in worrying about its future. The subprime mortgage market is reacting to the realities of financial risk: providing less capital, to less risky clients at higher prices.”

“This particular loan officer closed nearly a dozen loans over the previous six months with Argent. Other loan officers had achieved similar success. The problem for this loan officer is that one of the loans did go delinquent, within the first six months.”

“Argent’s reaction was to pull the relationship with the entire bank.”

The Associated Press. “The number of mortgage fraud cases investigated by the FBI almost doubled the past three years, reflecting a problem that is ‘pervasive and growing,’ the bureau said Wednesday in its annual report on financial crimes.”

“‘The true level of mortgage fraud is largely unknown,’ the agency’s report said.”

“Chicago Federal Reserve President Michael Moskow on Wednesday did not rule out another interest rate increase to tamp down inflation, even after a recent run of soft economic data. ‘It is much too early to say that inflation is no longer a concern,’ Moskow said.”

“The extent of the housing slowdown remains a key question, and recent data show downside risks continue, especially given an overhang of inventory, Moskow said. ‘There also are financial risks associated with the declines in housing markets. Notably, defaults on subprime mortgages could have a larger-than-expected effect on households and lenders,’ he said.”

“Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.”

“He recommended that their holdings might be linked to a ‘measurable public purpose, such as the promotion of affordable housing.’”

“Fannie Mae’s and Freddie Mac’s combined portfolios from the end of 1990 until the end of 2003 have grown more than tenfold, to $1.56 trillion, Bernanke said. Besides buying mortgage-backed securities, the mortgage giants purchase other types of assets for their own investment portfolios, Bernanke said.”

“Yet, less than 30 percent of their current portfolio holdings are oriented toward affordable housing, Bernanke said.”

The Boston Herald reports from Massachusetts. “The number of foreclosures in Boston is escalating dramatically in the new year as scores of the high-interest-rate subprime mortgages go bust. As of the end of February, lenders had filed 301 notices to foreclose against homes and condos in Boston, reports Dorchester housing researcher John Anderson.”

“That’s up from 86 during the same period last year, according to Anderson. If the current pace continues, Boston could wind up with 2,500 to 3,000 foreclosure filings by the end of the year, Anderson estimates. That’s compared to the 1,100 foreclosure filings in Boston last year, the worst in the 10 years he has been tracking these numbers.”

“The trend, though, is not a new one, with foreclosures in the city having begun to rise as far back as 2005, Anderson says. ‘It’s overwhelming,’ Anderson said. ‘Everybody who is all of a sudden concerned; they are two years behind.’”

“The nation’s subprime lending industry is now in full ‘meltdown’ and its woes are far from over, experts warned yesterday. ‘It’s a total meltdown,’ said Ernest Napier, an analyst with Standard & Poor’s. ‘Everyone had anticipated that the music would stop (on these type of high-risk mortgages). Well, it has.’”

“‘I think we’re just seeing the tip of the iceberg,’ said Lee Forker, president of Boston’s New England Research and Management. ‘This is serious stuff. . . . It’s not time to be putting your head in the sand.’”

“Gerard Cassidy, an analyst at RBC Capital Markets, agreed the situation is serious, especially since subprime lending accounted for about 22 percent, or more than $550 billion, of the entire $2.5 trillion mortgage industry in 2006.”

From Reuters. “In Massachusetts, where housing prices notched double-digit growth between 1995 and 2004 in a red-hot market, foreclosure filings surged 70 percent to 19,487 homeowners last year, as single-family home prices fell for the time since 1993.”

“The pace continued in January when the number of homeowners threatened with foreclosure more than doubled in a year to a record — the most for any state in the U.S. Northeast and exceeding the larger New York property market.”

“‘Our latest data indicates that 2007 may be even worse,’ said Jeremy Shapiro, president of ForeclosuresMass.”

“‘As the sellers finally get their head around the idea that they may be taking losses, they are listening more to the brokers,’ said Marc Charney, president of CharneyRealEstate. ‘There’s a real pattern that you’re seeing with people who are foreclosed. They over-leverage themselves by getting an interest only-loan or some sort of an adjustable rate mortgage. They take that money and plan an addition on the house.’”

“‘They start the addition but then realize they want to buy a car, or a sister needs money or something like that. So the work is half done. But you’re out of money and lose your job, or you get divorced and can’t make payments,’ he said.”

The Boston Globe. “The Patrick administration’s chief housing official yesterday called for better regulation of mortgage brokers and the establishment of a $5 million fund to assist the escalating number of Massachusetts homeowners facing the loss of their homes through foreclosure.”

“The majority of the record foreclosure filings in 2006 against Massachusetts homeowners, 19,487, were subprime loans to borrowers with poor credit ratings. ‘This is a serious problem and requires our immediate attention,’ Secretary of Housing and Economic Development, Daniel O’Connell said.”

“The Federal Reserve Bank of Boston found in a new study that adjustable-rate, subprime loans accounted for more than half of 2006 foreclosure filings in state Land Court, though they are only 7 percent of all loans outstanding.”

“While subprime mortgages grew to a $640 billion business last year, regulation of mortgage companies that make them has been patchwork and weak, in contrast to the heavily regulated banks. Housing advocate Bruce Marks, chief executive of a national, nonprofit lender to working people, said regulators were ‘asleep at the switch’ during the housing boom.”

“O’Connell said he would count on commercial banks to help with the state’s rescue effort, but Kevin Kiley, executive vice president of the Massachusetts Bankers Association, said out-of-state mortgage-banking companies that made these loans should be tapped.”

“Loans now in foreclosure ‘never should’ve been originated or funded,’ Kiley said. ‘Why should it be the responsibility of a bank to step in and fund that loan?’”

Bloomberg reports on Florida. “Scott and Kerry Bingham put down a deposit three weeks ago on a new $321,000 house at Heritage Bay, a development set on a golf course about seven miles from the ocean in Naples, Florida. Two days later, they abandoned the deal. Like other prospective new-home purchasers, they were nervous about falling home prices across the country and the prospect their new property could tumble in value.”

“We don’t want to buy if prices are going down,’ said Scott Bingham. ‘At this point, we’re in a holding mode. If we wait, we might be able to get closer to the ocean and get a better deal.’”

“For some, such as Toll Brothers, the lackluster spring market is a surprise. CEO Robert Toll told investors three months ago the market may be poised to rebound. It didn’t happen.”

“‘We’re all a little more disappointed than we were two weeks ago,’ Toll said Feb. 22 on a conference call, responding to questions about February sales. ‘We didn’t have anywhere near the bump up that we usually see.’”

“When the Binghams started their search a year ago in Sarasota, Florida, they were disappointed. That market was full of overpriced houses, said Scott Bingham. They moved their search to Naples, two hours south, and found things weren’t much better.”

“‘I’d say about 70 percent of the homes aren’t priced competitively to sell at this time,’ Bingham said. ‘I don’t want to be the guy who pays too much and then watches the value of my real estate fall through the floor.’”

“As 2007 began, the housing rebound proved elusive. U.S. new- home sales fell in January by the most in 13 years, the Commerce Department said last week. The annualized rate dropped to 937,000, lower than any economist had forecast in a Bloomberg survey and down from the 1.12 million pace in December.”

“The time a completed home stood empty before being sold reached a record 4.8 months, the highest in almost seven years.”

“‘Some people are waiting on the sidelines trying to time the market and buy at the absolute bottom, just like the people who tried to time the top perfectly,’ said Tom Doyle, a real estate agent in Naples.”

“Homebuyers seeking clues about the pace of the recovery should look to buyers like the Binghams. They say they’re in no hurry to sign a contract to buy a home. ‘Prices are going to drop, but it could be nine months before they drop to a level that makes us comfortable about buying,’ said Scott Bingham.”

The Bradenton Herald. “A Cape Coral homebuilder is planning to step in and complete some of the hundreds of homes that were left unfinished in the wake of the Construction Compliance Inc. and Coast Bank loan debacle.”

“In all, 482 borrowers of Bradenton-based Coast Bank were left in limbo after CCI’s announcement. The bank determined about half of those homes amounted to empty lots at the time CCI ran into trouble.”

“‘I talked to Coast and Coast wants to help them (investors) out any way they can,’ said Tom Gillespie, owner of Enchanted Homes. ‘I think they’re taking the steps to do whatever they can do to help these investors finish their projects.’”

“Zanuel Johnson, an account executive at a Tampa mortgage company, said he closed in June on a home in Cape Coral being built by Enchanted Homes. The deal was brokered through Tampa-based American Mortgage Link, a broker involved in many of the CCI home loans.”

“Johnson claims he was promised a 10 percent return on the sale of the home without having to take ownership. Instead, Johnson maintains, he now is obligated through a Coast Bank loan to pay $430,000 for the home, a price he says was inflated by those involved in the investment scheme.”

“‘They told me it was an investment program for people with good credit and assets,’ Johnson said. ‘They would use my credit to build a home and I would get a 10 percent return, because I would never take possession or move into the home.’”

“Johnson said the home is mostly finished but he doubts he’ll be able to sell it and accuses Enchanted Homes and American Mortgage Link of inflating the price. ‘There’s no way they could sell that house for $430,000. They have one listed for $349,900, two houses down from me,’ Johnson said.”

“Gillespie blamed investors for not being more shrewd and failing to consider future risk. ‘If they felt there was crookery or trickery or problems, none of them would have done it,’ Gillespie said. ‘Let’s face it, if the market had stayed strong, we wouldn’t even be talking today.’”

“‘It wasn’t a guarantee. It was an investment. Now that the market hasn’t gone the way everybody thought it was, now they want to come say someone’s done something crooked,’ he said.”

The Herald Tribune. “A subsidiary of Orion Bank has bought a 289-acre tract near Lakewood Ranch that formerly belonged to Michael Tringali for $14.3 million, the exact amount Tringali owed the bank.”

“But the Dog Kennel Road property, which the bank was foreclosing on, is worth far less than what Orion’s Fruitville Acquisition LLC said it paid, and the Naples-based bank will soon have to take a multimillion-dollar hit to its earnings.”

“The reason the property became so overvalued can be traced back to a November 2005 appraisal done by Julian Stokes. Stokes, who has completed at least three faulty appraisals involving properties bought by Tringali, omitted the fact that Tringali’s former partner, Neil Mohamad Husani, bought the land for $8.93 million on Dec. 30, 2004. Husani then sold it to Tringali the next day in a cashless transaction for $18.2 million.”

“‘The appraiser is key to these transactions,’ said Jack McCabe, a real estate industry analyst based in Deerfield Beach. ‘Nothing can happen unless an appraiser comes up with an overinflated price.’”

“‘The reason banks ask appraisers for a three-year sales record is to verify whether rapid transfers have occurred at rapidly escalating prices,’ said Dennis Black, (a) Port Charlotte appraisal instructor. ‘Those standards date back to the end of the savings & loan crisis of the 1980s, and are meant to stem the kind of daisy-chain real estate deals that occurred in the years preceding the crisis.’”

The Tampa Tribune. “Hundreds of Tampa employees of beleaguered subprime lender Fremont Investment & Loan are on paid leave and waiting on a telephone call today to find out whether they still have a job.”

“The company is expected to announce whether it will sell or liquidate the division today, spokesman Dan Hilley said. ‘Employees were told to go home on paid leave indefinitely,’ Hilley said. Among the Tampa employees are loan originators, appraisers and review appraisers.”

“Monday’s staff announcement came after a cease-and-desist order issued last week from the Federal Deposit Insurance Corp. telling Fremont not to write any more subprime loans, according to Hilley and a statement released from Fremont.”

“‘The FDIC obviously went in and found a lot of things they didn’t like,’ said Chris Wolfe, an analyst with Fitch Ratings.”

“Fremont isn’t the only subprime lender in trouble now, and Wolfe said others likely will follow Fremont’s lead. During the recent boom years of the housing market, the list of the nation’s subprime lenders grew, and now that the market is slowing, there is too much competition, Wolfe said.”

“‘It’s like musical chairs,’ he said. ‘Somebody’s got to go.’”

“Too many subprime lenders were lax on lending requirements and too many buyers jumped into unsuitable loans, Wolfe said. ‘The quality of loans deteriorated rapidly in 2006.’”

“Employees of the company’s residential division could find out today they still have job but now work for a new employer, Hilley said. That may be unlikely because numerous other subprime lenders also are looking for buyers.”

“‘I think it’s going to be difficult to find a buyer for a reasonable price,’ Wolfe said. ‘It’s basically a distressed sale at this point. Nobody’s going to give them what it’s probably worth.’”

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