The Housing Bubble

The LA Times reports from California. “ShaRon Lewis is facing a 50% hike in the payment on her adjustable-rate mortgage next month. This week, she discovered she can’t qualify for a new loan with payments that she could afford. And although she’s willing to sell the West Hills home she’s owned for two years, she has been told it won’t fetch what she paid for it. ‘I have to laugh to keep from bawling,’ Lewis said.”

“Her situation is becoming increasingly common across the country amid the implosion of the business of sub-prime mortgages — loans for people with less-than-perfect credit or no credit histories.”

“Even some borrowers already in the pipeline are being rejected. ‘You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,’ said Philip X. Tirone, a senior loan officer with United Pacific Mortgage in West Los Angeles.”

“As recently as two months ago, consumers could qualify for a home-purchase loan or a refinancing even if they had low credit scores and no cash for a down payment. Not anymore. ‘You’re back to real credit standards,’ said Scott Simon, a mortgage expert and money manager at Pacific Investment Management Co. in Newport Beach.”

“Mark Cohen, a mortgage broker in West Los Angeles, said some lenders already were toughening standards for the so-called Alt-A group of borrowers: those with solid credit scores but uneven employment history or inconsistent income. ‘The question is, is it really limited to sub-prime and Alt-A, or will it go up the food chain?’ Cohen asked.”

“As loan standards tighten for sub-prime and Alt-A borrowers, as many as 1.1 million people could be closed out of the housing market this year, said Dale Westhoff, head of mortgage-backed securities research at brokerage Bear, Stearns.”

“That’s the unhappy state in which homeowner Lewis finds herself. Two years ago, when Lewis was looking for a larger house, she easily prequalified for a nearly $700,000 house even though she had no down payment and a spotty credit record. It helped that she was willing to take on two loans to cover 100% of the cost.”

“‘I wasn’t completely aware of the mortgage terms but I knew it would adjust in two years,’ she said. But almost as soon as she and her family moved in, Southern California’s housing market began to cool off, giving Lewis a chill.”

“‘I knew I was in trouble the very next month, and it’s been that way since,’ she said.”

“Although she has shopped around for a new loan, she can’t find one that would enable her to keep her monthly payment at its current level, around $4,000. And because her house hasn’t risen in value, she can’t use equity as a down payment on a refinancing.”

“Starting next month, her payment is slated to jump to more than $6,000, an amount she says she won’t be able to pay. ‘It’s overwhelming,’ said Lewis, who hopes that if she can sell her home within the next few months, she can at least break even after closing costs before she misses too many payments.”

“‘I can completely ruin my credit,’ Lewis said. ‘Or get out the best way I can.’”

The Orange County Business Journal. “The spectacular meltdown of the subprime mortgage sector now has turned into a guessing game. ‘The effects will be felt here on Main Street,’ said Kerry Vandell, director of the Center for Real Estate at the University of California, Irvine. ‘The hits are going to be real. Some of these companies aren’t just going to cut back, they are going to go away.’”

“‘When risk rears its ugly head, someone ends up taking the hit, there’s a real effect,’ Vandell said. ‘People are going to lose their homes because of this.’”

The Union Tribune. “‘Fraud against lenders is a growing problem that hurts everyone throughout the mortgage process, from the lenders themselves through the brokers and appraisers to the consumers and the communities we invest in,’ bankers association Chairman John M. Robbins said at the National Fraud Issues Conference, which ends today at the Omni San Diego Hotel.”

“At the meeting, Robbins and FBI Financial Crimes Section Chief Karen E. Spangenberg signed a memorandum of understanding to issue nationally a new mortgage fraud warning notice. Lenders would distribute notices to borrowers warning that mortgage fraud is punishable by up to 30 years in prison, a fine of $1 million or both.”

“The warning ‘is a reminder that this is not a game you can play anymore and expect not to be punished,’ Robbins said.”

“‘Fraud is at record levels,’ said Richard H. Wohl, president of IndyMac Bank. ‘A lot of us are seeing deals pushed in our shops that never should get through the front door.’”

“Outside the conference, Gary Wong, senior vice president of residential lending for Union Bank of California in San Diego, said large banks in the state don’t have licensing requirements for loan officers.”

“‘My loan officers here do not require licenses to operate,’ Wong said. ‘Obviously, we have our own internal regulations, guided by the federal government. The level of oversight is intense.’”

The Voice of San Diego. “I spoke with Christopher Cagan, a researcher with FirstAmerican who monitors loan resets. He said he doesn’t expect a ‘terrible crash’ from the subprime belt-tightening, but added prices could drop as some people find themselves unable to refinance out of challenging loan terms.”

“The marketplace is doing a good job of regulating subprime mortgage lenders now, Cagan said. He said those ‘Bankrupt? No Problem’ mortgages never quite sat well with him when they were getting popular during the housing boom days.”

“‘To me, bankruptcy is a problem and you should wait a couple of years,’ he said.”

“For homeowners stuck in a loan or thinking about purchasing a home, Cagan said such folks would be wise to rein in some of the free-money ideas of the housing boom and think of their homes as places to live in, not investments, similarly to how a couple of generations past thought of real estate, he said.”

“‘Survive and get through and understand what you’re in,’ he said. ‘Listen to your grandmother and come out fine.’”

Readers suggested a topic on subprime woes. “Is the credit crunching subprime meltdown thingy over OR are we just getting started?”

One replied, “I think we’re just getting started and it is going to get worse before it gets better. A lot worse.”

One looked at the secondary market, “It depends on whether someone with $$$ thinks they can hedge their way around it. They’re probably working on that as we speak. The ‘returns’ are very enticing and institutional investors have high expectations. So many hedge funds depend on this. My guess is a fix will be forthcoming that will ultimately fail too.”

A reply, “Oh, that’s practically a given! It just postpones the pain and makes it worse in the long run by putting it off.”

One brought up who might be affected. “We might explore how far the rings go out from the Sub-prime implosion. Clearly the ‘investors’ who buy the mortgages and package them into mortgage backed securities and sell them are affected. The buyers of the MBS are clearly affected particularly since defunct lenders can’t honor their obligations to re-purchase loans previously sold when they default early.”

“What does the holder of an MBS do when loans default and the originator can’t buy them back? Foreclose on them himself? Does the organizer/packager of the loan pool have an obligation there? How about the pension funds who hold MBS? They are already seriously underfunded in many cases. How about realtors?”

“People who had inadequate income were buying homes. But the lenders are tightening the rules and that will shrink the pool of potential buyers of homes. The surviving lenders will be hit two ways; their originations will decrease with the tighter rules and they are experiencing cash drains as they repurchase the early defaults they sold previously. So even if they somehow survive business ain’t going to be good.”

“I am sure these are just a few of the considerations of what the subprime meltdown means, so let’s discuss it and see what others know about the situation. It truly is the key issue of the day, it seems to me.”

Another asks about a bailout. “Will the ’subprime meltdown’ begin to affect the BIG banks and financial institutions who are involved with securitizations and derivative insurance? If so, are they ‘too big to fail’ and how would they be bailed out? At whose expense? Anyone think there will be some major lawsuits against the ratings agencies?”

The Houston Chronicle. “The easy flow of home loans to borrowers with spotty credit is becoming a memory, as these mortgages become far harder to come by. It used to be that ‘if you breathe and have a Social Security number … you were going to get a house,’ said Mark Cady, executive vice president for Market Street Mortgage.”

“David Starke has experienced the change firsthand. With a credit score below 620 and a recent history of unemployment, he needed a 100 percent financed subprime loan to be able to buy a home.”

“Starke was approved for the loan he wanted late last year, but by the time he decided on a two-bedroom, one-bathroom home near the Heights, his lender said it was no longer offering such loans. His mortgage broker found another lender that would, but warned him that he had to close by Friday, after which the lender will stop offering such loans. Starke closed on Thursday.”

“While he’s found a good-paying job now, and says he needs the tax deductions that come with home ownership, he is still getting over the financial damage caused by two recent stints without a full-time job. ‘I really needed this loan to repair old credit problems,’ Starke said. ‘It will be terrible for people in my situation if they stop making subprime loans.’”

From Reuters. “Countrywide Financial Corp., the largest U.S. mortgage lender, on Friday told its brokers to stop offering borrowers the option of no-money-down home loans, according to a document obtained by Reuters.”

“‘Please get in any deals over 95 LTV (loan-to-value) today!’ Countrywide said late on Friday in an urgent e-mail to brokers. ‘Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12.’”

“The general pullback in credit to riskier borrowers will take a toll on the overall economy, economists at Goldman Sachs Group Inc. said in a research note this week. More cautious lending could cut annual new home purchases by 200,000 units in ‘a relatively conservative scenario,’ the economists wrote.”

“Losses on more than $2.6 billion in loans issued by WMC Mortgage, a Burbank, California-based unit of GE Money Bank, are expected to top 15 percent, the highest projected rate of any bond in the widely watched ABX derivative index of bonds issued in early 2006, a UBS Securities model showed.”

“Thirty-day delinquencies rose to 9.62 percent in February, from less than 2.0 percent six months ago, on WMC’s loans backing one of the 20 bonds in the ABX 06-2 index, according to Morgan Stanley, whose Morgan Stanley ABS Capital I Trust packaged the loans into home equity ABS.”

“WMC issued $21.6 billion in loans last year, making it the ninth-biggest issuer, according to trade publication Inside B&C Lending. In 2003, WMC reportedly originated $8.2 billion. WMC on Friday said it stopped making 100 percent loan-to-value mortgages.”

From Bloomberg. “The nation’s banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, said U.S. Federal Reserve Governor Susan Bies, who has been the Fed’s top banking policy official in her tenure at the U.S. central bank.”

“‘In the housing markets and bubbles that occurred in some areas, to afford housing, people pushed their limit to afford a house,’ Bies said. ‘And in doing so, lenders tried to create products to meet those demands.’”

“Bies said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.”

“‘What’s happening is the front end of this wave of teaser- rate loans that are coming into full pricing,’ Bies said. ‘So what we’re seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning.’”

The St Petersburg Times reports from Florida. “As the housing downturn consumes their livelihood, home builders and Realtors soothe themselves with a steady mantra: The seas are turbulent now, but retiring baby boomers will keep the market afloat. Researchers at the University of Florida suggest they may have a point.”

“That’s the conclusion of a report ‘The Florida Housing Boom’ published this week by UF’s Bureau of Economic and Business Research.”

“A UF survey of real estate professionals released this week by the Bergstrom Center for Real Estate Studies held that prices have already bottomed out. That view isn’t universally shared: The number of homes for sale in the Tampa Bay area, about 40,000, is quadruple the inventory of 2005. Oversupply tends to drive down prices.”

“The bureau’s research economist, David Denslow, predicts that higher home prices will force Florida employers to increase wages. ‘We’ve got to adjust to the fact that Florida is now a higher-cost state,’ he said.”

The Tampa Tribune. “Whether you’re trying to sell your house or contemplating buying a home, there’s one question on everyone’s mind: Has the housing market bottomed out yet?”

“There may be a glimmer of hope, however, according to a study released Thursday by the University of Florida. ‘I expect that for most of Florida, prices are as good as they’re going to get,’ said Wayne Archer, director of the Bergstrom Center for Real Estate Studies, which conducted the report. ‘This is comforting news.’”

“The university surveyed industry professionals, including real estate lawyers, title insurers, financial advisers and real estate scholars. There were 318 respondents.”

“Some analysts and economists are doubtful and were quick to question the report. ‘I see absolutely no scope for rising prices this year,’ said Per Gunnar Berglund, senior economist with Moody’s Economy.com. ‘I think prices have a bit further to go.’”

“The median sales price of existing single-family homes in the Tampa-St. Petersburg-Clearwater area was $214,000 in January, down 7 percent from December and significantly below the real estate market’s $239,900 peak in June, according to data released last month by the Florida Association of Realtors.”

“There were 1,768 sales in January, down 41 percent from a year ago and down 27 percent from December’s sales volume of 2,438. More than 34,000 existing homes are on the market in Hillsborough and Pinellas counties, according to local real estate trade groups.”

“Berglund says inventory levels in the Bay area are more than twice the normal level. It would take more than 16 months to sell all the houses, Berglund said. ‘The ratio of homes on the market has risen way above the six-month supply that is considered equilibrium,’ Berglund said.”

The Bradenton Herald. “A shaky house of cards built with loans to countless borrowers who should have never qualified is about to come crashing down, experts believe. Locally, that could mean that an already stagnating housing market may see even fewer buyers in the future because lenders will be tightening loan guidelines, or in cases like New Century Financial, not writing new loans.”

“Warren Herman, senior lending officer with Premier Mortgage Funding Inc. in Bradenton and Sarasota, believes the subprime fallout will be limited, although his company is suggesting caution for the time being.”

“‘They’re suggesting we hold back on these loans right now and see how the fallout happens,’ Herman said. ‘It will stabilize and it would be an opportunity for banks to make money on people who are recovering. There’s always good that comes out of something that is seemingly bad.’”

“Patrice Yamato, president of the Florida Association of Mortgage Brokers, fears the impact tighter loan guidelines will have on Florida. ‘I’m afraid we’re going to take a lot of people out of the market here in Florida,’ Yamato said. ‘I’m also afraid we’re going to be prevented from helping folks keep their homes who could have been helped through these loan programs.’”

“Although stories abound like the one in a recent Forbes article involving an hourly Target worker who was able to finagle financing on a $696,000 home, some subprime loans can actually help homeowners get out of trouble, Yamato said.”

“‘Let’s say they went delinquent on a mortgage and got into trouble and we’re able to put them in this option ARM for two years until they could get out of trouble,’ Yamato gave as an example. ‘I understand the pre-emptive strike (by lenders) but I think they may actually be causing what they are trying to prevent. We’re not going to be able to help homeowners who are going to need help. I’m afraid for how it’s going to affect our marketplace.’”

“But John Bancroft, editor of Inside Mortgage Finance, says tough medicine is needed to prevent future defaults and foreclosures from subprime loans.”

“‘Certainly, for many borrowers, they’re going to have a more difficult time finding replacement financing,’ Bancroft said. ‘But I’m not sure that’s a bad thing because obviously getting into those types of financing in the first place wasn’t such a great idea for them. I think generally this kind of medicine is good all around.’”

“Florida ranked No. 3 in foreclosures in January, behind California and Texas, with 11,709 new filings. As of Friday, there were 633 properties in Manatee County and 742 in Sarasota County in pre-foreclosure, according to RealtyTrac.”

“Herman said lack of financing availability, coupled with rising property insurance costs and taxes, may put a temporary dent in Florida’s housing market.”

“‘You have a lot of people going out of the state. They can’t afford to stay,’ Herman said. ‘We’ve been through this boom cycle where the fish were jumping in the boat. Now the lenders and Realtors and mortgage brokers actually have to put a line in the water.’”

The Times Union. “WMC Mortgage Corp., a unit of General Electric Co., is shutting down its Jacksonville office and laying off 68 employees.”

“The announcement from the company, which decided to discontinue some of its subprime lending operations, comes as subprime lenders across the country face increasing loan defaults and skittish investors and creditors. Jacksonville, in addition to facing a high foreclosure rate on local loans, has a wide base of processing centers for financial services companies.”

“WMC Mortgage will no longer give loans with no down payment.”

“Wachovia senior economist Mark Vitner said that Jacksonville’s exposure to the contraction being experienced by the mortgage market is greater than average but that he didn’t expect the difficulties experienced by subprime lenders to carry over into the rest of the mortgage industry.”

“‘It’s not driven by a deterioration in credit quality but by fraud,’ he said. Vitner said many subprime borrowers exaggerated incomes to receive loans.”

The Orlando Sentinel. “Condominium owners in the Metropolitan at Lake Eola, a downtown Orlando complex that was converted from an aging hotel, are complaining that they bought into a property rife with problems.”

“A lawsuit filed in state Circuit Court by the Metropolitan at Lake Eola Condominium Association seeks to have the condos’ developer repair everything from the roof to the heating-and-cooling systems.”

“As many as 50 percent of the owners who bought from David Eichenblatt, the Atlanta developer, later resold their properties to others for big profits during the height of the home-buying frenzy, the developer contends. Those higher prices paid by the resale owners may have led them to think their properties were comparable to the new condo-tower units rising all around the Metropolitan in downtown Orlando, Eichenblatt argues.”

The News Press. “For a number of people who tried to buy a house as an investment in 2005, 2007 has become a bad year. For the second time in 30 days, a builder has filed more than a dozen lawsuits against buyers who contracted to buy houses then opted not to close.”

“The problems revolve around a soft housing market and appraisals that are lower than expected because of the number of homes on the market.”

“Real estate experts say it could become common for builders to look to the courts to make up money lost on houses they already have built but are unwanted. ‘I think you’re going to see it more and more,’ real estate attorney Kevin Jursinski said.”

“He said buyers often don’t have much of a remedy if the contract states they can be sued if they don’t close. ‘It’s like playing poker and the other side knows your hand,’ Jursinski said. ‘You can’t bluff.’”

“This week, Advantage Builders of America filed lawsuits against 13 people, four from Southwest Florida, each for more than $15,000 in damages and attorney’s fees. In February, the builders of Sail Harbour, a south Fort Myers development, asked the court to force 29 people to complete payment.”

“Jursinski, who has practiced real estate law for 25 years, said the houses that people bought two years ago as investments have depreciated because the market is flooded. ‘Now they’re walking from their contracts,’ he said. ‘The builders are wanting people to close.’”

“For Mark and Kerry Trenkamp, of Fort Myers, the Cape Coral house they contracted to buy from Advantage Builders in August 2005 was going to be a new home. Then it became an investment. ‘We were kind of looking out there to move,’ said Mark Trenkamp, one of the 13 being sued. ‘Then the market went so bad.’”

“Cape Coral attorney Bill McFarland, who represents Advantage, said the company is just asking for what its contracts state. ‘They can’t stick their heads in the sand and hope it goes away,’ he said.”

“McFarland said many banks are opting out of loans with buyers, which leaves builders developing a house that can’t be funded. That has been happening when houses don’t appraise for the loan amount. ‘Nobody wants to be responsible for the shortfall,’ he said. ‘It’s a mess, and it’s going to get worse as things continue.’”

“In the Sail Harbour cases, investors said they were misled about aspects of the properties and the company took too long to build their units. The company is asking the court to force 29 investors to buy houses on which they didn’t close. Jursinski said the soft market is affecting banks, buyers and builders. ‘It’s a trickle-down effect,’ he said. ‘We’ve got a big, big supply to get rid of.’”

“McFarland said the supply is going to take years to drain. ‘It’s the stuff that was written in ‘05, in ‘06 that is still out there,’ he said. ‘The market fell fast. It’s falling faster than it went up.’”

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