The Housing Bubble

The Mercury News reports from California. “Luis Mapula and his wife weren’t looking to buy a home when Plata was approached at the San Jose Flea Market in April 2004, according to their lawsuit. Three months later, Mapula, whose take-home pay was $3,400 a month, and Luis Plata, a stay-at-home mother of two, bought a half-million dollar home on Burdick Way.”

“Mapula qualified for the loans through a stated-income process, his attorney said. Though Mapula signed the loan application, his lawsuit says he learned later that it falsely claimed he was making almost $100,000 a year from two jobs and receiving an additional $16,800 a year in rental income.”

“The application also said he had $19,700 in the bank, owned a $22,000 Acura and had $28,000 in furniture and personal property. Mapula said none of that was correct.”

“The payments on the loans were more than $3,500 a month, slightly more than Mapula’s after-tax pay. After two years, their primary loan for about $434,000 would become adjustable at six-month intervals. Today, they would be paying a total of $4,306 a month, according to a mortgage expert who reviewed the loans.”

“After a year of struggling with the payments, renting out rooms and borrowing from relatives, the couple in July 2005 sued. The case was settled last year. Vision Quest 21 took back the house and paid off the loans without admitting liability.”

“As the housing market cools, and loans made two years ago are starting to become adjustable, more people are coming forward. ‘I have stacks of cases,’ said Emilio Martinez, a Watsonville-area private investigator who has specialized in real estate cases for the past year.”

The North County Times. “‘There are two words,’ said Earl Bonawitz, who manages a real estate office in Temecula., ‘two scary words that can come out of a salesperson’s mouth: ‘trust me.’ That’s when red flags go up.’”

“Representatives of a Murrieta mortgage brokerage and a related investment company allegedly used that phrase copiously in 2004 and 2005 when investors raised questions about purchases of multiple properties, according to lawsuits filed by two dozen of the investors in January and February.”

“‘Mortgage loan fraud is growing because it can be very lucrative and relatively easy to perpetrate, particularly in geographic areas experiencing rapid appreciation,’ the report stated.”

“Between 2003 and 2006, that condition prevailed in California, and particularly in Riverside County. Local real estate professionals interviewed in recent months said the popularity of risky mortgages, fraud notwithstanding, are partly to blame for a recent wave of foreclosures.”

“Mortgage fraud is a particular problem that tends to show up in the months after the peak of a real estate cycle, late 2004, in the most recent cycle, Bonawitz said.”

“Buyers and sellers can help guard against mortgage fraud and other sorts of malfeasance by checking to see whether the house was appraised correctly, said Joseph Russo, a Murrieta-based appraiser.”

“A booming market and the promise of easy money drew hundreds of rookies into Southwest County’s real estate industry in 2003 and 2004, Russo and others in the industry have said in recent weeks. That’s a recipe for sloppy appraisals, Russo said.”

“One common rookie mistake, Russo said, is to rely on sales of comparable homes that aren’t in the same neighborhood. He recalled reviewing the work of one colleague who justified an appraisal based on a similarly sized home on the opposite side of Interstate 15. At a minimum, that can be a hint to a buyer or a lender that more investigation is needed, he said.”

The Star Net. “Maria Hynum said she’s one of nine church members, including the pastor, who invested in a company formerly known as Pacific Wealth Management of Murrieta, Calif., a firm that made its Tucson pitches at some of the city’s poshest hotels.”

“Hynum, an East Side grandmother who said she lost $393,000. Two of her relatives also lost tens of thousands of dollars each, she said. ‘They said they could help us, that it was based on faith and trust. They knew the vocabulary to use with Christian people,’ said Hynum.”

“Those involved say they’re now heavily in debt, some for as much as $400,000, for investment money they borrowed against their homes or credit cards to buy Iraqi dinars or California properties that now face foreclosure.”

“No criminal charges have been filed against anyone involved. Several agencies are investigating, including the FBI, the Air Force Office of Special Investigations and the Riverside County Attorney’s Office in California. At least four lawsuits have been filed by three California law firms.”

“One attorney says as many as 400 people from across Arizona were victimized, along with hundreds more in California, Arkansas, Puerto Rico, Texas, Oregon and Washington.”

“Collectively, their losses total hundreds of millions of dollars, and many face bankruptcy, ruined credit ratings and the loss of their homes, said the lawyer, Richard Ackerman of Temecula, Calif., who represents numerous California investors and recently met with dozens of Tucson investors.”

“Ackerman says Pacific Wealth in Murrieta had no assets of its own and was essentially a ‘ponzi scheme’ that could be kept afloat only as long as more new investors were persuaded to come aboard.”

“Pastor Randy Winkles said he was one of the 40 or so people at the recent meeting with Ackerman in Tucson. Winkles said he lost about $400,000 through remortgaging his home and that his house payment has jumped from $1,300 to $2,500 a month.”

“Noemi Barrios, a Tucson nurse, said she lost about $80,000 and her mortgage payments jumped from $734 to $1,800 a month. ‘Some of us feel kind of foolish now for believing, but these are not ignorant people who got involved with this. There’s a retired professor, a civic planner, military people, and a lawyer and a doctor,’ she said.”

“But with the company’s Christian pronouncements, no one thought to check up on the firm’s legitimacy, Barrios said.”

The Union Tribune. “In just a few short months, mortgage lenders who specialize in loans to borrowers with tarnished credit records have been in turmoil.”

“A report by the UBS investment firm last month found that the number of loans at least 60 days past due made to Alt A borrowers, those with stronger credit scores than subprime but not as good as top-tier prime borrowers, had doubled in the past 14 months.”

“‘It is a real problem,’ said Rob McNelis, president of One Stop Lending and Realty in Santee. ‘I have several people I’ve talked to in the past six months who for one reason or another were coming to their time to refinance and they probably are not going to be able to. They’re going to have to bite the bullet and pay that higher rate.’”

“McNelis added that some borrowers have failed to clean up their credit during the teaser rate period, or have taken on additional debt, making it harder to refinance. ‘They didn’t use the loan for what it was intended – as a Band-Aid to get them through a situation,’ he said. ‘And those are the people who are really being hit hard right now.’”

“Some lenders are cutting back on 100 percent financing programs for certain loans and boosting credit score requirements, said Michael Moorhouse, executive VP at WinStar Mortgage Partners, a midsize privately held originator of Alt A and prime mortgages.”

“‘What has really happened is they’ve looked at certain risk bands and found maybe 15 percent of their products are generating 50 to 70 percent of their delinquencies,’ Moorhouse said.”

“John Burroughs, a VP with American Mortgage Express in San Diego, noted that lenders are likely to work in inconspicuous ways to stiffen standards.”

“Instead of just looking at the credit score, they’re likely to take a closer look at appraisals. They’ll investigate more thoroughly whether a home is truly owner occupied. They’ll require borrowers to have more money in savings. They’ll look closely at whether the property is a single-family home or a condo.”

“‘There are all kinds of levels of adjustment that can come, in ever so subtle ways,’ Burroughs said. ‘I do think it’s going to be a little rough on the first-time buyer going into a 100 percent.’”

“‘What really happened within the industry is it got caught in what I call a prevalent money cycle, and its underwriting standards were relaxed,’ said John Robbins, chairman of the Mortgage Bankers Association and a longtime San Diego mortgage lender. ‘The credit decisions were truly being made by the borrower and not the lender.’”

Readers suggested a topic on the real estate industry in a down market. “Will RE/Mortgage business behavior improve or deteriorate in a bear market?”

One posts, “I believe it will improve incredibly but not by their doing. The market will dictate that they don’t run amok because there will be so little activity. ‘If 100,000 houses are selling, how will anybody catch me if I fudge the numbers on 2?’ That will change to, ‘with only 1,000 houses selling I better not fudge on anything.’”

“‘If we are making $30 billion in subprime loans who is going to notice my $6 million portion of this madness?’ That will change to, ‘there are so few loans being made that I better do everything by the book.’ Reversion to reality will be ‘the new paradigm’ for the shysters.”

The first reply, “You’re kidding yourself.”

Another reply, “On the other hand, we may see a tendency to screw every last cent out of each individual deal, on the basis that the next deal could be a long way away. I’m thinking there will be some very hungry Realtors and Mortgage Brokers in a few months.”

Another added, “Desperate times bring desperate measures. This, I assure you, is already happening. Fraud and deception will increase in the months ahead, no question about it.”

One saw this, “I had a horrible thought. As the toxic loans solds as MBS explode, the buyers of those securities will be looking to the original sellers to buy them back for not performing. Would some of those original sellers, in desperation, look to any ‘good’ loans that they still have around to see if they have a demand clause, and if so, exercise the demand clause upon people in an last gasp attempt to raise cash?”

The New York Times. “On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting.”

“Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed. The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.”

“‘The regulators are trying to figure out how to work around it, but the Hill is going to be in for one big surprise,’ said Josh Rosner, an expert on mortgage securities. ‘This is far more dramatic than what led to Sarbanes-Oxley,’ he added, referring to the legislation that followed the WorldCom and Enron scandals, ‘both in conflicts and in terms of absolute economic impact.’”

The Arizona Republic. “The Valley’s real estate industry is lending regulators a hand in cracking down on mortgage fraud. Several real estate, escrow and mortgage firms are working not only to educate their own employees but those at other firms on how to detect fraud and what deals to pass on.”

“Barbara McDugald, the Phoenix general counsel for Security Title, made mortgage fraud the subject of the agency’s newsletter in December. ‘We are turning away a lot of deals, but there’s peer pressure in the industry because other firms are turning them away, too,’ McDugald said.”

The Denver Post. “Glenn Puller and Cindy Ingram are on their way to federal prisons for mortgage fraud. At a sentencing hearing last week, Puller received one year and Ingram received two years in prison for their separate roles as straw buyers in a massive mortgage fraud scheme in Aurora.”

“‘I apologize to the lenders,’ Ingram told the court. Puller said the same.”

“I wanted to laugh out loud in the courtroom. Lenders make money lending, even when borrowers never pay it back. The industry runs on loan volume, not loan quality. Mortgage companies sell the loans they make to Wall Street investment banks, which sell them to investors.”

“This is why Puller and Ingram were able to get loans to acquire multiple homes at inflated selling prices of around $600,000 apiece.”

“Among the lenders they defrauded was New Century Financial. New Century’s three founders made more than $40.5 million selling stock from 2004 to 2006, according to a report in The New York Times last week.”

“The founders do not seem punished to me. Meanwhile, the real losers are shareholders who didn’t sell their stock, and homeowners, whose home values rise and fall in a mortgage market with lax underwriting standards.”

“Former federal prosecutor Anthony Accetta, now a Denver-based fraud investigator, has helped shut down several mortgage companies for fraud over the years.”

“‘The guys at the top know exactly what’s going on,’ Accetta said of his experience. ‘They want the lending standards reduced so they can make as many loans and collect as many fees as they can. … They are the ultimate beneficiaries of the crime. And the crime is making false statements to get a mortgage loan.’”

“Another subprime market leader, Countrywide Financial, recently reported that 19 percent of its subprime loans were more than 30 days delinquent. Before news of Countrywide’s widening subprime delinquencies broke, its CEO, Angelo Mozilo, sold $140 million in stock over the past 14 months, The Wall Street Journal reported last week.”

“Mozilo defended a 19 percent delinquency rate. ‘That means 81 percent of these subprime borrowers are making their payments on time,’ he told the Journal. ‘That 81 percent never would have had the opportunity to own a home.’”

“Countrywide also was among lenders Puller and Ingram apologized to in court.”

The Tuscaloosa News reports from Alabama. “While 2007 is set to be a big year for condos, it may also mark the beginning of moderation in what has been an explosively growing market since 2004. (Developer) Bill Lunsford said the market has changed significantly since his company began work on Summit Condominiums, a 108-unit complex along Veterans Memorial Parkway, in 2005.”

“‘The market is not anything like it was when we started that project,’ Lunsford said. ‘We sold, in one afternoon, 57 units. I don’t think I could do that right now.’ That may be because the condo market is approaching saturation.”

“A survey of the Tuscaloosa market found that about 1,400 condo units were ready to be occupied, or would be within the following 12 months. ‘That seemed to me a very large number for a town this size,’ said Leonard Zumpano, professor of finance (at) the University of Alabama.”

“The number may be even higher. The Tuscaloosa News found about 32 condominium projects, including apartment complex conversions, on the books at the city planning department, which translates into more than 3,000 units. ‘I suspect some of these that have been planned may never be forthcoming,’ Zumpano said.”

“But there is little risk that the Tuscaloosa market could collapse as did those in San Diego and Miami where rampant speculation pushed prices beyond sustainable levels. ‘I don’t think it’s a predominantly speculative market,’ Zumpano said.”

The News & Observer from North Carolina. “Rising with the help of cranes and soaring values, condominium towers are multiplying like subdivisions in the sky. Condo units in the city’s core are expected to increase from about 450 now to nearly 1,000 within two years. By 2011, there could be more than 2,000.”

“The rise in condo numbers and prices can go too high. Overbuilding has taken the sizzle out of condo markets in Miami, Las Vegas and elsewhere. ‘There’s a lot of risk,’ said developer Gregg Sandreuter, who is building a new 170-unit condo complex. ‘Anybody who says it isn’t is just not understanding reality.’”

“Out-of-state investors are queuing up alongside empty nesters and young professionals to buy. But there are signs of caution. Some developers have shelved plans. Others have abandoned them.”

“‘I felt it was a lot less risky than if I bought it 10 years ago,’ said Scott Scherer, a Los Angeles resident who recently paid more than $320,000 for a condo in the partially built Palladium Plaza. ‘I wonder sometimes, ‘Is this puppy going to appreciate at all, or is it going to be flat?’ he said.”

“Investors will have to be careful, said Bernard Helm, president of Market Opportunity Research Enterprises. ‘For those who are building condos because they hear the market for condos is hot, there are going to be empty pockets,’ he said.”

The Guardian reports on Florida. “Agents admit holiday home prices in the sunshine state are down 10-15 per cent from early 2006 but many vendors say the fall is over 20 per cent. This is despite Florida being insulated from much of the US housing bubble, as 30 per cent of sales in some areas are to foreigners, a third of them British, says the National Association of Realtors umbrella group.”

“‘I don’t know why investors buy in Florida. The properties aren’t high quality in the main, there’s little to do in the winter and prices are falling,’ says Rupert Lee-Browne of Caxton FX. ‘There has to be a compelling reason for Britons buying in Florida given the precariousness of its property market,’ says Lee-Browne. ‘But there isn’t one.’”

The New York Times. “Until now, deep-pocketed Wall Street tycoons and foreign investors benefiting from a weak dollar seemed to be holding up the luxury real estate market even as the low-end fractured. But there are signs that some high-end real estate developers are also being hit by the slowdown.”

“Last night, a condo-hotel developer who was a partner with celebrities in selling luxury perches from Miami to Chicago let the mortgage on the Royal Palm Hotel in South Beach, a trendy section of Miami Beach, expire.”

“‘This is the first of what will probably be several high-end developers who had a number of luxury projects,’ consultant Jack McCabe said. ‘We’re going to see some where the banks take them back. We’re also going to see a lot of litigation.’”

“‘The financing was based on a successful condo-hotel conversion,’ said Larry Kay, for Standard & Poor’s. ‘My understanding is that the conversion or renovation is moving forward. But there have not been units sold to date.’”

The Palm Beach Daily News. “Developer Jim Engel of Palm Beach…started sales for Central Park Plaza, two blocks west of the Intracoastal Waterway. Pre-construction prices range from the upper $200,000s to $1.5 million, and Engel needs to sell 40 percent to begin building.”

“‘To be sold out in six weeks … that’s history. But shortly, people will realize that now is the time to be in the driver’s seat,’ he said. His timing trails that of planned condos that aren’t going forward. But Engel’s team is intent on offering new luxury units at a time when some developers can’t.”

“‘We took a gamble, but Donald Trump and Jorge Perez, the two geniuses, announced Trump Tower Palm Beach a week after’ American Heritage introduced Central Park Plaza, Engel said. ‘Either we’re all dumb, or we have insight.’”

“After tracking the downtown market for 18 months, Palm Beach broker Pamela Hoffpauer, concluded, ‘West Palm Beach is not overbuilt, it’s undersold. People are evaluating more carefully,’ she said. ‘There are only 700 completed and unsold units in our market.’”

“Palm Beach broker John Pinson, past president of the Realtors Association of the Palm Beaches, disagreed. The city has a glut of completed units and new units up for resale, and some buyers ‘are forced to close or lose deposits,’ Pinson said. At the same time, ‘owners are willing to rent for extremely low prices just to stop the bleeding.’”

“A few weeks ago, renters could choose from among 220 two-bedroom units in downtown buildings that sold for up to $500,000 per unit, Pinson said. Tenants can get into a full-service, amenity-rich building for $1,100 to $1,450 a month, ’so why buy when you can rent cheap and wait for foreclosures?’”

“Pinson predicted the market will improve, but possibly not until after the 2008 election. ‘The absorption of excess inventory will take some time to work out, maybe years,’ he said.”

The News Press. “It’s a little easier for someone in Lee County’s work force to buy a house these days. Prices have come down dramatically in the past year after a long runup. The median price of a single-family-home resale, for example, reached as much as $322,300 but had fallen by 17.2 percent to $266,900 in January.”

“Still, it’s not easy to lure people in jobs such as teachers, firefighters, police officers and nurses to this area. ‘The minute they start looking at housing, they get cold feet,’ said Tim Ficker, VP of operations for the Shell Point Retirement Community near Sanibel.”

“Real estate broker Denny Grimes, of Denny Grimes & Co., follows residential prices for The News-Press Market Watch annual real estate symposium. Grimes said good buys with new homes are available for as little as $150,000 in Lehigh Acres since prices came down.”

“‘I just listed a brand-new house on a freshwater canal in Cape Coral for $255,000.’ At the height of the housing market in 2005, he said, ‘freshwater lots alone were $170,000.’”

“With land prices so low, he said, people looking to buy should still consider building their own new house, said Jim Morrissette, president of Troy Development in Fort Myers. He said lots in Lehigh that would have cost $50,000 in 2005 go for as little as $16,000 today.”

What do you see in your local housing market this weekend? Disputed statistics? “Home sellers beware. Despite what real estate industry data might suggest, sales prices were down by 10 to 20 percent around the state last year, according to an East Brunswick analyst who keeps day-to-day tabs on New Jersey residential transactions.”

“In Bergen County the median price for a condo fell by 13 percent, according to the Otteau Group’s statistics. Analyst Jeffrey Otteau said that he is not interested in pillorying the National Association of Realtors, but only in pointing out that the trade association’s method of reporting may overstate the strength of the housing market in some locales.”

Lower prices? “January’s Housing Affordability Index released Tuesday by the Maryland Association of Realtors saw an increase of 0.4 percent, indicating housing is becoming more attainable for in-state buyers. The association indicated the cost of a starter house fell about $14,000 during the last six months, down to about $286,000.”

Builder adjustments?”Rebidding with subcontractors can knock 10 to 12 percent off the price of lower-end homes, said Doug Fulton of Fulton Homes. There is no doubt builders are getting tough, said Bill Washburn, VP of operations for SelectBuild in Arizona, a subcontracting company.”

“‘We’ll receive letters or direction that you have to lower your price 10 percent or 15 percent,’ he said.’They are taking a harder line.’”

“‘We’ll never see the heady days like in ‘05, when builders would load up the houses to justify the prices they would charge,’ said Ben Sage of Metrostudy. ‘This is a reasonable response to a slow market that will somewhat reverse itself when the market normalizes.’”

Cheaper materials? “The crisis in the subprime mortgage sector is threatening to exert more pressure on slumping Chicago Mercantile Exchange lumber futures. CME lumber futures on Friday were down nearly 30 percent from a year ago and almost 50 percent since their peak in mid-2004.”

Loan problems? “Fall out in the sub-prime mortgage market is causing turmoil. It’s one reason more than 2,300 listings in the Grand Rapids metropolitan area have foreclosed. The Grand Rapids Legal News publishes between 80-100 foreclosures a week.”

“Janice Barnes refinanced her house with a deal she couldn’t pass up. What she didn’t realize, and claims she wasn’t told, was the rate would change every month. ‘The instructions and paper is double talk,’ she told 24 Hour News 8. ‘They went from $500 to $850 in two years. In two years! When we began with the low payments, it was not covering the interest,’ she said, ’so they were tacking it onto the principal.’”

“More than 54,000 homeowners in the Chicago area were 60 days behind on their mortgage payments and in serious danger of going into default as of Dec. 31, 2006. That’s 14.5 percent of an estimated 374,000 subprime loans in the greater Chicago standard metropolitan area, said Bob Visini, vice president-marketing, for LoanPerformance.”

“‘[The subprime market] is the perfect storm where you have lenders looking for business [converging with] borrowers stretching to afford a home,’ Visini said.”

Burned speculators? “A glut of empty houses is creating financial chaos for the investors, said Indianapolis bankruptcy lawyer Mark Zuckerberg. The investors are saddled with mortgage payments on multiple properties.”

“Zuckerberg said more than 10 clients have filed or will file for bankruptcy because of the LRTB deal. Those clients own more than 30 houses among them. He expects more bankruptcies to be filed by other LRTB investors.”

“‘In the good old days, getting a mortgage was something to be proud of,’ Zuckerberg said. ‘Now you just walk in, and they hardly check any records. The mortgage lender makes a commission when they sell the mortgage. They don’t care who the borrower is because they are going to sell the mortgage to a securitized trust.’”

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