The Housing Bubble

Inside Bay Area reports from California. “Irene Pena is buying her first home, a three-bedroom house in San Pablo priced at about $500,000. She was scheduled to get the keys to her house this week, but instead she learned 10 days ago that her loan had fallen through because the lender changed its criteria.”

“‘There will be some customers that qualified even a week ago, and this week there’s no place to go with that loan,’ said Jim Svinth, COO and economist at LendingTree.com.”

“Pena’s seeking 100 percent financing using a combination of a first and second mortgage, and applied for the loans using a ’stated income’ process, because she cannot document her full income using pay stubs or W2 forms.”

“Her real estate agent, Gema Smith in San Jose, said Pena’s credit score is very good, but the lender denied the loan at the last minute because Pena works for a janitorial service and cleans houses as a side job. Smith said lenders are suddenly balking at making loans to workers who can’t easily document their income, even when they have good credit scores. Two other adults in her household will be contributing to the mortgage, but they lack income documents, too.”

“‘I feel like I was discriminated against,’ said Pena.”

“Many in the mortgage and real estate industries say changes to lending criteria are overdue. ‘It got to the point where it was easier to buy a home than it was to buy a refrigerator,’ said Rigo Bracamontes of Intero Premier Team in San Jose. ‘The highest priority was to make the loan.’”

The Visalia Times Delta. “Mirroring a suddenly alarming national trend, home foreclosures in Tulare County are on track to break records in 2007. According to Julie Poochigian, Tulare County chief deputy clerk/recorder, in the first 2 1/2 months of 2007 her office recorded 408 notices of default. That’s more than double the number from the same period last year.”

“If those numbers hold steady through the rest of 2007, Poochigian said the county would eclipse the annual all-time high of 1,601 foreclosures, set in 2001.”

“Gaylynn Heitzig, president of the Tulare County Association of Realtors, said it was still too early to tell how the recent increase in foreclosure activity will affect the local real estate market.”

‘”When you look at the numbers so far,’ said Heitzig, ‘our county really hasn’t been inundated with foreclosures yet. Whether that wave might be coming or not, I don’t know. It’s going to be an interesting year.’”

“Signs of growing trouble for homeowners struggling to pay their mortgages began appearing here last year. In the fourth quarter of 2006, foreclosures across the county shot up 109 percent compared to the same period in 2005.”

“‘Lenders are very nervous right now,’ said Brad Maaske, owner of Realty World in Visalia. ‘Suddenly they have to look at all of their portfolios and try to figure out what percentage of loans out there are bad.’”

The Sacramento Bee. “In another indicator of the turbulence buffeting the subprime mortgage industry, as many as 300 Sacramento-area Ameriquest Mortgage Co. employees were issued pink slips Thursday.”

“In announcing its downsizing, Ameriquest’s parent company said it was necessary to rein in costs and increase efficiency amid the current turmoil. ‘This is a very challenging non-prime market. Only companies with the ability to control costs and improve loan quality are going to be successful,’ said the statement from ACC Capital Holdings.”

“The subprime industry ‘kept the real estate boom going longer than it should have, and the repercussions are what’s happening now. It’s pretty scary. It’s really scary,’ said Bob Bader, head of Arden Mortgage in Sacramento. Arden Mortgage is not a subprime lender.”

The LA Times. “The parent of Ameriquest Mortgage Co., once the biggest provider of home loans to Americans with checkered credit, fired a large number of its workers Thursday and closed six operations centers around the country in a bid to survive the shakeout in sub-prime lending.”

“On Thursday afternoon, parking structures near the office towers of Ameriquest and sister company Argent Mortgage Co. in Orange were less than half full. At Ameriquest headquarters a few miles away, the 11-story building appeared deserted, with packing boxes strewn about the corridors.”

“‘Oh well,’ said a receptionist who wouldn’t give her name. ‘It’s sad, but it’s happening all over the business.’”

The Union Tribune. “Beleaguered San Diego mortgage firm Accredited Home Lenders gave itself some breathing room yesterday when it said it had agreed to sell $2.7 billion in mortgages to undisclosed buyers.”

“But these buyers are coming forward at the bargain prices. Accredited said it was selling the mortgages at a ’substantial discount.’ The company expects to take a one-time charge of $150 million related to the sale of the loans.”

“Accredited also is setting aside a reserve of $40 million to satisfy any future claims against the loans, including potential defaults.”

“Late yesterday, the San Diego law firm of Lerach Coughlin Stoia Geller Rudman & Robbins filed a class-action shareholder lawsuit in U.S. District Court against Accredited. The lawsuit alleges the company has made false or misleading statements since November 2005.”

“Accredited also is continuing to seek waivers and extensions of waivers of financial and operating covenants from its warehouse lenders. ‘There can be no assurance that the company will be successful in receiving any of the required waivers,’ Accredited said in a statement.”

The Recordnet. “Sales of existing homes continued to slip in San Joaquin County, falling to 251 last month from 270 in January, the lowest sales level since the past decade.”

“Last month’s median of $395,000 is down 7 percent from a high of $425,000 in December 2005.”

“‘Baby boomers are buying what they want, and the lower end, where you have the 100 percent financing, is slowing down,’ said Bruce Davies, co-owner of Partners Real Estate in Stockton. ‘They are more afraid because the house could still go down in value. So they’re not stupid. If I were a lower-end buyer, I wouldn’t buy right now.’”

Several readers suggested the new legislative proposals as a topic. “March, 2007: Subprime melts down, leaving pretty much no doubt even in the minds of the media that there had been a bubble accompanied by fraud. So what now? Senator Dodd’s suggestion of bailouts is actually big news. It’s a milestone. How long have we been discussing that there would be cries for a bailout?”

“If there is a bailout, we as taxpayers who never participated in the scam will be persecuted to bail out the fraudsters and speculators.”

One reduced it to this, “Is a REIC bail-out good for housing, bad for housing, or simply inevitable?”

Another sees, “I think a bailout is ‘in the bag.’ The news of Goldman Sachs’ interest in subprime lenders was a dead give-away, IMHO.”

One said, “These guys are just capitalizing from their ’strategic position’ in the lending spectrum. They are at the center of the information universe and are willing, able, and duty bound to exploit this advantage. What’s more, like Fannie Mae, they are given Carte Blanche under the label ‘Too Big to Fail.’”

A reply, “How many Too Big to Fail corporate entities can Uncle Sam Insurance Company carry on its books before the insurance scam collapses of its own weight?”

Another had this, “If a borrower feels they were a victim of a lender isn’t the remedy a lawsuit? The real truth about these bail-out ideas is that the FB’s could not hold up in a court of law with their claims of being a victim. Can you imagine a borrower submitting a lawsuit where they lied on the loan application in order to get the loan?”

“I’m sure there are some cases of some borrowers being a victim of fraud by the loan company but you have to be able to prove it in a court of law and maybe some can.”

“What I don’t like is that some of these FB’s are going to claim that they were victims when they knew darn well what they were doing. Are you a victim simply because you believed the sweet talking hype of the REIC that it was a sure bet that you would make a profit in real estate?”

“It seems to me like alot of these FB’s want to claim ‘victim’ simply because they decided to not read their loan documents because they were caught up in the profit seeking real estate mania.”

The New York Times. “‘I have two public policy goals,’ said Senator Christopher Dodd, who is a presidential candidate. ‘One is to make sure that what’s been going on stops. That is the easier of the two issues to address. And the second is what can we do to keep people in these homes. What if anything can be done to prevent flooding the market with these delinquencies.’”

“‘I’m not averse to legislating on it,’ Mr. Dodd said. ‘My preference is to see whether it could be better managed by the regulators knowing that legislation can be so difficult to get through.’”

From USA Today. “Andy Sobel is selling his San Diego condo for $60,000 less than he owes on his mortgage. He’s six months behind on his payments, but it’s all he can do to avoid foreclosure. He’s also writing to Rep. Barney Frank, chairman of the House Financial Services Committee.”

“‘Please don’t let this happen to anyone else,’ Sobel says he’s writing, and will explain how he was ‘duped’ into buying his first home in 2004 with an adjustable-rate mortgage designed for him to pay only the interest each month, no principal.”

“‘I know there are a lot of people like me, families — this ruins some people,’ Sobel says. ‘If there is going to be any kind of bailout, we should be part of it.’”

“Politicians have long encouraged the idea of homeownership. And government has played a substantial role in fostering homeownership, including offering mortgage insurance and creating Fannie Mae and Freddie Mac to buy mortgages from lenders and repackage them for sale to investors.”

“Moreover, the government has provided an ever-growing pile of subsidies to the buyers of homes.”

“Hundreds of thousands of families who bought houses in the last two years are now losing them. ‘Clearly we went too far,’ said Joseph E. Gyourko, a professor of real estate and finance at the Wharton School of the University of Pennsylvania. ‘It’s not the case that high homeownership is always good.’”

The North County Times. “‘It was all about return, yield spread and profits,’ said Robert Simpson, president of Investors Mortgage Asset Recovery, which helps mortgage companies recover money lost to fraudulent borrowers. ‘Let’s be clear that what we’ve done is bury people in debt.’”

“Tom Zimmerman, an analyst with the international investment company UBS who tracks the mortgage industry, said that lenders had not done adequate underwriting, that is, determining the risk of particular loans. ‘What was bad underwriting in ‘04 and ‘05, became atrocious in early ‘06,’ he said.”

The City Journal. “It’s conceivable that Dodd will propose some sort of government subsidy for Fannie and Freddie to buy out some defaulted mortgages from their private investors, taking over the loans and refinancing their terms with borrowers so that borrowers can stay in their homes.”

“Sounds harmless enough, right? But it would create a huge problem. Investors in mortgage loans, including investment banks, pension funds, and international bondholders, jumped into risky subprime mortgages because they were paid for that risk, getting higher interest rates than they would have received for investing in, say, Treasury bonds.”

“The reason that the risky mortgages paid more, of course, was that there was a very real possibility that lots of borrowers would default.”

“If the government, or its proxy, now steps in and purchases those mortgages, or otherwise systematically bails out borrowers, it will create a hazard for the future. The next generation of mortgage lenders won’t take the high risk of subprime home loans seriously, because they’ll expect that, in the event of another crisis, the government will step in and bail them out again.”

“So they’ll be even more eager to approve the risky subprime mortgages that are getting so many borrowers into trouble in the first place.”

The Washington Post. “Naturally, Congress will want to know whom to blame for this reckless lending and borrowing. The usual suspects come to mind: the Fed for pushing interest rates down to half-century lows, the bond-rating agencies for sugarcoating the risk on mortgage-backed securities and the lenders who competed with one another to see who could operate in defiance of the greatest number of canons of prudent credit practice.”

“It was Congress itself that eliminated tax deductions on interest for nearly all consumer debt, but let them stand for residential mortgages.”

“But our lawmakers should not forget to call human nature to account. In 1886, 40 years before the birth of former Fed chief Alan Greenspan, the Great Plains was the scene of a terrific real-estate boom, financed by the most reckless kind of lending. There was no Fed, and there were no rating agencies, just lenders and borrowers taking leave of their senses. They returned to them, eventually. They always do.”

The Pioneer Press reports from Minnesota. “There may or may not be a real estate bubble in Ramsey County, but there’s no denying Ramsey County’s housing market is losing some serious air. Tax statements that hit mailboxes this week show that as many single-family homes in St. Paul lost assessed value as gained value for 2007, according to a county report.”

“It’s the first such widespread decline county officials said they can remember. In each of the previous four years, nine of 10 homes in the city gained value, a Pioneer Press analysis found.”

“The news came in the mail for people like Phyllis Folta in St. Paul. Like nearly all of her neighbors, she saw the assessed value of her home slip by thousands of dollars on the tax statement she got this week, while her taxes went up 17 percent.”

“‘I’m not happy about it,’ said Folta. After more than a decade of steady rises in her home’s value, she noticed the change immediately. ‘I have the statement right here by my phone,’ she said. ‘I was hoping the county would send something, some kind of explanation.’”

“County assessor Stephen Baker cited a number of factors in the change: Real estate investors have been pulling out of the market; first-time buyers may be sitting on the sidelines and waiting for the market to bottom out; tightening credit may be both putting more homes on the market and winnowing the number of buyers with the wherewithal to buy them.”

“‘It reflects some uncertainty in the market that we saw,’ Baker said. ‘It looks like the market is stagnating, and this is where the models told us to go.’”

“‘I’d thought we were overvalued as it was,’ said Roy Wendt’. He said the ‘for sale’ signs on his street seem to indicate a slump.”

“‘There’s no way our house was going to sell for what it was assessed for,’ he said. ‘This is a little more reasonable … but then my taxes went up 16.4 percent anyway.’”

The Journal Sentinel from Wisconsin. “With a little doctoring of loan documents, Patricia Tamillo was ‘cured’ of multiple disabilities and her meager income was boosted. Urged on by an agent for a subprime lender, Tamillo said, she signed for a $77,000 mortgage on her home in November 2004, listing herself as a ‘handy woman’ making about $20,000 a year instead of who she is: a 42-year-old cerebral palsy patient whose $569 monthly disability check wouldn’t cover the $583.90 monthly payment.”

“‘They said I’d save $300 a month (over her old mortgage) and get $3,000 cash out,’ Tamillo said. ‘To a person who’s broke, that sounds pretty good.’”

“Now, the paperwork has come back to haunt borrower and lender alike. Tamillo’s Milwaukee house, inherited after her mother’s death, is in foreclosure. Her lender, Ameriquest Mortgage Co., closed operations centers across the country Thursday amid mounting financial troubles, and is now routing calls to its Orange, Calif., headquarters.”

“Tamillo’s attorney, Catherine Doyle of Legal Aid Society of Milwaukee Inc., called the loan ‘unconscionable and unenforceable.’”

“‘They knew she was on disability - they came to her house,’ Doyle said. ‘They said she earned $1,800 a month as a handywoman, when she’s in a wheelchair.’”

“Ameriquest violated the federal Truth in Lending Act on several fronts, Doyle alleged, including not informing Tamillo that the loan carried an adjustable rate ranging from 8.35% to 14.35%, and leaving blank key portions of Tamillo’s loan papers.”

“Wisconsin has lost its reputation as a stellar borrower. The Mortgage Bankers Association reported this week that Wisconsin’s mortgage foreclosure rate hit 1.42% in 2006’s fourth quarter. That exceeds the 1.19% national average, which itself reflected a worsening trend.”

“It all comes down to greed, some industry experts say. ‘There was so much money to be made, and these companies went after it. Home prices have doubled in some cases in the last 10 years. But now these people are going down with the mortgage companies that funded them,’ said John Pawarasat, director of the University of Wisconsin-Milwaukee’s Employment and Training Institute.”

“Veteran mortgage broker Stephen LaDue, president of Affiliated Mortgage Corp. in Wauwatosa, sees more trouble ahead, too. Loans written in the last few years were pinned to expectations of double-digit house price run-ups that have evaporated in the year-old housing slump, he said.”

“‘The lending market in general has been operating under unrealistic conditions,’ LaDue said, ‘but the subprime market was institutional psychosis. They found a way to dress it up and sell it to (government) regulators, opening up market access to people who shouldn’t have it. And that kind of loan is epidemic.’”

“‘When it was individual borrowers losing their houses, there wasn’t much attention paid. Now that Wall Street is taking a hit, and companies are going under, the issues are coming more to light,’ said Bethany Sanchez, director of community and economic development for the Metropolitan Milwaukee Fair Housing Council.”

“A national attitude adjustment is in order too, said Dick Jungen, chief executive officer of Central States Mortgage Corp., whose loan operation is tied to credit unions.”

“‘There’s almost an inalienable right to homeownership in people’s minds these days. It’s like a national goal,’ he said. ‘The mortgage industry responded by finding different ways for people to do that, and for a while, it worked. But maybe there’s a point at which some people just shouldn’t try.’”

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