The Housing Bubble

Newsweek reports from California. “Regina Miller says she is tired of ‘throwing away $1,520 each month’ to rent the two-bedroom apartment in Long Beach, Calif. But at least for the foreseeable future, a house may be out of the question. ‘I thought for sure I could buy something,’ says Miller, who says her credit rating hovers around 580. ‘Everyone was getting loans. People with worse credit than me, even.’”

The LA Times. “The business boomed as housing prices soared. Orange County was a center of the action. ‘The culture around all of these sub-prime lenders has been ‘Hey, bring it to us. We’ll make it happen,’ said Philip Tirone, a Los Angeles mortgage broker. ‘If you have a client with a [low] credit score who only wants to put 5% down and had a bankruptcy not too long ago, that’s OK. Bring us that loan.’”

“Then it all came crashing down, and few fell harder than New Century. ‘I am a little bit shocked that this meltdown didn’t happen sooner,’ said Jeff Lazerson, president of a Web-based brokerage in Laguna Niguel. ‘In the past, we used to say that if you could fog a mirror you could get a loan. For the last five years, you could be dead and get a loan. That’s why we’re in this mess today.’”

The Orange County Register. “My mortgage pals assured me that they were going to be smarter this time around. World-class technology was making sure that a wave of novel loans for riskier homebuyers would be good bets.”

“This new age had a fresh disciplinarian, too. Wall Street investors were supposedly carefully watching the game while gleefully collecting fattened mortgage payments that came from high-risk loans.”

“But it ceases to amaze me that lenders can’t control themselves. Prime evidence is a curious public document: a ‘cease and desist order’ by the Federal Deposit Insurance Corp. against the Fremont Investment and Loan bank from Brea, once one of the nation’s largest subprime lenders.”

“One would have hoped the FDIC and its regulatory peers were vigorously eyeballing this vintage of non-traditional lending, even in the gravy days of 2003 and 2004, when subprime loans performed admirably. But it’s only as this lending niche is, at best, dramatically scaling back that we start to see regulatory teeth.”

The Desert Sun. “It will be tougher for homeowners in the Coachella Valley, across California and in other states who are accustomed to zero-down mortgages, adjustable-rate mortgages and easy approvals to secure loans.”

“‘What’s happening is a lot of the (subprime lending) programs that were out there have disappeared within the last two or three weeks,’ said Jeff LeCompte, senior loan officer in Palm Desert. ‘The biggest issue is that credit will be looked at a lot harder now.’”

“‘I think there were two groups that really got into trouble,’ said Greg Berkemer, executive VP of the California Desert Association of Realtors. ‘There were the people who used interest-only or adjustable-rate mortgages as a tool to purchase more of a home than they could realistically afford.’”

“Others were investors and speculators who bought multiple properties merely to flip them and make a quick and often substantial profit, Berkemer said.”

The Sacramento Bee. “On the street ever more people who received easy money from mortgage firms are themselves reeling. ‘It’s shocking to see the foreclosures in the paper,’ said Sen. Mike Machado, chairman of the state Senate’s Banking, Finance and Insurance Committee.”

“Last month, 455 people lost their houses to foreclosure in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties compared with 59 in February 2006.”

“‘Sometimes legislators don’t understand the full ramifications of bills coming in,’ said Jack Williams, president of the California Association of Mortgage Brokers. ‘That may harm the first-time homebuyers, putting them into the permanent renter class.’”

The Ventura County Star. “A few who qualified for home purchases only a few weeks ago have seen their financing vanish along with their dreams as lenders spurn 100 percent loans. The situation has many who sell real estate in Ventura County worried. By some estimates, at least 20 percent of first-time buyers in recent years have needed 100 percent financing.”

“‘The market has to be affected, that’s a fact,’ said Joe Virnig, president of the Ventura County Coastal Association of Realtors. ‘I think it will be affected more in certain segments than others. In lower-cost areas of Ventura County, you’re seeing more short sales right now, because people can’t make their payment.’”

“Gustavo Ramirez, broker in Oxnard, estimates that subprime borrowers made up more than 20 percent of his buyers over the past three years. One who bought a house with 100 percent financing in 2005 despite a low FICO credit score of about 600 is having to sell, because his payments jumped recently from $2,100 to $3,500 monthly.”

“‘They’ve decided to go ahead and sell their home, and go rent for a while,’ Ramirez said. ‘They’re going to barely break even when everything is said and done.’”

“About 15 percent of Oxnard brokerage Mortech Financial Group’s clients are subprime borrowers, said Michael Hobbs, a partner in the firm. Hobbs said one of his clients lost the house he was buying when Silver State Mortgage closed suddenly last week.”

“‘Funding was authorized and all the documents were signed on Tuesday, but the company closed its doors on Thursday,’ Hobbs said. ‘Their reps said they were walked outside, then their boss went back in and locked the doors. It was abrupt, quick, and my client’s loan was not funded. I think this will happen increasingly for a while.’”

The Bakersfield Californian. “The party is officially over. A booming housing market that spurred an increase in no-down, fully financed loans has gone flat. The purse strings are drawing to a close as defaults on so-called ’subprime’ mortgages skyrocket.”

“Mortgage broker Frank St. Clair in Bakersfield, said overly liberal subprime lenders ‘are reaping what they sowed now.’ ‘Bad loans were made to people that couldn’t really afford them,’ said Diane Boultinghouse, manager of A2Z Escrow in Bakersfield. ‘So now you’re seeing notices of default going up like crazy.’”

“In the Bakersfield area, February notices of default were up more than sixfold from a year before at 275. Local appraiser Gary Crabtree, who produces monthly reports on the Bakersfield home market, said the number of sales per month could decline by 25 percent or 30 percent because of factors including the difficulty of getting a subprime loan.”

“A local couple were preparing to buy a home earlier this month, having been pre-approved for a loan despite having little money in the bank and a relatively low credit score.”

“Shortly before escrow was to close, their lender canceled the loan. The sale dissolved. ‘Two, three months ago, this would have gone through,’ said Anthony Kessler, the couple’s Bakersfield loan officer.”

“The couple’s realtor, Diana Williams, said they should not have qualified for the loan in the first place. Instead, they should have been counseled to shore up their finances before attempting to buy. ‘They had their heart set (on) becoming homeowners,’ she said. ‘Now they’ve somewhat lost faith in the system.’”

The San Francisco Chronicle. “Now that sales volumes are down, re-fi fever has cooled and some markets have softened, mortgage brokers and even lenders try to set their target value in advance of hiring their appraiser.”

“‘Internet-based mortgage companies call all the time,’ says Curt Thor, a Marin appraiser for more than 20 years. ‘They’re fishing for appraisers. They tell me what the number is and ask me if I can match it.’”

“John Philipp, an appraiser based in Sonoma County, says that he’s experienced similar ‘dialing for appraisals.’ ‘Sometimes they tell me what value they need to make their loan go through, which is illegal. The appraiser is not supposed to be made aware of the owner’s estimate of value, or the value that is needed to make the loan, so as not to be influenced or have a predetermined number prior to the inspection,’ he writes.”

The Union Tribune. “As far as San Diego bankruptcy attorney Mark Miller is concerned, many homeowners are only in the ‘denial’ stage regarding the subprime lending crisis, although they may soon slip into ‘anger.’”

“In the past eight months, he has watched as clients lost about 150 homes through foreclosure. ‘We’re seeing a ton of people come in with their shoulders sagging, wondering what they should do,’ Miller says. ‘The numbers are going up month by month.’”

“Miller tells the story of a married couple who had been talked into an adjustable-rate loan by a mortgage broker who gave them a $10,000 rebate when they put their name on the dotted line. Even in the beginning, with mortgage rates at historic lows, the couple could barely make the payments.”

“‘When the rates went up, they drained their retirement accounts and started charging things with credit cards just so they could make their payments,’ he says. ‘They now have $50,000 in credit card debts. And when the mortgage rates adjust this year, their monthly payments will go up by $800 a month, which is a terminal sentence.’”

“During the year ended Jan. 31, there were 13,249 homes in default or foreclosure in San Diego County – a 192 percent jump from the previous year. Defaults and foreclosures went up 131 percent statewide and 42 percent nationally, according to RealtyTrac.”

“Real estate agent Stan Sexton says the foreclosures and distressed sales will affect property values across the board. Once a bank takes over a property, it will put it on the market at a price low enough to make a quick sale, he says.”

“‘They’ll slash and trash because they don’t have an emotional attachment to the property and it costs them money to keep it on the books,’ he says. ‘They could sell the property at less than market price and take the loss.’”

“‘For people to think that we could go back to traditional lending standards and have prices remain where they are now is just crazy,’ said Peter Schiff, head of Euro Pacific Capital in Newport Beach. ‘Real estate will have to go back to 2000 levels. And a lot of people who just bought a home will find that instead of having an asset, they have a liability.’”

The Daily Bulletin. “For five years or so, the housing market was like a slot machine that couldn’t stop paying out jackpots. Or so it seemed.”

“Ian Bishop, a senior financial adviser in Upland, says that this year’s problems shouldn’t come as a surprise to anyone. ‘A year ago, there was a lot of dialogue about how these funny-money mortgages would come back to bite people,’ he said. ‘So this is not so much surprise as it is fulfillment.’”

“Bishop says that at least for now, prices appear to be holding. But they will be under much more pressure this summer. ‘I think you’ll see a lot more inventory on the market this summer as people realize they have problems with their adjustable mortgages,’ he said. ‘A lot of people invested in real estate; if a sector does well, more people get attracted to it. As often happens, the ones who are late to the game may get hurt.’”

The Register Star reports from Illinois. “When Kim Thusing put her home up for sale in August, she was confident about her chances. ‘When I put it on the market, honestly I thought it would sell in a week,’ said Thusing. ‘We’ve had lots of people looking and lots of complimentary remarks, but they seem to be weighing their options.’”

“After three years of rapidly escalating prices, the average sale price of homes went from nearly $122,000 to $141,000, the boom went bust in the last half of 2006.”

“The Rockford Area Association of Realtors tracks home and condominium sales in 114 ‘grids’ or areas in Boone, Ogle and Winnebago counties. In 2006, the average sale price fell in 27 of the grids.”

“‘There wasn’t anything that really changed when the (local) market came to a standstill. It wasn’t like a huge factory closed,’ Thusing said. ‘People read what was in the news and started looking for prices to drop.’”

The Chicago Tribune from Illinois. “The national subprime lending calamity first reached the South Side graystone on Greenwood Avenue in November. That was when the homeowner, Georgia Rhone, first missed payment on a mortgage that jumped from $974 a month in 2004 to $1,850 a month last year.”

“Her lender now has begun foreclosure procedures as a result of a deal she realizes she never quite understood but has her in a vise: a mortgage charging 11.625 percent after being refinanced twice in two years.”

“In Illinois, the percentage of subprime loans in foreclosure at the end of 2006 was 6.22 percent, up from 5.04 percent a year ago, according to the Mortgage Bankers Association.”

“‘Lenders are so scared about losing market share,’ said Malcolm Bush, president of a Chicago non-profit that studies housing. Their subprime underwriting has become so ‘appalling,’ he said, that some borrowers are defaulting on adjustable-rate mortgages even before the rates change for the first time.”

“In Chicago, more than 56,000 high-cost mortgages were originated in 2005, double the number in 2004. Adds Jeff Metcalf, who tracks foreclosures: ‘We see instances where people aren’t even in their homes for a year.’”

“Rhone said she told her broker the monthly payment on the most recent deal he brought her was ‘very, very steep for my budget.’ ‘They said, ‘This is the best deal’ available and that we would refinance in a few months,’ she said.”

“‘We are seeing it across the board’ in all price ranges and in all types of communities, said (broker) Jim Rossi. ‘A lot of lenders who came into business in the last five years applied the wrong product to the wrong buyers,’ Rossi said. Buyers were ’stretched into larger monthly payments than they should have had.’”

“Lending practices ‘were so loose that it drove prices up,’ he said. That, in turn, created a ’snowball effect.’ As prices rose, buyers needed larger mortgages to buy the house, and lenders eased standards to do the deals.”

The Kansas City Star from Missouri. “Negotiating a home purchase is a bit like playing poker. This spring, with about 18,000 houses on the Kansas City market, the cards favor buyers.”

“About 30 percent of the homes on the market are new, the hangover from the recent building boom when builders were cranking out 10,000 or more houses annually.”

“According to the latest data from the Realtors association, the area’s housing inventory stood at 18,133 homes in January. Put another way, there was a 15.9-month supply of new home inventory at the sales pace in January, and an 8.6-months existing home supply.”

“New homes are particularly plentiful in the Northland and Wyandotte County, and the price range where some serious ‘wheeling and dealing’ should be occurring is the mid to upper six-figure range, said agent Steve Johnston.”

“‘Metrowide, upscale is a buyers’ market,’ he said. ‘The real upper reaches like $1 million plus, it’s not so bad because sellers can hold out. With the $400,000 to $800,000 homes, a lot is available and that’s where the wheeling and dealing comes in.’”

“‘Buyers can find the area they want and if the seller is not willing to take your price, you have the luxury of moving to the next one,’ said Jim Nutter Jr. of James B. Nutter & Co., a locally based national lender. ‘Two years ago, you didn’t have that luxury. You had to move fast or it was gone.’”

“Matt Buff benefited mightily from that third-party sale scenario recently. He and his family shaved 20 percent off the cost of a house in Olathe that had been appraised for $185,000. They not only paid $147,000 for their new home, but received a $14,000 check from the seller to cover minor repairs and some cosmetic improvements.”

“‘It was a corporation that had bought the home from someone who had to move on,’ Buff said.”

From St Louis Today in Missouri. “The American dream of home ownership could prove even more elusive as lenders clamp down in the wake of a rising foreclosure rate for the riskiest loans, say bankers, economists and community activists.”

“Don Menendez, a senior loan officer in Creve Coeur, said he already is seeing some sources of subprime lending dry up. Other funding sources are raising the credit rating needed to get a loan.”

“‘Every day, I’m getting e-mail saying that this program now requires a certain credit score or the programs have been deleted,’ Menendez said.”

“‘If someone comes in with not-so-good credit, our options are being limited every day,’ he said. ‘In the near future, I believe this credit is going to become obsolete.’”

“Rick Sharp, a former president of the Mortgage Bankers Association of St. Louis, and Marve Stockert, executive director of the Illinois Association of Mortgage Brokers, said they’re alarmed at the amount of mortgage fraud in the two states, which they say contributes to the problem, and in some cases results from subprime loans.”

“In Illinois, banking regulators have just one investigator to document fraud at the state’s 2,000 mortgage companies, and the person in that job recently quit, Stockert said.”

“Bob Cropf, an associate professor com crash of a few years ago. ‘It was a fairly big money maker until recently,’ Cropf said of the subprime loan market. ‘The perception was that these types of loans were stronger than they were,’ Cropf said. Investors ‘certainly weren’t being careful. They were putting too much capital in this area.’”

The Star Tribune from Minnesota. “With time ticking on his adjustable rate mortgage, Mark Lamb has been trying to refinance to a fixed rate and save himself from a $400 monthly payment increase come July.”

“The response from lenders is always the same: Pay down your debt and improve your credit score, both of which have been the same since he got the mortgage two years ago. Refinancing is ‘a lot more difficult now,’ Lamb said. ‘It was fairly easy to do that two years ago.’”

“The source of the trouble is the same part of the mortgage industry that helped drive the biggest housing boom in history over the past five years. Until recently, lenders worked to outdo each other at finding new ways to relax their standards and create increasingly exotic mortgages.”

“‘Anyone with a pulse and who could fog a mirror could get a mortgage, but we’re seeing that that just isn’t the case anymore,’ said Ronny Loew, a mortgage banker in Edina.”

“He said underwriting guidelines seem to change daily. He recently got notice that the minimum credit score for an Alt-A program for borrowers with marginal to good credit is going up from 620 to 660.”

“In some cases, he said, buyers are having to shop for less expensive houses to meet the new guidelines. For example, a person who might have qualified to buy a $220,000 house two months ago might now only qualify for a $205,000 house.”

“Doug Winter, senior VP for Countrywide Home Loans in Plymouth, agreed that the availability of subprime and Alt-A mortgages has changed dramatically. But he’s also seeing stricter requirements for second mortgages and home-equity loans.”

“He used to be able to offer a first mortgage for 80 percent of the property’s value combined with a second mortgage for the remaining 20 percent to people with credit scores in the mid-600s or lower. ‘Today, you can’t find a buyer to take that second mortgage.’”

The Hickory Daily Record reports from North Carolina. “In the Hickory region, the surplus occurred within the past three or four years. ‘Everyone was hearing how great the market was and sellers couldn’t understand why we couldn’t sell their houses,’ said (broker) Diane Cline in Hickory.”

“Dee Blackwell and Taylor Dellinger, analysts with the Western Piedmont Council of Governments, estimate about 10,000 homes are for sale now, more than ever before.”

“If there isn’t a surplus now, there could be in the future. A study performed by the WPCOG found 24 potential major housing developments in Catawba County with more than 6,000 potential lots. River Oaks, located on Lake Norman, just north of the town of Catawba, will contain 2,000 home sites.”

“Key Harbor in northern Sherrills Ford is second in number, with 1,400 planned units. Nearly 9,000 more lots are planned in Alexander, Burke and Caldwell counties.”

“Blackwell and Dellinger say the development will at least create many questions, such as what occurs in 15 or 20 years when retiring baby boomers begin to die off. ‘We’ll have this huge surplus of housing,’ Blackwell said. ‘And who will be able to afford the housing?’”

The Charlotte Observer from North Carolina. “Mark and Lea Tingley bought a new home in 2001 in a subdivision called Southern Chase. They recall feeling surprised they could afford a house. And thrilled.”

“Southern Chase was a new kind of subdivision for Beazer, an experiment in selling low-cost homes to low-income families. The strategy was a financial success for Beazer. But the neighborhood fell apart.”

“Seventy-seven buyers have lost homes to foreclosure in a subdivision of 406 homes. That’s about one in five, more than six times the national rate.”

“Some homes sat empty. Others became rentals. Prices dropped. Mark Tingley pointed to holes in his siding, garbage in neighboring yards, overgrown lawns, junked cars. He feels angry, cheated and trapped. ‘We were just so happy,’ he said. ‘Now, no one is happy.’”

“The buyers in Southern Chase share responsibility for the decisions they made. But an Observer investigation found Beazer acted in ways that made a high rate of foreclosures inevitable. Beazer not only built the homes in Southern Chase, it arranged mortgage loans for two-thirds of the buyers.”

“The company used that control to arrange larger loans than some buyers could afford. That allowed it to include the cost of financial incentives in the price of homes.”

“The night before Southern Chase opened in 1997, people camped outside the sales office, waiting to pick the best lots. Home prices started below $80,000, roughly half the Charlotte-area average. Demand was ‘hot as a match,’ said Barry Helms, the sales agent who greeted them. He remembers selling six or seven homes the first day.”

“The unusually low prices were a strategic decision for Beazer. Beazer also was responding to opportunity. The federal government was pushing to expand home ownership. It was encouraging mortgage lenders to relax standards, to make loans available to many lower-income families for the first time. The FHA offered to insure the loans: If the borrower didn’t pay, the government would.”

“Contractors did the building. Beazer focused on marketing. It held pizza parties at nearby apartment complexes. ‘We believe in the dream,’ read a Beazer flier distributed to apartments in Concord. ‘We believe that everyone deserves to own their own home.’”

“But as the company pushed to find new buyers, it increasingly crossed the line between selling to people who could barely afford homes, and selling to people who couldn’t.”

“Lea and Mark Tingley were not looking to buy a home in early 2001. They had little savings. They heard about Southern Chase from Lea’s brother, who had just put a deposit on a home there. If he could afford a house, Lea recalls thinking, I can, too.”

“They say the sales agent told them Beazer would arrange the down payment. The company also would arrange a mortgage. It would even help with the monthly payments for the first two years. Lea remembers the sales agent saying, Let’s just do this. You’re pregnant. You need a home of your own. She returned the next day with a $600 deposit.”

“The model the Tingleys purchased had a base price of $96,490 on a 1999 price sheet. By 2001, Beazer had raised the base price for the same model with the same square footage to $108,990. Beazer arranged the loans through a subsidiary. From 2001, Beazer Mortgage arranged loans for 84 percent of the buyers in Southern Chase.”

“Almost all of the loans were insured by the Federal Housing Administration. That meant Beazer and the lender had little to lose if the borrower could not afford the loan.”

“The Tingleys moved into their new home in April 2001. Lea cleared out her 401(k) to pay $2,500 toward closing costs.The keys came in a manila envelope with instructions on the front: 1) Dump on table. 2) Place key on ring. 3) Do the ‘Happy Dance’ (Jump up and down shouting wildly.)’ The thrill did not last.”

“Lea had applied for the loan without Mark because he had credit problems. She omitted from her application a monthly payment of $350 on a leased Dodge Avenger. Lea said a Beazer employee told her to do it because the application also didn’t include Mark’s income.”

“‘At the time it made sense to me and I was just excited about owning the home,’ Lea said. She says she knows she shouldn’t have omitted the payment, but she trusted the employee.”

“In the summer of 2001, three months after buying the home, Lea called the dealership and asked to have the Avenger repossessed. She could not afford the car and the mortgage.”

“2004 was the first year in which many buyers were making a full mortgage payment without Beazer’s help. The overwhelmed owners might have sold their homes to pay their debts. But prices in the neighborhood had dropped.”

“Too many homes were for sale. Foreclosed homes were available for 80 cents on the dollar. There were newer subdivisions nearby. Many remaining residents owed more than they could sell their homes for, and they lacked the savings to pay the difference.”

“Martin and Jill Higginbotham tried to sell their home for two years after Martin took a job in Tennessee. Finally, Martin mailed in the keys and called the lender. ‘Do what you have to do,’ he remembers saying.”

“The lender foreclosed in early 2004. Twenty-nine other owners lost their homes that year.”

“The Tingleys had a plan when they moved to Southern Chase. They would sell after five years and move to a larger home. By last fall, the Tingleys owed more than $115,000 on a house valued for tax purposes at less than $108,000. They talked with real estate agents, who quoted even lower prices.”

“The Tingleys were struggling to pay their mortgage. The monthly bill had climbed to $1,091, including catch-up payments. They didn’t have the savings to sell the home at a loss. ‘We can’t afford it, we can’t sell it and we’re hurting ourselves just trying to keep it,’ Lea said.”

What do you see in your housing market this weekend? Price reductions? “For Harver Bautista, these are the best of times in the mortgage-lending business and the worst. Mr. Bautista said that generally prices have fallen at least 10% or more in the past several months, depending on the neighbourhood. Home prices within commuting distance of Washington start at about US$400,000.”

“‘People selling in northern Virginia are taking the biggest hit. Prices there have already fallen to 2004 levels and even if they price it reasonably, they are dreaming if they think they are going to sell. There are too many listings to even look at,’ he said.”

Industry shakeups? “The woes of the subprime lending industry were felt Friday in Kansas City, as NovaStar Financial Inc. announced a 17 percent reduction of its 2,000-strong work force.”

“A spokesman for NovaStar, Richard M. Johnson, said the cuts were made ‘to reduce costs in line with what’s going on in the mortgage market. The company has been sued by investors who saw the company’s market value tumble by nearly $1 billion. NovaStar attributed its fourth-quarter results to higher-than-expected loan defaults.”

“The news came a day after NovaStar reported to the Securities and Exchange Commission that on Feb. 12 the compensation committee of its board of directors approved bonus payments to NovaStar’s executives for their performance in 2006.”

Changes in lending? “According to the experts, there is good news and bad news. Knoxville and East Tennessee, in general, are doing quite well in the housing market. The bad news is, people with bad credit, who may have been approved several years ago, may not be able to get a loan now.”

“‘It’s a very scary time,’ says Loren Riddick, a loan officer with United Capital Mortgage. ‘The problem is now is that those lending opportunities may not even be there.””

“They may find themselves in a situation where they have a 7 percent rate or 8 percent rate now and then in just a few months, they may be at 13 to 15 percent,’ Riddick says.”

Failed projects? “An empty Meeting Street lot that was supposed to be transformed into condominiums and townhomes will remain vacant for the time being. Across the street, Charleston-based Bennett-Hofford Co. plans to redevelop a 159-unit apartment complex, though specific plans have not been announced.”

“The slowing housing market has factored into the decision to temporarily shelve 400 Meeting, as speculative investors have all but retreated from the condo sector, said Russ Davis, one of the partners.”

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