The Housing Bubble

It’s Friday desk clearing time. “2007 is expected to be a year of transition,, according the National Association of Home Builders’ Regional Housing Starts Forecast. The earlier boom in housing can be attributed largely to excess demand generated by historically low interest rates coupled with aggressive mortgage lending practices, a combination that made homeownership more affordable but also attracted investors and speculators into many markets.”

“‘Because the boom and correction cycle has largely been driven by national rather than local factors, most regions have experienced some degree of over-heating and correction,’ said NAHB Chief Economist David Seiders.”

“Once upon a time, would-be home buyers had to outbid each other and forgo inspections to get the place of their dreams. Now, sellers are the ones making concessions. ‘The buyers are in the driver’s seat,’ said John Eric, a real estate in Arlington, VA.”

“With foreclosures now at a record high, banks are once again getting picky. ‘It’s not just a buyer’s market,’ said Leon Bailey, a real estate agent in Prince George’s County. ‘It’s a buyers-with-great-credit market.’”

“Louisville-area homebuilders didn’t accept the idea last year that the market for new homes had slowed, but they’re true believers now. Last month, builders took out 55 percent fewer permits for single-family homes in Jefferson County than in February 2006.”

“‘We’ve got a lot of people tightening their belts and holding on,’ said Chuck Kavanaugh, executive director of the Home Builders Association of Louisville.”

“Vacation home prices in Spain, a leading indicator of Europe’s property market, may face a slump that’s worse than the real estate decline in the U.S., based on the loan terms banks are imposing on developers.”

“‘Banks are imposing terms on real-estate firms similar to those for defaulted loans,’ said David Malpica, who helps manage $5.6 billion of real-estate and distressed debt assets in Europe and the U.S. ‘It reflects the high volatility of real-estate assets.’”

“A survey of realtors found condominiums to be a more popular choice for housing in markets where prices have gone up most, such as Edmonton, Calgary, Saskatoon and Kelowna. ‘Especially since January, the good product [sells] right away, reealtor Aaron Best said. ‘The prices are already high and they have to over-bid. There’s general frustration with that as well.’”

“Donald Trump almost lost his shirt 15 years ago when the North American real estate bubble burst. The 2007 version of that disaster will be much more benign, the real estate magnate predicts, although there is softness in some urban markets, such as Toronto and San Francisco.”

“‘We’re talking very minor [problems] compared with the depression of the early 1990s,’ Mr. Trump said. He said that two years ago, when the market was at an all-time high, he was telling people not to buy real estate. ‘Now I’m telling them to do it.’”

“Just two days before Shari Scott and her family were supposed to move into their new home, her loan officer at New Century Financial Corp. called her with some bad news: The company wasn’t going to be able to lend her the money for her mortgage after all.”

“‘I literally stopped the car and threw up,’ says the 30-year-old accountant from Burleson, Texas, who got the news on her cellphone while driving home from work this month. By that point, she was supposed to close on the loan the next day. ‘Homeless was the first thing that went through my mind,’ she says.”

“Large national investment funds are starting to shy away from financing condo projects, instead turning their focus to apartments. Portland saw the trend for the first time Thursday when the developers of Ladd Tower, a planned $85 million condo high-rise, changed course. They announced they will build luxury apartments.”

“Developer Opus Northwest, based in Minneapolis, said it changed plans for the Ladd Tower because the world changed around it in the past year. Also, Opus Northwest’s John Bartell said condos weren’t selling as quickly as he hoped.”

“The possibility that Katherine Gwinn will lose her St. Louis home has unfolded like a nightmare. The 53-year-old resident of the Hill is among a rapidly increasing number of Americans swept into a maelstrom of foreclosures created by subprime mortgages.”

“‘We are not even hitting the crest yet. We are standing here waiting to be knocked over,’ said Chris Krehmeyer, executive director of a St. Louis based nonprofit. ‘What is astounding is the scope and scale of it.’”

“‘There was no subprime market 15 years ago. If you didn’t meet the qualifications you couldn’t get a loan,’ said Dennis Norman, president of the St. Louis Association of Realtors. ‘Over the last few years it has become big business. To get more market share, more business and greater volume, lenders kept lowering their standards, and that’s why so many of them are now in trouble.’”

“Congress is making noises about doing something to help homeowners who can’t meet their mortgage payments hold on to their slice of the American Dream. As a sideshow, our elected representatives will probably spank regulators for not doing more to curb deceptive lending practices and hang executives of subprime lenders out to dry for presiding over the boom-bust cycle.”

“While lawmakers’ intentions may be noble, it’s a pretty safe bet that, left to their own devices, they will muck things up even more.”

“The percentage of loans entering foreclosure rose to a record 0.54 percent in the fourth quarter. Delinquency rates rose for all major loan categories, with subprime loans at a four-year high of 13.33 percent. That’s creating a ‘political firestorm,’ says Andy Laperriere, at the ISI Group in Washington. ‘Congress may be forced into action in the same way they were forced to do something about accounting issues after (the scandals at) WorldCom and Enron.’”

“Housing is already a tax-advantaged asset. The folks who write the tax laws have decided that it should be. When these incentives are compounded by easy money and loose lending standards, it’s not hard to understand how solid economic fundamentals translated into perhaps the biggest residential real estate boom in history.”

“When transactions go well, no one complains,’ says Jacob Frenkel, a former federal prosecutor. ‘When they go sour, fingers point in every possible direction.’ Early indications from Congress are that fingers will be pointed at everyone except constituents.”

The California realtors report on February sales. “Home sales decreased 9.6 percent in February in California compared with the same period a year ago, while the median price of an existing home increased 5.7 percent, CAR reported today. ‘Next month’s report could tell a different story since sales last year peaked in March,’ said C.A.R. President Colleen Badagliacco.”

“‘Statewide, the number of homes for sale increased slightly in February and remain just above the long-run average,’ said C.A.R. Vice President Leslie Appleton-Young. ‘The unsold inventory index stood at 8.8 months in February.’”

“In a separate report covering more localized statistics generated by C.A.R. and DataQuick Information Systems, 37 percent, or 129 out of 349 cities and communities, showed an increase in their respective median home prices from a year ago. DataQuick statistics are based on county records data rather than MLS information.”

The Orange County Register. “The median price of an existing single-family home in Orange County was down last month, making February the sixth of the past seven months to see year-over-year price declines, CAR reported today.”

“The median price was $692,820, the association reported, down 3.9 percent from February 2006.”

“Because the Realtor group derives its median prices from a different source than DataQuick, its figures differ slightly. DataQuick reported last week that the median price of an existing single-family home was $675,000 in February, which was down 2.2 percent from the median in February 2006.”

“Joe Areias knows all about the pitfalls of subprime loans – both as a lender and a borrower. Over the past 10 years, the loan officer made a good living in the mortgage business, earning enough to buy his own Garden Grove condo four years ago.”

“But Areias got behind financially last year after taking time off from work to care for his ill wife and new baby. As the mortgage business slowed, he struggled to make the payments on the subprime loan he refinanced into two years ago.”

“In August when he was unable to refinance again after the teaser rate on his loan ended and his payment adjusted higher. This month when the only deal he had going with a client fell apart after a major subprime lender in Brea cut off its lending. On March 1, Areias received a foreclosure notice from his lender on his own condo.”

“‘Don’t think you can just turn over your keys and walk away,’ says Norm Bour, a Laguna Niguel mortgage expert.”

“With home sales slowing and prices dipping in some areas, many desperate home sellers may face a so-called short sale, which is when the house is sold for less than the mortgage. Homeowners who have refinanced, however, face a different situation. A refinanced loan is considered a ‘recourse’ loan, meaning the lender can come after the borrowers personally for payment of any difference between the mortgage and the sales price.”

“It’s just like on a car loan,’ says Bradford L. Hall, an Irvine CPA. ‘You can hand over the keys to your car to the dealer, but you still have to pay off the loan.’”

“Many lenders opt not to take a homeowner to court to recover the money. Instead lenders write off the loss and send the IRS a Form 1099 for the so-called deficiency.”

“The IRS treats the shortfall as income so the borrower will not only be out of a house, but will owe income taxes on the difference. And it is taxed at the ordinary income rate, not the typically lower capital gains rate. ‘It adds insult to injury,’ says Bour, the mortgage broker.”

From KPIX 5. “The collapse of the subprime lending market is far from over, an Emeryville mortgage broker told a U.S. Senate committee holding hearings on an industry where banks have ordered some brokers to stop making loans altogether.”

“‘It will be more than a couple of days or weeks. It could go on for a few months,’ said Cory Reid, past president of the East Bay chapter of the California Association of Mortgage Brokers.”

“‘There’s still a number of non-performing loans out there, and companies who really shouldn’t be around,’ he said.”

From Reuters. “Many subprime borrowers are in default or foreclosure because interest rates on their mortgages have reset following low initial levels. California may be hit hardest because higher loan payments are kicking in amid slowing home sales and flat or slipping home prices, experts say.”

“‘Outright price deflation is a risk factor that will drive defaults,’ Glenn Costello, co-head of U.S. residential mortgage-backed securities at Fitch Ratings, said.”

“‘Our concern today is that the low home price appreciation environment is going to make it more difficult for borrowers to refinance,’ Costello added.”

“At the end of December, a fifth of mortgages in California were loans to subprime borrowers. State Attorney General Jerry Brown’s office is keeping a close watch for reports of mortgage rescue offers to distressed mortgage holders, said Al Shelden, chief of the office’s consumer law section.”

“‘It’s certainly an interest of the office,’ Shelden told Reuters in a telephone interview. ‘We are worried there will be more of these as foreclosures increase.’”

“‘There was a large uptick in these in the early ’90s, the last time there was large increase in foreclosures,’ Shelden said.”

“‘It’s conceivable the lender will want to work with them,’ Shelden said. ‘Most lenders don’t want to end up with a stockpile of 500 homes because for those that are federally regulated it will affect their ratio of good loans to bad, which is looked at as financial stability criteria.’”

“Homeless advocates expect more people to hole up in their cars as they lose homes due to the current subprime mortgage crisis. ‘The subprime meltdown is the kind of situation that pushes people into cars. It’s a very common story,’ said Ruth Hollman, executive director of a non-profit in Los Angeles.”

“‘It’s an old saying in the social services world that most people are one to six paychecks away from being homeless. But if you can’t make your mortgage, it’s more like a month or two. It’s really fragile out there, particularly with the subprime situation,’ said William Wise, a spokesman for (a) relief agency.”

The Bakersfield Californian. “KB Home sold about 100 homes in Bakersfield last year. The company hopes to top that number this year despite a slowing market, said Augie Dent, president of KB Home’s south valley division.”

“‘We need to recognize the new reality of the market and reposition ourselves accordingly,’ Dent said. ‘Our pricing is a function of the market.’”

“‘We are actively pursuing other new communities,’ Dent said. ‘But we need to find them at a price level that makes sense with current market conditions.’”

From KERO 23. “Bakersfield is in it’s first housing slump since 1998. Apraiser Gary Crabtree said Bakersfield has seen high levels of sales for the past four years, and now the market is correcting itself.”

“He is confident prices on houses will go down. One reason for the surplus of homes on the market is an increase in foreclosures, Crabtree said. Crabtree said that comes from buyers using what are called ’sub-prime’ loans.”

The Florida realtors report on February sales. “According to the Florida Association of Realtors…sales of single-family existing homes totaled 10,779 last month compared to 14,080 homes sold in February 2006 for a 23 percent decrease. Florida’s median sales price for existing single-family homes in February was $235,500; a year ago, it was $242,500 for a 3 percent decrease.”

“Sales of existing condominiums in Florida also decreased last month, with a total of 3,172 condos sold statewide compared to 4,397 in February 2006 for a 28 percent decline, according to FAR. The statewide median sales price for condos last month remained flat at $212,200; a year ago, it was $213,000. ‘Why wouldn’t you buy now? Mortgage rates are still incredibly low and buyers are able to consider a range of inventory,’ says May Aston, president of the Manatee County Association of Realtors.”

“Among the state’s larger markets, the Sarasota-Bradenton Metropolitan Statistical Area reported the market’s median sales price for homes was $294,500; it was $324,200 in February 2006 for a 9 percent decrease.”

“The Melbourne-Titusville-Palm Bay MSA reported the existing home median sales price was $201,100; a year ago, it was $232,700 for a 14 percent decline. The market’s existing condo median price was $168,800; a year ago, it was $206,300 for a decrease of 18 percent.”

The News Press. “Prices and sales of homes in Lee County fell in February compared to a year ago, according to statistics released today by the Florida Association of Realtors. The median price of a single-family home sold with the help of a Realtor fell 9 percent from $280,300 to $256,100 while the number of sales fell 38 percent from 682 to 423.”

“For condominiums, the price fell 31 percent from $356,600 to $247,600 and the number of sales fell 24 percent from 195 to 149.”

The Herald Tribune. “Investors from California to New Jersey jumped at the opportunity to sign contracts for the investment homes in Florida. They were drawn by a group of companies that included CCI, Enchanted Homes, American Mortgage Link and Seashore Resorts LLC of South Carolina.”

“The investors’ credit was used to get construction loans with little or no upfront cash. They were promised 10 percent of the home’s value once the property was sold.”

“Not all of Enchanted’s clients are happy with the home builder’s service. Timothy and Maryann Stefanik of Swartswood, N.J., contracted with Enchanted to build a home in Cape Coral. They said they were introduced to the builder by Seashore Vice President Carl Cirinelli.”

“The couple has claimed that a $100,000 lot sold to them on March 3, 2006, was virtually identical to two adjacent lots sold for $50,100 each on Nov. 11.”

“The Stefaniks, who have hired a lawyer, maintain that Seashore and Enchanted misrepresented the deal to them and that the appraisals supplied by American Mortgage Link to the couple and to Coast were not current.”

“The deal ‘put us in a position of having a house that’s value is $125,000 less than the mortgaged amount,’ Maryann Stefanik said.”

“Enchanted principal Thomas Gillespie said he does not know what ‘Seashore or others promised’ the Stefaniks, ‘but they have a beautiful two-story home on a canal that has been issued a certificate of occupancy.’”

“‘Everything was fine until the market turned around — they got a package deal in a program that works,’ he said.”

The St Petersburg Times. “Looks like bad things come in threes for Coast Financial Holdings. The Bradenton bank was pelted Thursday with three federal class-action lawsuits on behalf of shareholders who have seen their investments tank.”

“The suits allege Coast fraudulently propped up its stock price in 2005 and 2006 by hiding its reliance on loans tied to a single builder. Coast declined comment Thursday evening.”

The News & Observer from North Carolina. “Local homes sales declined in the first two months of 2007 as the Triangle’s most important industry continued to weaken.Brokers closed on 1.7 percent fewer homes in January and February in Wake, Durham, Orange and Johnston counties compared with a year ago, according to Triangle MLS. The inventory of unsold homes was up 10.9 percent in February compared with a year earlier.”

“‘It’s a weakening market,’ said economist Michael Helmar, who predicted sales will continue to decline for several more several months. Building is slowing but it will take months to absorb excess housing inventory, he said.”

“Brokers are still seeing plenty of clients who have moved to the area but can’t buy because they can’t afford two mortgages. ‘If anything, the amount of people outside the area having trouble selling their houses has increased,’ said (broker) Ann-Cabell Baum Andersen.”

“Joe Ward, who sells about 100 homes a year in Raleigh, has three houses that would sell if the buyers could unload their homes out of state. ‘When the market slowed down in spring and summer it was very obvious that the relocating buyer was going to hurt our market,’ he said. ‘It’s still the same.’”

“Building permits and lot sales, both harbingers of future sales, point to further slowing. Fewer lots also were sold. There were 1,998 single-family lots closed during the fourth quarter of 2006, down 14.6 percent from the period a year earlier, according to Market Opportunity Research Enterprises.”

“Brokers are also waiting to see how much sales will drop now that lenders are requiring higher credit ratings and down payments for subprime mortgage loans.”

“Glen Astolfi, chief operating officer at DNJ Mortgage in Cary, is also seeing more people who can’t qualify for subprime mortgages, and fewer lenders willing to make the loans. ‘If you have lower credit scores, its getting harder and harder to finance with no money down,’ Astolfi said. ‘It’s going to hurt home sales.’”

Some housing bubble reports from Wall Street and Washington. “The National Association of Realtors reported Friday that price of a median home sold last month dropped to $212,800, down by 1.3 percent from the same month in 2006. It marked a record seven straight months that the median home prime has fallen compared to the same period a year ago.”

“Total existing home sales are 3.6 percent below the 6.94 million-unit pace in February 2006.”

From Reuters. “Freddie Mac, the No. 2 U.S. mortgage finance company, reported a $480 million net loss for the fourth quarter of 2006, the company said Friday.”

“For all of 2006, Freddie’s mortgage guarantee business grew 10.6 percent to about $1.5 trillion, the company said. That growth came despite a ‘challenging year for housing and mortgage finance,’ said Richard Syron, the company’s chief executive.”

“Freddie Mac and Fannie Mae were created by Congress to pump money into the $8 trillion home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street.”

“Countrywide’s subprime mortgage defaults for 2006 loans may exceed the company’s highest on record, a company executive told a government panel examining mortgage lending.”

“‘We believe that declining home prices and other factors … may produce foreclosures numbers on 2006 originations approaching or exceeding those on loans originated in 2000,’ Sandor Samuels, the company’s executive managing director said in remarks.”

“Samuels urged Congress not to ‘lose sight of the reality that more than 90 percent of Countrywide’s subprime borrowers will not lose their homes to foreclosure.’”

“Samuels also warned lawmakers not to create overly tight restrictions on high-risk mortgages, saying that could lock out many would-be homebuyers.”

“H&R Block Inc. said its Option One subprime mortgage unit renewed a credit line with Bank of America Corp. for a year, but the size was cut in half.”

“H&R said last week it has written down the value of the subprime lender’s assets by $29.2 million before taxes, because of the ‘extreme volatility in the mortgage market,’ according to H&R Block CEO Mark Ernst.”

The New York Times. “The rise and fall of the subprime market has been told as a story of a flood of Wall Street money and the desire of Americans desperate to be part of a housing boom. But it was the little-noticed tool of automated underwriting software that made that boom possible.”

“Subprime lenders like automated underwriting because it is cheap and fast. ‘You don’t have to chase every lead — just greenlight ’em,’ Edward N.. Jones of Arc Systems said in an interview.”

The Globe & Mail. “Members of Congress are pointing angry fingers at Alan Greenspan and other U.S. bank regulators for fostering a mortgage market ‘on steroids’ and failing to thwart a predictable subprime meltdown.”

“Witnesses said the real villains in the subprime meltdown aren’t regulators, lenders or consumers, but Wall Street, which had an insatiable appetite for mortgage-backed bonds. ‘The real market demand for bond services is on Wall Street,’ explained Irv Ackelsberg, a Philadelphia real estate lawyer and consumer advocate. ‘That’s the real market and the real culprit.’”

“North Carolina bank commissioner Joseph Smith told the hearing that lending standards lapsed because of a ‘fee-driven, volume machine’ that pushed mortgage brokers to sell mortgages to people who they knew could not afford them. ‘The animal instinct took control,’ he said.”

The Washington Post. “A top Fed officer defended the agency but acknowledged it could have stepped in earlier to curb risky lending. ‘Given what we know now, yes, we could have done more sooner,’ Roger Cole, the Fed’s director of banking supervision and regulation, told the committee.”

“Greenspan, in an interview later in the day, declined comment on whether the Fed was a lax regulator. But he disputed the senators’ other allegations that he encouraged homebuyers to take on nontraditional mortgages.”

“At one point, committee Chairman Christopher Dodd, held up three large blue charts that demonstrated the Fed was aware as far back as 2003 that lending standards were deteriorating.”

“About the same time, Dodd said, Greenspan was touting adjustable-rate loans. ‘American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgages,’ Dodd quoted Greenspan in a speech in early 2004.”

“Greenspan noted Thursday that he retreated from those remarks about two weeks after he made them, saying he meant only ‘a narrow segment’ of households might benefit from nontraditional mortgages.”

“Greenspan also took issue with Dodd’s criticism. ‘To suggest the Fed was pushing subprime mortgages or even adjustable-rate mortgages is just not accurate,’ he said. ‘I was merely identifying an arithmetically obvious issue, that some mortgage borrowers, admittedly a very small segment, would do better with a different product.’”

“In June 2004, the Fed embarked on a two-year campaign of raising short-term rates to tame inflation. But Dodd said it also hit homeowners who had loans with adjustable rates. While interest rates were going up and questionable lending practices were spreading, federal banking regulators were not ‘protecting hardworking Americans from unscrupulous financial actors,’ he said.”

“‘In my view, these actions set the conditions for the perfect storm that is sweeping over millions of American homeowners today,’ said Dodd.”

“The expansion of the lending industry was part of a nationwide push for homeownership. Now the real-estate boom is unraveling, with about $160 billion in mortgages falling into delinquency, regulators said at Thursday’s hearing.”

The News & Observer. “The city of Charlotte does not count foreclosures. Neither does Mecklenburg County, the state of North Carolina or the federal government. Even the Federal Housing Administration, which insured many of the failed loans, didn’t track the concentrations.”

“About 8,700 homes have foreclosed in Mecklenburg County over the past four years. An Observer study found almost 30 percent of the foreclosures in 2003 and 2004 were associated with loans insured by the federal government.”

“The share of Americans who own homes rose to almost 69 percent last year from 65 percent in 1996. The FHA was responsible for a share of the increase. So were subprime lenders, which make loans with high interest rates to the same people traditionally served by the FHA.”

“But now the number of foreclosures also is pushing into record territory, driven by defaults on FHA and subprime loans, according to estimates made by the lending industry.”

“‘The mortgage industry has said they have increased home ownership,’ HUD’s inspector general, Kenneth Donohue, told a U.S. House committee last week. ‘However, at what cost to the American people?’”

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