The Housing Bubble

Inside Bay Area reports from California. “Last year, James and Barbara Morgan refinanced their mortgage into a subprime loan in hopes of lowering their house payments. Now the couple worry that the high-risk loan could force them to sell the East Oakland home they have lived in for more than 30 years.”

“First-time homeowner Carmen Rodriguez likes everything about the three-bedroom house in San Pablo she bought in September and shares with her brother. Except for the loan. Rodriguez, speaking through a Spanish interpreter, said the payments on her loan have already increased by a third, rising $500 to $2,000 a month.”

“‘I am very frustrated. I am very upset,” said Rodriguez, whose monthly take-home pay is about $1,700. ‘I have not been able to pay other bills.’”

“The Morgans, retired shipyard workers who live on a fixed income, are paying $1,142 a month on their $355,000 subprime adjustable-rate mortgage for a four-bedroom house. In two years, their monthly payments could reach $3,000 under the terms of their loan, Barbara Morgan said.”

“Morgan said she was told ‘not to worry about it’ when she asked the loan representative about interest rates. These days, she has plenty to worry about. ‘I’m trying to get my house ready to sell to pay off the loan,’ Morgan said.”

“In the Bay Area, default notices for all loans more than doubled to 5,362 in the fourth quarter of 2006 from a year earlier, according to DataQuick. About 32 percent of homeowners who got default notices in 2006 ended up losing their homes to foreclosure in the fourth quarter, compared with 8 percent in the same period of 2005, according to DataQuick.”

“San Francisco-based Wells Fargo & Co. said this past week it was eliminating more than 500 jobs in a division that makes subprime loans.”

“‘Market discipline in this industry is swift, can be severe and is more effective at changing lending practices than any potential changes in regulation,’ said Doug Duncan, chief economist for the Mortgage Bankers Association. ‘Some of the lenders who have been exiting the business have stated they didn’t underwrite properly the risk in the loan.’”

The Record Searchlight. “From 2001 to 2006, home values in the Redding area more than doubled, an unprecedented run-up in appreciation. The rise in real estate was buoyed by a bevy of alternative loan products, including the subprime market.”

“Joe Rodola, a Redding credit counselor, said he is seeing more people struggling to come up with the monthly payment on their variable-rate home loan. ‘We are seeing more people who owe more money than what their home is worth. That scares me to death,’ Rodola said.”

“At the peak of the market, Redding loan officer Sherrie Downard says practically anybody with credit, bad or good, was able to get 100 percent financing to buy their dream home. And if one lender refused to write you up, you could walk across the street where your business was welcomed.”

“‘You didn’t have to verify your income or assets, so we were giving loans to everybody,’ said Downard, who’s been a loan officer for 17 years. Downard estimates that 15 percent of the loans her office did in 2006 were subprime.”

“She recalls clients coming in with two car payments, credit card debt and wanting to buy a $400,000 home with nothing down. ‘Everybody was trying to keep up with the Joneses,’ Downard said. ‘You can educate them (borrowers) to do the right thing, but it’s up to them to make the right choice.’”

“But the market sagged, home values stopped going up at a break-neck pace. Suddenly, subprime borrowers discovered that refinancing was not an option. ‘If you bought a home in the last 18 months, unless you did some improvements, typically you are not seeing a dime of appreciation,’ said Mike Neves of Access Mortgage in Redding.”

“Mike Van Bockern, co-owner of Foreclosure Specialists in Redding, said his business is up. Van Bockern gets involved in the final stage of foreclosure, the notice of sale. ‘The majority of them (public sales) are new loans (originated in 2005 and 2006). There is no equity,’ Van Bockern said.”

“Credit counselor Rodola said it’s easier for somebody to walk away when they don’t have a financial stake in the home. ‘From a realistic standpoint, you pay a very big penalty on your credit report. Foreclosure is probably the worst thing that can happen,’ Rodola said.”

“But the emotional and financial pull to keep your home isn’t there when you didn’t put any money down and you haven’t built up any equity. ‘If you go upside-down, what do you care?’ Rodola said.”

The San Diego Business Journal. “In the fourth quarter of 2006, San Diego County experienced a 169 percent increase in homes receiving notices of loan default from a year ago. Default notices were up to 3,150 from 1,173 for the like quarter 2005, according to DataQuick.”

“Throughout California, there were 37,273 default notices, notifying homeowners 90 days behind on payments, sent from October to December 2006. The study, released in January, states that foreclosures tend to occur a year or two after the loan is made. Most of the loans currently entering default originated between January 2005 and February 2006.”

“But Chris Cagan, director of research and analytics at Santa Ana-based First American CoreLogic Inc, said that there are ways to recover on defaults before falling into foreclosure and a majority of homeowners are getting themselves out before it gets to that point.”

“‘They can pay the defaulted payments, refinance, renegotiate (with the lender) and some people do a short sell, where they sell their home at slightly lower than purchase price to avoid the large losses from foreclosure,’ Cagan said. ‘Lenders don’t want to be burned if they don’t have to be.’”

The Orange County Register. “My Big Orange Index, a compilation of three dozen economic markers of the local economy, stalled this past winter.”

“You don’t need a database of economic trends to know the slowdown’s culprit: that sagging real estate market. The Big O’s Property Owner Index had its worst quarter this winter since 1995.”

“One of the biggest challenges presented by real estate’s weakness, after what amounted to a nine-year winning streak, is the unknown it presents to the all-important job market.”

“Coming into 2006, real estate and finance work represented nearly half of the 30,000-a year job gains produced by Orange County bosses in the previous three years.”

“In the past year, O.C. companies added another 27,000 jobs. Real estate’s contribution? Just a 1,700 boost, a sum counted before the many mortgage companies that dot this town began pruning staff.”

“By The Big O’s count, all real estate loans made on Orange County property peaked back in the autumn of 2003, at a rate of $119 billion a year. This winter, local lending is down to an $85 billion annual rate.”

“Any industries suffering a 30 percent drop in activity will see work-force reductions. So forget the grand debate about the merits of some of the recent lending. There are simply too many mortgage makers.”

“Home buying peaked by The Big O’s count in the winter of 2003-04, shortly after the Federal Reserve ended its extra easy money policies. Three years later, home sales in O.C. are off 40 percent. Homes haven’t been this hard to sell since 1996, just before real estate’s great run began.”

“This dreary backdrop doesn’t jazz builders. Chapman U. estimates that residential building permits are running at a four-year low.”

“The Big O’s Banker index suggests a growing flock of families can’t meet the financial burdens of home ownership. Local property tax bills haven’t been so tardy since the summer of 1997. Bankers are filing mortgage default notices, the first step toward foreclosure, on O.C. real estate at the fastest pace since the summer of ‘98.”

“Joe Magruder is ready for a break after his recent career path placed him with a pair of employers in the midst of eye-catching economic whirlwinds. Magruder is a payroll specialist at ECC Capital of Irvine. Magruder’s been told he may only have a few more weeks left to work with ECC, a company that’s pondering its own corporate fate.”

“Magruder, a Dove Canyon resident, is philosophical about his plight. He spent nearly five years helping ECC ride up, and now down, the real estate cycle. The volatility reminds him of his previous work at a dot-com forerunner Epoch Networks from Orange County.”

“‘I’m not bitter at all,’ he says of his recent career turbulence. ‘Business is business.’”

The Houston Chronicle reports from Texas. “Last year, nearly 400 people who owned more than one home in the Houston area accounted for more than 1,000 foreclosures, an analysis of local data shows. That’s up from about 150 investors who were responsible for about 350 foreclosures two years earlier, according to a Houston Chronicle analysis.”

“Although it’s unclear how big a factor the novice investor is in the current market, it is clear that defaults among multiple homeowners contributed to a 44 percent increase in foreclosures in Harris, Montgomery and Fort Bend counties. Foreclosures shot up to 11,983 in 2006 from 8,300 in 2004.”

“‘Unsophisticated investors always make mistakes because they speculate instead of buying something that’s a good investment,’ said Del Walmsley, president of Lifestyles Unlimited. ‘They go out and buy anything.’”

“Condos in Houston are generally difficult to rent, noted Walmsley. Here, potential tenants can usually pay the same or less rent to live in an apartment with many amenities or even to rent a house, he said. It’s hard, he said, to charge a rent in Houston that’s high enough to cover monthly mortgage payments and maintenance dues.”

“Another reason condos sometimes end up in foreclosure is because investors try to sell them to individuals when often ‘they’re really just glorified apartments,’ said Rickey Williams, president of Homevestors WFI Properties in Houston. ‘They’re converted apartments. Would you rather go to an upgraded apartment complex or an older one that’s been turned into a condo?’”

“Large homes can also be a problem, Walmsley said. ‘Big houses aren’t going to rent,’ he said. ‘If you’re an investor and don’t know that, you’re going to load yourself on houses you can buy well below market. Problem is, they won’t rent, so they get upside down.’”

“Some can’t keep up with their homeowner association fees. At Candlelight Trails in northwest Houston, for example, the homeowners association foreclosed on 22 of its more than 240 units in 2006, according to the listing service.”

“All of those foreclosures resulted from nonpayment of monthly maintenance fees, said Shirley Gonzales, who sits on the association’s three-member board. Gonzales said many investors can’t afford the average monthly dues of $250 because they can’t find steady tenants to live in the community.”

“Many first-time investors lost their properties after getting entangled in questionable deals. The problem has become so pervasive in Houston that the FBI has created a special unit here to crack down on mortgage fraud.”

“Chris Robison said she recently filed a complaint with the FBI claiming she got lured into buying a house in Pearland and a condo downtown that were doomed investments from the start. ‘I signed the loans. I didn’t know what I was doing,’ she said. ‘Now my credit is ruined.’”

“Unfortunately, she didn’t read the loan papers thoroughly before she signed them, said Robison, who provided the Chronicle with the documents. Her loan applications, she said, state separate monthly incomes inflated by thousands of dollars and stated she would be living in the two properties.”

“‘I just trusted these people. I didn’t read anything,’ she said.”

The American Statesman. “Will Austin dodge the subprime bullet? Or will the industry’s woes rattle the region’s real estate market? Industry experts say builders will put up fewer entry-level homes in Central Texas as the pool of buyers shrinks. There will be some effect on the resale market.”

“By the end of 2006, 20 percent of active mortgages in the Bakersfield, Calif., area were subprime, according to San Francisco-based First American LoanPerformance. In Texas, McAllen had the highest rate, 26 percent. The national average is 14.7 percent. In Central Texas, however, the rate was 8.6 percent. Among large Texas cities, only Houston’s was above the national average.”

“Lenders ‘are going to look for a better credit score and more income, and that’s going to hurt the housing market,’ said Greg Hallman, a lecturer at the University of Texas. ‘The degree to which it’s going to hurt — that’s what we don’t know yet.’”

“Whatever the effect, ‘we are going to feel that in Austin’ Hallman said. ‘We are going to feel that all over.’”

“The days of aggressive zero-down financing offers and loan approvals for those with credit scores in the 500 range — a high-risk score — are gone for now. Locally, mortgage brokers and real estate agents alike are starting to see some of the signs.”

“Gary Solka, a consultant at Milestone Mortgage, said subprime mortgage holders hoping to refinance are having trouble qualifying for a loan with a lower interest rate. Those homeowners could be in deeper trouble when their adjustable-rate loans reset to a higher figure, meaning a bigger mortgage payment, Solka said.”

“Paul Borman, an agent for Avalar at Steiner Ranch, said he has started turning away prospective buyers who would have qualified for a mortgage two months ago. For example, zero move-in financing for buyers with a 620 credit score will be harder to come by, Borman said. Now, those buyers are going to need a down payment.”

“‘It’s going to take buyers out of the market,’ he said.”

“The Federal Reserve Bank of Dallas is watching the situation, but senior economist Pia Orrenius said the Texas economy is solid. ‘We have a healthy housing market in Texas as a whole relative to the nation,’ Orrenius said. ‘Austin is a little bit of an exception — it had the biggest runup in home prices — but again, the Austin economy is very healthy, with fundamental underlying strengths that are propping up home values, and none of those are expected to change.’”

“In some cases, subprime lenders have stopped doing business as a result of cease and desist orders from regulators. Regulators at the Texas Department of Savings and Mortgage Lending are watching the situation closely, Commissioner Danny Payne said.”

“Payne said the subprime troubles could be the beginning of the end for risky loan products and exotic financing.”

The Times Record News. “North Texans could have a tougher time getting mortgage loans in the future as a result of the subprime mortgage worries that are trickling through financial markets.”

“Ralph Dunkelberg III, vice president and mortgage specialist at Fidelity Bank in Wichita Falls, said the subprime fallout will affect borrowers with good credit as well as those considered poor risks. ‘Unfortunately, the subprime problem is segueing over into the mainline loan industry,’ Dunkelberg said.”

“Dunkelberg said the lending institutions from which he acquires money for local mortgages have raised credit score requirements on borrowers by 10 to 20 points.”

“Between 2004 and 2006, subprime loans accounted for about 11 percent of the mortgages issued in Wichita Falls, according to First American Loan Performance. The number of those borrowers who were 60 days or more past due on payments was about 12 percent during the same period.”

“Dunkelberg said one reason lenders made so many subprime loans is because a growing number of Americans can’t qualify for better mortgages ‘Unfortunately, we’re seeing more and more declining credit scores over the past few years,’ he said, mainly among people under age 30. ‘Many folks have great income, but their credit is bad and they owe as much as much as they make.’”

“Gail Cunningham of Consumer Credit Counseling Service said her agency has seen the impact of risky-credit families buying homes. ‘They get into buying a house with their heart, not their head,’” she said.”

“‘Lenders want to keep you in your house and keep you paying,’ Cunningham said. She said that’s especially true in a softening housing market where lenders don’t want to risk taking possession of houses that might sit on the market a long time and then sell at a loss.”

What do you see in your housing market this weekend? Puzzled analysts? “Chicago-area home sales in the first two months of the year declined 12.1 percent from 2006, confounding analysts who were looking for the first small signs of a spring bounce but instead saw a market continuing to struggle.”

“‘It’s not a market that got caught up in the bubble, and it didn’t have affordability issues. I suppose buyers have gotten caught up in the general psychology and are sitting on the sidelines, waiting to see what happens,’ added economist David Stiff.”

“‘The buyers I’m working with all tell me they’re in no hurry,’ he said Wilmette real estate agent John Nash. ‘They say they want to get a good deal, and I don’t know that they’re not overplaying their hands.’”

“One of his clients, Ann Peisel, listed her Wilmette home last summer, and took it off the market after three months, without a single offer. She lopped $100,000 off her asking price and relisted it a little over a month ago for just over $1 million.”

“She did get an offer–though it was for about $900,000, which she considered too low. ‘It was somebody who was taking a chance, who really couldn’t afford the price,’ she said. ‘Nobody is taking into consideration that I have already lowered the price by $100,000.’”

Subprime concerns? “With foreclosures mounting and the subprime mortgage industry melting, a University of Minnesota housing forum Friday broached the $64,000 question: What now?”

“‘This was a social experiment, and it’s terrifying,’ speaker Prentiss Cox said of subprime lending. Cox is a University of Minnesota law professor specializing in consumer protection.”

New legislation? “Rising foreclosures and the near-collapse of the market for home loans to those with bad credit have triggered a flood of proposals from Texas lawmakers.”

Lending cutbacks? “Industry analysts worry that tougher lending standards could lock out thousands of potential North Texas homebuyers at a time when home sales are already lagging.”

“‘Local builders and local Realtors should be somewhat worried that the number of potential buyers will decrease or at least shift into lower-cost submarkets as lenders start requiring equity down payments and tightening underwriting,’ said said James Gaines, a research economist at Texas A&M University’s Real Estate Center. ”

“But Jim Fite and other local housing executives say that changes in the mortgage market are welcome and overdue. ‘Is there really a surprise that many of these loans went into default and then the lenders went under?’ he asked. ‘As we have seen in the past, there is a ‘correction cycle’ that is occurring.’”

A report from the Washington Post. “For almost anyone selling a condo, 2006 was a bleak year. The first two months of 2007 have been promising, though, real estate agents across the region say. But does that mean that the worst is over for the condo market? Probably not, analysts say.”

“Gregory Leisch, CEO of the Alexandria firm Delta Associates, said the slowdown in sales activity will probably continue through the second half of 2007. There are 21,523 units under construction or being marketed, according to Delta. There are another 20,469 units planned over the next three years.”

“At the same time, sales volume has dropped as investors have fled the market. After selling more than 3,000 new condos each quarter of 2005, developers in the Washington area sold 1,629 units in the first quarter of this year. At that sales velocity, it would take about three years to get rid of that inventory, Delta’s report said.”

“‘We’re kind of at the bottom of things shaking themselves out,’ said Lisa Fowler, a researcher at George Mason University.”

“Fowler said condos took a heavy hit because so many investors bought them, then tried to unload them once the market weakened. At the same time, many developers were too far into the building process to terminate their projects. ‘You go up faster and you have farther to fall,’ Fowler said.”

“Many asking prices last year still reflected the double-digit appreciation of the early part of the decade. Now, sellers have to be more realistic, agents said.”

“‘They’re still saying my neighbor sold his for $500,000 two years ago and why can’t I sell it for that now,’ said Nelson Mendes, a loan officer in Arlington. ‘You have to educate them. You can ask for any price you want but are you going to attract buyers? Probably not.’”

“Since the real estate market softened, builders have been stuck with too many houses and too much land, in part because jittery buyers canceled contracts at a frantic pace last year. The cancellations kept coming at the beginning of this year.”

“In the Washington region, the cancellation rate for new homes hit 11.4 percent in January, up from an already high 9.3 percent at the same time last year, according to Hanley Wood.”

“The number of contract closings dropped 33.3 percent that month to 947, from 1,419 in January 2006.”

“‘There’s a growing willingness to trim prices and offer other kinds of incentives’ to lure more people to buy, said David Seiders, chief economist at the National Association of Home Builders. ‘That’s been a theme, and there’s no doubt it’s continuing.’”

“Builders are also watching the problems plaguing the mortgage industry, namely the subprime market.”

“Builders are doing more than just cutting prices or offering incentives, said Todd Vencil, a home building industry analyst at BB&T Capital Markets. They’re also ridding themselves of land. They’ve done this mostly by dropping options that gave them the right to buy land in the future in exchange for a small down payment, Vencil said.”

The Baltimore Sun. “Charles McCloud had never owned a home, but as he entered his late 50s he thought it was time to have the security and stability that would come from having a place of his own.”

“So two years ago, he bought a detached two-story house on a quiet corner in the Howard Park section of West Baltimore for $225,000, borrowing the money for the closing costs and taking out two loans, one of which had an interest rate of more than 10 percent.”

“When his original four boarders shrank to two, McCloud found himself in trouble.”

“McCloud is one of thousands of Marylanders with subprime loans who are facing, fearing or fending off foreclosure. A recent report by the Mortgage Bankers Association said that at the end of last year, one out of eight of the nearly 130,000 subprime loans in the state were delinquent.”

“‘I can’t remain here,’ says McCloud. ‘I need to make plans to go somewhere else.’”

“‘A lot of people are into a deal they shouldn’t be in,’ says Frank Fischer, a longtime counselor who is working with McCloud. ‘The slightest thing makes them fall off the margin.’”

“Plaintiff Tanya Jones and her sister Donna Jones took out a $520,000 loan from IndyMac in the fall of 2005 on a home in Brandywine in southern Prince George’s County. The loan had an initial interest rate of 1 percent and an initial monthy payment of $1,673 - but an adjustable rate provision allowed the rate to rise almost immediately, with a limit of just under 10 percent.”

“Tanya Jones says she didn’t realize at first that her monthly payments would more than double within a couple of years. ‘I make $4,000 a month before taxes,’ says Jones. ‘I can’t afford $4,000 a month [in mortgage payments] and still survive.’”

“Tanya Jones says she and her sister are about $20,000 behind in their payments. ‘If I lose this house, I don’t know what I’ll do,’ she said. ‘I’m trying every way I can not to lose it.’”

“Another Northeast Baltimore woman, Dawn Tucker, is also looking to sell her house - not because of her original mortgage but because of her decision to refinance.”

“Tucker bought a detached, two-story house in Gardenville six years ago for $89,000. Hoping to pay off some debts, she refinanced in 2005, not fully grasping that loan fees would shrink the amount of money she would receive while the higher interest rate and greater principal would raise her monthly payments by more than $300.”

“‘I thought it would be a little higher and I would only have one bill,’ she says. ‘I just dug myself in a hole.’”

“As of last week, she had not made her March mortgage payment. Tucker figures she needs to get about $150,000 for her house to break even. Houses in the neighborhood have recently sold for well above that, she says, but she’s cautious about her prospects. ‘I really want to sell,’ she says.”

“‘Because it’s a buyer’s market, who knows what I’m going to get?’ she says. ‘I’ll probably take what I can get so I don’t have to face foreclosure.’”

The News Leader from Virginia. “Because of an abundance of homes that were built but have yet to sell in Augusta County, there are lots of great deals in the housing market. But those deals may be short lived, local Realtors and planning professionals say.”

“After 27 years in the market, Staunton native Wilson Fauber has seen his share of ups and downs. Last year, however, wasn’t what Fauber would consider a year of growth. When the nation’s housing bubble burst, it rocked the local market. After years of big growth, the market turned south — but only temporarily, Fauber believes.”

“‘What we are experiencing is a market adjustment,’ Fauber explained.”

“‘Back in 2004, new construction was so strong here we were building houses as fast as we could to satisfy the demands of local buyers,’ he said. ‘But when the market began to soften there were a lot of builders who did not heed the warning. They didn’t slow down on their new starts.’”

“As the correction that was taking place in other parts of the country slipped into the Valley last year, those builders took a beating, Fauber said. ‘Since they didn’t slow down, we ended up with an oversaturation of new homes in the market. Consequently, most of the builders have had to significantly reduce the prices of their new homes.’”

“Fauber’s not kidding. New homes in the area have been discounted anywhere from $20,000 to $50,000 he said. ‘It was done out of necessity to delete this excess inventory,’ Fauber said.”

“But now that inventory is almost gone and the demand is still going to be there. Now, you’re going to start seeing prices increase.”

“‘It’s going to be one of those things where some people will be kicking themselves in six months for not getting into the market,’ said Fred Morgan, immediate past-president of the Greater Augusta Association of Realtors. ‘The demand for housing here will not fade,’ said Morgan.”

“‘One of the reasons the prices simply can not drop is because of the cost of land here,’ Fauber said. ‘Back in the ’90s, a $300,000 house came with an acre or two of land. A few years ago, that $300,000-house came on a half-acre lot. Today, that same house is being built on a lot that’s 50 feet wide.’”

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