The Housing Bubble

Bloomberg reports from California. “The words ‘New Century’ used to flash several times a day on caller ID at Taleo Mexican Grill in Irvine, California. Reservations were often for 10 or more. Not anymore, said Nic Villarreal, the owner of the restaurant, located two blocks from New Century Financial Corp.’s headquarters. ‘We don’t get any.’”

“In Irvine, where just nine months ago office vacancies approached a three-year low, home prices were at an all-time high, and unemployment was less than the national average, at just 3.6 percent, the unraveling subprime mortgage market is ruining the recent prosperity.”

“Hometown lenders including New Century and Ameriquest Mortgage Co. already have fired more than 3,000 people, house and condominium prices are down 17 percent since June and office vacancy rates are poised to double this year, said John McDermott, regional manager for Orange County at commercial real estate broker Sperry Van Ness.”

“‘It’s a huge engine that has been shut off,’ McDermott said. ‘I don’t know where the new influx of jobs are if you take the lending market out of the equation.’”

“No one from the mortgage industry is shopping for Porsches these days, said Theresa Seradsky, Phillips Auto’s general sales manager in nearby Newport Beach. Instead, they’re putting their Porsches up for sale through the consignment program, she said.”

“‘Two years ago, every other day we had somebody coming in to buy,’ Seradsky said. ‘In the last two weeks, we’ve had nobody.’”

“Before its collapse, New Century had 7,400 employees, compared with 8,600 at the University of California, Irvine, said Jacquie Ellis, president of the Irvine Chamber of Commerce. ‘There are going to be massive layoffs and maybe something worse than that,’ Ellis said. ‘You wonder what impact it’s going to have on other companies as well.’”

“More than two dozen mortgage lenders have closed or sought buyers since the beginning of the year. Irvine-based People’s Choice Home Loan Inc. filed for bankruptcy protection last week. H&R Block Inc. is trying to sell its Irvine-based Option One Mortgage Corp. unit. Accredited Home Lenders Holding Co., based in San Diego, has offices in Irvine, and Ameriquest is based in Orange, just north of Irvine.”

“For Irvine’s 190,000 residents, the median price for new and resale houses and condominiums was $641,500 in February, down 17 percent from last June’s peak of $775,000, according to DataQuick.”

“As recently as last year, loan officers were getting annual pay of as much as $200,000, said Charlyn Cooper, a former manager at subprime lender Secured Funding based in nearby Costa Mesa. Now they’re being offered low-paying jobs in call centers.”

“‘Twelve dollars an hour is not a living wage for us,’ said Jorge Perez, who manages the California unemployment office in Santa Ana. ‘You can’t live here and have an apartment. That’s not near what you need to be making.’”

“Natalie Lohrenz, director of counseling at the Consumer Credit Counseling Service of Orange County, is meeting with about 65 people a month who are seeking help to avoid defaults on their mortgages. It was about 25 a month last year.”

“She said she has counseled people with monthly mortgages of $4,000 and incomes of $6,000 a month. ‘There are plenty of people out there living their lives with two-thirds of their income going to their mortgage,’ Lohrenz said. ‘That’s something we didn’t see a few years ago.’”

“After the collapse of the savings and loans in the 1980s, executives from that industry started subprime and other mortgage lenders, said Melissa Richards, general counsel for the California Mortgage Bankers Association. Their time at savings and loans gave them experience dealing with investment banks, she said.”

“‘You have the developers there, and you had the need for companies to get people into homes they can’t afford,’ said Peter Navarro, a business professor at the University of California, Irvine. ‘And that’s how I’d describe the subprime industry.’”

“Beth Krom, Irvine’s mayor since 2004 and a city council member for four years before that, said…the increase in prices has outpaced incomes, she said. ‘This isn’t Beverly Hills,’ Krom said. ‘It’s not a community where everybody is living next door to a millionaire. Many people couldn’t afford to move back into their homes today.’”

“Ankur Kumar worked in Ameriquest’s fraud-detection department from mid-2004 until last May when he lost his job as part of the company’s layoffs. In his new career as a fitness trainer, he hopes to have an income of $30,000 this year, compared with more than $40,000 when he worked at Ameriquest.”

“Kumar lives in a five-bedroom Irvine house and pays almost $3,000 a month between his interest-only loan payment and taxes. Kumar rents out three of the house’s five bedrooms, which pays for about half his monthly housing expenses. The interest rate on Kumar’s adjustable-rate mortgage is scheduled to go up in October. He plans to refinance. ‘I’ll probably have to do something risky, to be honest,’ he said.”

The Press Enterprise. “Reflecting statewide trends in a slowing housing market, the Inland region in February saw new-home construction starts drop 48.3 percent from a year ago, as builders focused on selling off their existing inventories.”

“The latest February figure was also down 14.1 percent from January. For the first two months of 2007, Inland housing starts were down 40.9 percent, with 3,527 permits issued this year compared with 5,969 a year ago.”

“‘They’re really focused right now on dealing with the unsold inventory,’ said Steve Johnson, a director with Riverside real-estate consulting firm MetroStudy.”

“To move those homes, he said builders are continuing to offer a number of incentives that began to kick in last summer, when the local new-home market began to soften.”

The North County Times. “As the bull market in housing rampaged between 2001 and 2006, Wall Street did not sit idly on the sidelines. It jumped in to enjoy the spoils. Even if you don’t own a home, or have never taken out one of these high-interest mortgages geared for borrowers with poor credit, you might need to think again.”

“You could own a piece of the multibillion-dollar market in risky mortgages, through your pension plan or a mutual fund.”

“Wall Street, with its insatiable need for growth and profits, provided the liquidity, or the cash, to keep the housing market revved up. Some major mutual fund companies, such as T. Rowe Price, American Century and Legg Mason Partners, invested in loans issued by subprime mortgage companies, according to a recent report by The New York Times.”

“At a mortgage investment conference earlier this month at the La Costa Resort and Spa, executives with some of the biggest financial services companies in America were bemoaning that many subprime and other risky mortgages were going bad and could harm investors.”

“Those investors, one speaker noted wryly, ‘are probably your and my 401(k).’”

The Capital reports from Maryland. “Even though Maryland is insulated from the worst fallout from the proliferation of subprime loans in the past few years, it will still feel some consequences. These foreclosures also hurt lenders. To counteract any financial hit, lenders will try to clean up this ’subprime slime’ with tighter credit standards and higher interest rates, said Anirban Basu, chairman of the Sage Policy Group.”

“Overaggressive lenders can increase the likelihood of foreclosure, said Tom Shaner, executive director of the Maryland Association of Mortgage Brokers, but one of the biggest problems with these loans is a lack of housing knowledge from buyers.”

“‘I’ve had people after buying a house, call me and ask where they pay the rent,’ Mr. Shaner said. ‘Lenders have been aware of the issues and trying to use caution and we’re telling them, but they still want the house.’”

“People were so enamored with low interest rates that they leveraged themselves to the hilt, and they weren’t just buying houses. They were buying flat-screen televisions to go in them, Mr. Basu said. ‘Contrary to the American dream, for the first time we are hearing people say, ‘You aren’t ready to buy a house,’ Mr. Shaner said.”

“There is a whole generation of lenders who came into the industry with the housing boom beginning in the mid-1990s and who have never seen a downturn, said Christian Weller, senior economist at the Center for American Progress.”

“During this boom, there was a lot of money chasing too few good opportunities, which gave the lender a free rein, he said. ‘You have a whole industry being professional optimists,’ Mr. Weller said. ‘Both the lender and the borrower have clearly underestimated the risks.’”

“‘The last hurrah in the housing market was on the back of the subprime,’ said Christian Weller, senior economist at the Center for American Progress.”

The Examiner from Maryland. “Homeowners across the state with subprime mortgages may be setting themselves up for financial disaster. According to the Mortgage Bankers Association, there was a 12.39 percent increase in subprime loans by Marylanders in the fourth quarter of 2006.”

“Residents of Baltimore City…have taken out an alarming 14.2 percent of their loans from subprime lenders. According to statistics acquired by The Examiner from Data Place, this number is only compounded by 33.7 percent of mortgage refinancing loans being brokered by subprime lenders.”

“‘Even with higher incomes, you may have got suckered in with a low teaser rate,’ Urban Institute Senior Research Associate Peter Tatian said. ‘People will be able to get out of it, it’s just going to cost them some money to do it.’”

The Washington Post. “Tysons Corner mortgage broker Jose Luis Semidey, who has a popular Spanish-language real estate talk show on Radio Universal, is being deluged with calls from desperate homeowners who are falling behind on their mortgages.”

“Semidey said that the most calls are coming from Manassas, Woodbridge and Dale City in Virginia and Gaithersburg, Germantown, Capitol Heights and Langley Park in Maryland.”

“An illiterate carpenter bought a $750,000 house in Ashburn Village, Semidey said. Francisco Santos makes $60,000 a year by working seven days a week. He became convinced that real estate was a can’t-lose proposition after the value of the townhouse he had bought in Woodbridge in 2002 for $95,000 climbed to $230,000.”

“He and his wife traded up to another house and banked part of their profits. The Spanish-speaking real estate agents with whom he negotiated the purchase persuaded him to borrow against his equity to move up again.”

“‘They called me every day; they said we can do more business, that it’s a good time to do it,’ he said. ‘They talked very sweet into my ear. I believed. I believed these people, and I did this business.’”

The Philly Burbs from Pennsylvania. “Last week, we reported that home sales and home prices in the 43 municipalities of Central and Upper Bucks County and Eastern Montgomery County were both up 26 percent, a pretty significant increase.”

“The data on which we based that conclusion, as it turns out, was wrong. The corrected data shows, instead, that prices dropped 1.8 percent in February when compared to February 2006. The median sales price in February was $280,000, well below the $356,500 we reported a week ago. In February 2006, the median price was $285,000.”

“Sales also fell 1.7 percent to 282 in February from 287 in February 2006. We initially reported that sales jumped to 357 last month from 283 a year ago.”

“The overall trend we’ve been reporting for much of the last year, a housing market where prices and sales are falling while inventories rise.”

“In January, for instance, home prices in the area fell 4.8 percent, the revised numbers show, to $295,000. Last month, citing incorrect data, we reported that home prices fell 6.6 percent. The number of home sales in January fell 12.9 percent, according to the corrected data, a bigger drop than the 2.2 percent decline we initially reported.”

The Pittsburg Post Gazette. “David W. Bishoff is so pleased with condominium sales at the Carlyle, the soon-to-be-converted Union National Bank building at Fourth Avenue and Wood Street, Downtown, that he’s ready to try it again — right next door.”

“While it might seem like too much to some, Mr. Bishoff has no doubt the market can support it. ‘The question isn’t whether this city can absorb 200 or 400 or 600 or even a thousand. This Downtown should easily absorb and keep filled several thousand units,’ he said.”

“Mayor Luke Ravenstahl used the ribbon cutting to pitch his proposed tax abatement program for residential housing that is now before City Council.”

“One Carlyle buyer, Brian Ritz, likened his investment to ‘owning a piece of the Golden Triangle.’”

Some housing bubble news from Wall Street, Washington and Business Week. “BusinessWeek has learned that federal investigators have opened a broad criminal probe into lending practices, some financial transactions, and other dealings at Beazer Homes USA. The North Carolina field offices of the Federal Bureau of Investigation, the Internal Revenue Service, and the Justice Dept. have recently opened a joint investigation into the company over such matters.”

“Investigators, however, are not limiting their probe to possible mortgage fraud. ‘There’s all sorts of potential fraud issues here,’ FBI spokesman Ken Lucas told BusinessWeek. ‘We’re looking at all types of [potential] fraud associated with Beazer—corporate, mortgage, investments.’”

From MarketWatch. “‘Beazer Homes has been in contact with the U.S. Attorney’s Office and, at this time, there have been no allegations of any wrongdoing,’ the company said in a press release.”

“Several major home builders also operate finance companies to aid customers in buying their houses. Those businesses and the broader home-lending industry have been under scrutiny lately as defaults among the riskiest of those loans, called subprime, have spiked.”

The Associated Press. “The Charlotte Observer reported last week that the company had an unusually high rate of foreclosures in many developments around North Carolina’s largest city. The paper reported that of the 2,900 Beazer homes built in Mecklenburg County between 1997 and 2006, at least 388 have foreclosed - a rate above 13 percent.”

“Nationally, fewer than 3 percent of buyers lose homes to foreclosure, the paper said. In its series, The Observer documented four examples where the income and debts of borrowers were misstated on their applications for government-insured loans.”

The New York Times. “New Century Financial, the troubled subprime mortgage company, could file for bankruptcy protection as early as the end of this week, people briefed on the company’s plans said yesterday.”

“In the last week, banks that provided it with credit lines totaling $17.4 billion started repossessing or selling the collateral that backs those debts. Barclays Capital, for instance, has taken ownership of mortgages with a face value of $900 million. Morgan Stanley, which lent the company $265 million this month, is auctioning $2.48 billion worth of loans this week, and Natixis Real Estate Capital is auctioning $800 million in loans.”

“‘The one reason they haven’t filed for bankruptcy yet is that they believe they can still pull off a transaction with someone coming in and acquiring them,’ said Jeffrey K. Garfinkle, a partner with a law firm in Irvine, Calif., that has represented the company in the past but no longer does so. ‘But it is really late in the game.’”

“The Securities and Exchange Commission and the United States attorney’s office in Santa Ana, Calif., are investigating trading in the company’s shares and accounting errors.”

“Furthermore, regulators in several states including California, New York and Ohio have restricted the company from making new mortgages because it was unable to fund loans after closing. Those sanctions will limit the number of potential bidders for the company’s assets.”

From Reuters. “New Century’s franchise value has largely been destroyed, and the subprime lender has gone too far down the bankruptcy path to reverse course, according to a Merrill Lynch & Co. analyst.”

“Kenneth Bruce said potential acquirers of all or part of New Century are likely to be scared away as the Irvine, California-based lender’s loans get sold and amid a flurry of regulatory and legal actions.”

“‘The business is broken,’ Bruce wrote. ‘New Century has gone too far down the path of bankruptcy to reverse course. The value of its franchise was largely destroyed, once it failed to close loans in its pipeline.’”

“Washington Mutual Inc.’s subprime bonds are suffering from some of the worst rates of delinquency among securities in benchmark indexes, according to JPMorgan Chase & Co. research.”

“Delinquencies of 60 days or more on loans supporting WaMu’s Long Beach Mortgage LBMLT 2006-1 issue jumped 1.78 percentage points according to monthly reports published this week, to 19.44 percent, JPMorgan data shows.”

From Bloomberg. “GMAC LLC said losses at its Residential Capital home mortgage division, which lends to borrowers with weak credit, will hurt profit this year as defaults and foreclosures surge.”

“GMAC is making changes at the mortgage unit, also known as ResCap, to limit losses, the company said in a slide presentation included in a Securities and Exchange Commission filing today. GMAC said it’s ’sharply’ cutting non-prime mortgage lending and expanding efforts to cut losses from bad loans.”

“The ResCap unit posted a fourth-quarter operating loss of $651 million, compared with profit of $118 million a year earlier, GMAC said March 13. ResCap made $6.9 billion of ‘nonprime’ loans in the fourth quarter, a 43 percent decline from the same period in 2005.”

The Philadelphia Inquirer. “Fulton Financial Corp. said it might have to buy back from an investor up to $22 million in risky home mortgages that went bad during the first three months of scheduled payments.”

“Most of the problem loans, made by a Virginia subsidiary of Fulton, were so-called 80/20 mortgages. Such loans exploded in popularity during the real estate boom, but they left some borrowers owing more than their houses were worth when the real estate market slowed.”

“The high failure rate of 80/20 loans, which require no independent verification of the borrower’s income, is a significant factor in the turmoil nationally in the subprime mortgage market.”

“Subprime mortgage backed securities from 2006 may be the ‘worst-performing in recent history,’ with delinquencies on the underlying debt ‘consistently higher’ than in the prior five years, Standard & Poor’s said.”

“About 13 percent of mortgages made last year to people who have poor or bad credit are delinquent, S&P analysts Michael Stock and Scott Mason said in a report yesterday, with 6.65 percent of the total classified as ’seriously delinquent,’ or more than 90 days late.”

“‘It was the layering of risk,’ Stock said. ‘There is no equity in the home, no income verification and a first-time homebuyer.’”

“In almost 29 percent of subprime mortgages, a second loan was taken out simultaneously, meaning that homeowners were ‘in laymen’s terms, borrowing their down payment,’ Stock said.”

“Almost eight out of 10 borrowers in 2006 had low- documentation loans where lenders didn’t require proof of the borrowers’ income, S&P said in the report.”

“About $540 billion of bonds backed by subprime mortgages made in 2006 are outstanding, making up more than a third of all securities derived from such loans, according to Bear Stearns Cos. the biggest U.S. underwriter of mortgage bonds.”

“Collateralized debt obligations, known as CDOs, helped fuel the recent housing craze by purchasing some of the riskier parts of the MBS market that other investors avoided.”

“But now that the housing market is slowing, analysts are scrambling to figure out if the value of CDOs is going to be badly dented by their exposure to the subprime market.”

“Many CDOs will be protected against excessive subprime exposure by the fact that their bond pools typically contain instruments other than subprime residential MBS, according to Moodys analyst John Park.”

“Other common holdings in CDO portfolios are prime residential MBS, commercial MBS, auto loan securities, credit card securities and real estate investment trust instruments. However, in recent weeks traders have wondered whether the subprime MBS meltdown will spread to securities based on auto and credit card loans issued to borrowers with below-average credit profiles. If so, CDOs may not enjoy as much protection from diversification.”

“New York Fed President Timothy Geithner said last week that, even the more sophisticated participants in the markets ‘find the risk management challenges associated with these instruments daunting. This raises the prospect of unanticipated losses.’”

The Financial Times. “US authorities stepped up investigations on Tuesday into possible fraud by companies in the high-risk mortgage market. The Securities and Exchange Commission told Congress it had set up an enforcement unit to probe possible fraud involving subprime mortgage lenders.”

“‘To the extent that these loans are securitised and to the extent that they become part of problems, fraud or accounting problems related to that, we want to be there as enforcers,’ said Christopher Cox, chairman of the SEC.”

The Naples Daily News reports from Florida. “Frenzied flippers have walked away from contracts to purchase homes as the real estate market has slowed across Florida. In their dust, they’ve left behind cash. Rather than keep the cash, Taylor Woodrow is offering other buyers the opportunity to use forfeited deposits toward the purchase of a new home at a few of its communities.”

“‘They will be able to buy a home that already has the deposit in place,’ said Tim Diers, director of sales and marketing for Taylor Woodrow’s Southwest Division.”

“While some might see it as just a marketing gimmick, the company says it’s a way to increase buying power.”

“By using the forfeited deposits toward purchases, the company can keep its recorded home prices higher. ‘We want to keep the valuations of the communities up and the neighborhoods up,’ Diers said. A few other builders in Florida have offered similar programs, including G.L. Homes, based in Sunrise.”

“Under the program, most buyers still have to put down their own deposits, depending on how financing is structured, Diers said.”

“Ross McIntosh, a Naples-based real estate broker, said marketing a home that another buyer has walked away from can be tough. Other buyers are left with the impression that the home isn’t worth its selling price. ‘It’s nice to have the deposit,’ he said. ‘But it’s not nice to have the deposit and be stuck with the unit.’”

“‘For a lot of people that are looking at this market from a long-term standpoint, now is actually a good time to buy,’ Diers said. ‘If you’re looking to buy a property to flip, certainly I don’t think anybody looks at the ability to do that in this marketplace.’”

“One by one, some of the nation’s largest home-builders have seen quarterly earnings get crushed by the slump in the housing market. Miami-based Lennar Corp. became the latest victim Tuesday.”

“‘These are difficult times for the home-building industry,’ CEO Stuart Miller said. ‘The reality is that market conditions are still challenging at best and in some markets continuing to deteriorate.’”

“Orders fell 34 percent in Lennar’s east segment, which includes Florida, Maryland, New Jersey and Virginia. Among the slowest markets were southwest Florida and the area north of Palm Beach County, the company said.”

From Reuters. “Gabriellee Cunningham had fallen behind on the mortgage on her modest suburban Miami home and was mired in debt when she was approached in June by a door-to-door ‘mortgage lender’ who promised to help her.”

“Nine months later, her $89,000 mortgage has ballooned into a $234,000 loan, her monthly payments have doubled and she faces foreclosure on a house she no longer owns.”

“‘I know I did something stupid but I am going to fight these people ’til my last breath because they are trying to rob me,’ said Cunningham.”

“Florida is among the states hardest hit by the crisis, which some advocates believe is in its infancy. Florida ranks second to California in the percentage of subprime loans, many of whom are finding they can’t make their payments.”

“By some estimates, up to 30 percent of loans in Miami are subprime.” “Jeffrey Hearne, a lawyer with Legal Services of Greater Miami, said his office saw few cases until two years ago but now has two dozen and sees one or two new ones each week. ‘We are having to turn them away,’ he said.”

“Cunningham says her mortgage, an $89,000 loan at 8.5 percent when she bought the home in 2000, is now a $234,000 loan at 11 percent. Monthly payments have gone from $1,038 to $2,275. And her name is no longer on the title. ‘How do you think I’m going to pay $2,275 if I fell behind at $1,038?’ she said. ‘I’m afraid I don’t even own my home anymore.’”

The Palm Beach Post. “Foreclosures spiked in the state and around the region in February, according to a study released Monday that confirmed fears the housing boom’s speculation and easy credit would lead to a hangover.”

“In Florida, 19,144 homes entered foreclosure in February, the most of any state, said RealtyTrac.”

“In Palm Beach County, 1,317 homes went into foreclosure, nearly double January’s 680 foreclosures and well above the 765 foreclosures in February 2006. The 228 foreclosures in St. Lucie County were triple the February 2006 number.”

“‘It’s no secret that Florida had a disproportionate number of speculators buying homes they never intended to use,’ said Brad Hunter of Metrostudy Corp. in West Palm Beach. ‘We’ve known for some time now that those people were going to lose their homes.’”

“‘Prices are going to come down,’ said Jack McCabe, a Deerfield Beach-based housing consultant. ‘It’s the period that I call ‘catch a falling knife.’”

From TC Palm. “Ron Rennick will conduct an auction Thursday at the Vero Beach Museum of Art, with properties ranging from condominium units at the Vista Plantation complex to large million-dollar waterfront estate homes.”

“‘Some people are very motivated to sell their homes, but obviously it’s difficult in a slow market,’ Rennick said. ‘The properties all have different owners…and buyers will be able to find some good prices.’”

“Jack McCabe said auctions are being used more frequently because the normal sale and marketing aren’t working. ‘I think we’re going to see a lot more of foreclosures, a lot more homes taken back by the banks and a lot more homes being auctioned on the steps of court houses,’ McCabe said.”

The Tampa Tribune. “After decades of rampant enrollment growth and a frantic race to build schools, Hillsborough County expects a halt in 2007-08.”

“‘If I had to be a betting person, I see no indication that the economy would turn,’ said Jim Hamilton, Hillsborough schools’ chief officer for district compliance. ‘Housing prices would have to come back to reality, and rentals that tried to convert to condos would have to convert back to work force housing.’”

The Bradenton Herald. “Coast Financial Holdings Inc. has been hit with another class action lawsuit seeking a jury trial.”

“The suit filed Monday in Tampa federal court alleges that directors and officers of the holding company and its Bradenton-based Coast Bank withheld information from shareholders that wound up cutting their stock value in half.”

“It names as plaintiff Troy Ratcliff as an individual and on behalf of others with similar potential claims. Ratcliff’s suit maintains that Coast Financial partnered with St. Petersburg-based Construction Compliance Inc. in order to ‘take advantage of the housing boom and in particular the fast-growing real estate market in Southwest Florida.’”

“‘The plan was simple: Borrowers would put little money down and take out construction loans in their name that CCI would then use to construct the properties,’ the suit states. ‘CCI would then use the credit line to construct the properties and pay the interest on the loans. Once the construction was completed, borrowers would then sell the property or ‘flip’ it for a quick profit.’”

“‘Furthermore, the company should have fully disclosed the risks associated with this line of business - there were little, if any, controls placed on CCI and its ability to withdraw money from Coast Financial,’ Ratcliff’s suit states. ‘Ultimately, CCI withdrew tens of millions of dollars, never completed construction on many homes and left Coast Financial holding the bag.’”

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