The Housing Bubble

The Contra Costa Times reports from California. “East Bay cities such as Berkeley, Brentwood, Clayton and Walnut Creek experienced a nearly 25 percent drop in median home prices from February of last year. Walnut Creek’s median home sales price dropped to $519,000, according to DataQuick, making it lower than the median home price for Martinez, Brentwood and Pinole.”

“‘There were two condo conversions going on in Walnut Creek,’ said John Karevoll, a DataQuick analyst. ‘It looks like those tugged the home median price down.’”

“In tiny Moraga and Orinda, which had about a dozen sales each and rising prices, one home can push down or pull up the price hundreds of thousands of dollars, said Micky Gill, an agent in Walnut Creek.”

“Gill admitted he has seen a drop in prices, but not a dramatic one. ‘I’d say there has been a decline, but only in the 10 percent range and not 22 percent,’ Gill said.”

“He said that decline is based on a few reasons, including housing stock, but also on the older population of Walnut Creek. ‘They want to sell without making improvements,’ he said. ‘Their equity is huge … and sometimes they don’t want to make more than $500,000 (to avoid capital gains taxation.)’”

“(Broker) Lila Owens and her mother, Varnell Owens, an agent in Oakland, said that some of the big price changes could be based on last year’s overbidding and inflated appraisals, which is now at an end.”

“‘With some of the properties we have sold, buyers slightly overbid on properties and that drove up values in the neighborhood,’ Varnell Owens said.”

The Orange County Register. “The end came as no surprise, but it was still a shock for laid-off workers at New Century Financial Corp. when the Irvine-based subprime lender filed for bankruptcy protection Monday.”

“‘This is like the Titanic sinking,’ said Erica Olsen of La Palma, a unit manager at New Century’s retail lending arm. ‘We never thought New Century was going to sink and it is.’”

“She was among the 3,200 New Century workers – 500 in Orange County – who lost their jobs Monday. New Century still employs about 1,000 workers in Orange County.”

“About two dozen colleagues gathered at an El Torito restaurant for what they dubbed ‘the last supper,’ a farewell lunch with beers and margaritas, tears, hugs and a little gallows humor.”

“Many of the laid-off employees had experience losing jobs in the mortgage industry, which seems to go through a crisis every 10 or 15 years. At El Torito, they joked about future employment opportunities. Contestant on ‘Deal or No Deal.’ Pole dancer. Singing bus driver, said a woman who burst into a rendition of Gloria Gaynor’s ‘I Will Survive.’”

The North County Times. “The imploding sector of the housing market that was built on risky loans has become a major drag on the economy, but it is not, for now, at least, expected to push San Diego and Riverside counties into recession, according to the new UCLA Anderson Forecast.”

“‘Although we believe that our no recession-soft landing thesis for the economy remains intact, we are becomingly increasingly nervous about the economic outlook as the period of below-trend growth grinds on,’ the report states.”

“In many cases, loans were issued with no money down and carried adustable interest rates. Such loans exploded in popularity toward the end of the housing boom, which ground to a halt last year after a final hurrah in 2005.”

“‘The only thing keeping the party going in 2005, when affordablility was at an all-time low, was the fact that you were making loans to people who couldn’t afford a home anymore,’ Ratcliff said.”

“But now many who bought homes are receiving default notices. Counties throughout California have seen significant spikes in such notices. Between the fourth quarter of 2005 and the last three months of 2006, defaults soared 180 percent in Riverside County, the report shows. San Diego County, meanwhile, saw defaults surge 160 percent.”

“But Robert Campbell, an independent San Diego economist who closely tracks the real estate market, said, ‘I think they are dramaticaly underestimating the risk.’”

“Campbell said people aren’t going to make up their payments because they couldn’t afford their homes in the first place. ‘What’s it going to take for these people to hang onto these mortgages? Income, and lots of it,’ he said.”

“Robert Brown, chairman of the Department of Economics at Cal State San Marcos who tracks North County home prices and sale trends, said it isn’t just families on adjustable and interest-only loans that are having trouble making ends meet.”

“‘People are stretched, even if you just have a conventional loan,’ he said.”

The Recordnet. “‘We still expect to see substantial job losses in construction, and we’ve already seen more job losses in financial activities than we expected,’ Ratcliff wrote.”

“Ratcliff highlighted the subprime lending crunch, saying: ‘The days of wine and roses for the mortgage market are over. Only one year ago mortgages were available to practically any borrower who had a pulse.’”

“Brokers had loans for borrowers with no income and no assets and even NINJA loans for those with no income, no job or assets. Those days are over.”

“Lenders specializing in financing borrowers with marginal credit are closing shop; more than 25 subprime brokerages have closed their doors in the past few months, Ratcliff noted. Other lenders are tightening credit standards.”

“That could put the U.S. housing market into an extended downturn, the forecaster said. ‘In terms of duration it will look like the protracted decline that took place in Southern California from 1989-1996,’ he wrote.”

The Washington Post reports on Michigan. “The housing bubble of recent years has burst and home prices are under pressure in many parts of the country. States like Michigan and Ohio, struggling with their particular economic problems, illustrate just how bad things could get in the housing sector.”

“Janet Laitis leaned on a chain-link fence in her front yard and pointed to the homes on her block that lenders have seized in just the past two weeks. ‘There. There. There,’ said Laitis, pointing across the street, down the street and then to the modest ranch house next door. ‘This neighborhood is deteriorating before my eyes.’”

“Three years ago, Brian Minjares left his job at a financial services firm to start his own practice with a partner in the Detroit suburb of Southfield. Minjares took out a home equity line of credit to finance the business. At the time, his house was appraised at $350,000 and he owed $275,000, he said. The bank gave him a loan equal to 100 percent of his equity.”

“As the housing crisis worsened, the value of his home dropped to $260,000. Minjares could not afford to sell it because he owed more than it was worth. He could not afford to keep it because, as the rates on his loans adjusted, his monthly payments jumped to $3,000 from $2,100.”

“He fell behind on his payments and the bank foreclosed on his Colonial in Flat Rock, not far from Detroit. ‘You just have to cut your losses and run,’ Minjares said. ‘You have to take into consideration your marriage and your health and you say to yourself: ‘It’s just a house.’”

“Max, an engineer who spoke on condition that his last name not be used because he is embarrassed by his situation. Max bought a condominium in the Detroit suburb of Plymouth using a traditional fixed-rate mortgage more than five years ago. But three years later, his firm took away company cars from its workers, hiked insurance premiums and cut raises and bonuses, raising Max’s monthly living expenses and reducing his pay.”

“Max responded by refinancing his condo twice. Though he did not realize it then, the second loan was adjustable. ‘I wasn’t even reading the paperwork,’ said Max, who makes $106,000 a year. Weeks ago, Max turned in his keys to his lender.”

The Oakland Press from Michigan. “Recently released U.S. Census Bureau population estimates indicate that over the last six years, Oakland County has seen nearly 50,000 residents pull up stakes and head to neighboring counties or other states.”

“Chris Shoemaker, president of the North Oakland County Board of Realtors, said said the trend of clients looking for bigger homes and more property elsewhere might be even more pronounced if it were not for a sluggish housing market.”

“‘We do have problems selling the houses here so those people can move,’ Shoemaker explained. ‘I don’t feel it’s a problem in Oakland County specifically. I think it’s just the market generally.’”

The Daily Press from Michigan. “Several Livingston County communities are seeing a significant spike in boards of review appeals this year — signs of a struggling housing market and struggling state economy. Boards of review are set up to allow residents to contest the assessed value of their homes.”

“Green Oak Township saw the largest increase in assessment appeals this year at 640, up from 200 last year.”

“Township Supervisor Mark St. Charles attributed the majority of his community’s appeals this year to a 13 percent increase in the township’s overall state-equalized value. ‘We’ve been kind of the bright spot of the building economy and the economic engine in the state as of recent,’ St. Charles said of Livingston County. ‘We are now seeing sales declining, building permits declining. That is catching up to us here.’”

“Unadilla Township heard 114 appeals this year, compared to about 30 last year. This year’s appeals represented 5 percent of taxable properties in the township, Supervisor Jim Peterson said.”

“‘The main frustration was they couldn’t sell the home for what we’re assessing them at,’ Peterson said.”

The Star Tribune from Minnesota. “The subprime mortgage crisis that has gummed up the housing sector nationwide doesn’t carry a ‘Made in Minnesota’ tag. But it almost deserves that label.”

“Minnesota lenders, from Norwest (now Wells Fargo) and Green Tree to Metris, were pioneers in finding ways to cater to strapped borrowers, creating the lending template that others copied.”

“History suggests…that no matter how many times subprime lenders blow up, new ones will rise here, unable to resist the temptation of lending at double-digit interest rates.”

“‘It all comes down to risk and reward,’ said Jim Campbell, a longtime Norwest and Wells Fargo executive. ‘Taking high risks gets you a lot of reward. It kind of feeds on itself.’”

“‘People get kind of greedy,’ said Andrew Winton, chairman of the finance department at the University of Minnesota. ‘They don’t remember the past. They keep thinking, ‘It’s different this time.’”

“What strikes Campbell about today’s subprime mess is that some of it stems from the lack of cyclical nature of the business and the lack of enough experienced people who’ve seen past problems in the business and can appropriately price for risk.”

“‘You think you can do no wrong,’ Campbell said. ‘Things tighten up. Everything gets difficult. ‘We are not going to do it anymore.’ People retire. Then new people come in and think ‘These are great opportunities.’”

“Subprime lenders such as Green Tree ’set up an accounting system that took in all of the payments on the loans under a present-value formula so that [they] could deliver rapid earnings growth,’ said analyst Richard Bove.”

“‘If you look at Green Tree, they grew their portfolio very quickly,’ Winton said. ‘They were starting to put on loans that were likely to go under.’”

“Green Tree was the first to package loans into bonds and sell them directly to Wall Street investors. Today the mortgage-backed securities market totals trillions of dollars. The model encouraged subprime lenders to make risky loans because they weren’t bearing the risk of default themselves, said Ben Crabtree, a Minneapolis-based analyst.”

“‘If they couldn’t get the loans off their books, there would be less incentive to write riskier loans,’ said Crabtree.”

“Green Tree eventually admitted that it used aggressive accounting practices that inflated its profits by failing to predict how many loans would go bad or how quickly consumers would repay their debts ahead of schedule. In 2002, Conseco sold what was left of Green Tree.”

“Metris Companies Inc. was another high-flying subprime lender in the late 1990s. The recession that followed the September 2001 terrorist attacks nearly bankrupted the company.”

“Metris, based in Minnetonka, prided itself on its ability to determine which customers would pay their bills on time. ‘The Metris model was a fantastic one,’ said Al Gagano, who was the investor relations director at Metris. ‘It was the first time in history a lot of people were given access to unsecured loans.’”

“But the Metris model couldn’t withstand what happened after 9/11. Cash-strapped debtors stopped paying their bills, forcing Metris to take giant charge-offs to cover delinquent debt At the time, Metris CEO Ron Zebeck insisted the company was a ‘healthy baby that’s being thrown out with the bath water.’”

“Zebeck was eventually forced out, and the company was able to trim bad loans off its portfolio and return to profitability. HSBC eventually purchased Metris for $1.5 billion in 2005.”

“‘Subprime was never really tested at the time with a recession,’ Galgano said. ‘Now I guess we know.’”

“Gagano recalls one analyst in the late 1990s — so confident that Metris could handle a recession that she titled one of her reports ‘Bring It On.’ ‘I guess she got her answer,’ he said with a laugh.”

Some housing bubble news from Wall Street and Washington. “The Pending Home Sales Index, based on contracts signed in February, stood at 109.3 – down 8.5 percent from February 2006. The PHSI in the South was 8.0 percent below a year ago. The index in the Midwest was 9.7 percent lower than February 2006. The index in the Northeast was 8.2 percent below a year earlier. In the West, the index was 8.2 percent lower than February 2006.”

“David Lereah, NAR’s chief economist, said there has been a steady narrowing from year-ago readings since last July. ‘If it wasn’t for the unusually bad weather in February, we’d be seeing a better performance in pending home sales,’ he said. ‘We also may be seeing some fallout from a decline in subprime lending.’”

From Reuters. “Grant Thornton resigned as auditor for two troubled subprime lenders because ‘they no longer meet our requirements for client acceptance,’ the auditor said.”

“The two lenders, Accredited Home Lenders Holding Co. and Fremont General Corp., said separately Monday that Grant Thornton had resigned as their auditor after advising them that it needed to ’significantly expand’ the scope of its audit of their 2006 financial statements.”

“Both firms said they were now seeking new independent auditors but that there was no guarantee that they would be able to find them.”

From Bloomberg. “Fremont, the No. 5 U.S. subprime lender, was cited by federal regulators last month for giving loans to borrowers unable to repay them. The Santa Monica, California-based company shut its home-lending operations March 5, put employees on paid leave and hired Credit Suisse Group to sell the mortgage unit.”

“‘The subprime market is one that is getting additional focus by everyone, not just accountants, but in the entire business community’ said Grant Thornton CEO Edward Nusbaum.”

“Accredited Home Lenders Holding Co. said in a separate SEC filing today that Thornton resigned as auditor. Neither company gave a reason. Last month, Thornton said the San Diego-based lender’s financial problems were severe enough to cast a doubt on its ability to stay in business.”

“Thornton’s departure will cause an ‘additional delay’ in the filing of the lender’s annual report, Accredited said in a statement on its Web site.”

“‘I don’t think this is about reputation,’ Nusbaum said today. ‘It is about the risks and issues that are described in the filings’ by Fremont and Accredited.”

The New York Times. “From an 11-story steel-and-glass tower that housed its headquarters in Irvine, Calif., the New Century Financial Corporation ruled as one of the nation’s largest mortgage lenders to individuals with weak, or subprime, credit during the recent housing boom. That reign officially ended yesterday.”

“‘It’s definitely the end of an era,’ said Guy Cecala, publisher of an industry newsletter.”

“Earlier, New Century said it owed $17.4 billion on credit lines from investment banks; most of those debts were secured by loans that New Century made with those funds. Many of those banks, which declared New Century in default in early March, began seizing the loans or auctioning them off in the last two weeks.”

“The results of those auctions, which have not been disclosed, would provide an important benchmark of what New Century’s assets and loan portfolios are worth, said analyst Zach Gast. ‘The bids for the loans put up for auction will provide a pretty good estimate of how much debtholders will be hurt,’ Mr. Gast said.”

The Associated Press. “‘New Century’s failure raises the very real risk that the problems facing the subprime sector will spread into the broader mortgage market,’ said Octavio Marenzi, CEO of Celent, a Boston-based financial research and consulting firm.”

“‘Relatively lax lending standards were by no means limited to subprime lenders, and problems could easily spread to the broader banking sector,’ he said.”

From Business Week. “The fall of the industry’s biggest player to date underscores the market’s tough posture toward the whole field in the current era of rising defaults and shaky housing prices.”

“‘I would say to you that no matter what a NovaStar or a New Century might say to me, I don’t think I’d be reassured,’ says Theodore Kovaleff, a senior bank and thrift analyst at Sky Capital.”

The Kansas City Star. “H&R Block said Friday that problems in the nation’s troubled subprime mortgage market prevented it from meeting a self-imposed March target for selling its Option One Mortgage Corp. unit.”

“‘Clearly they’re in advanced negotiations, but it’s a moving target because of the meltdown in industry,’ money manager David Roberts told Bloomberg Market News. ‘Although it’s very disappointing they didn’t announce the deal today, I’m encouraged by the shares not tanking,’ Roberts said.”

“Michael Millman, a longtime analyst of Block, called the announcement disappointing. ‘We think (Block) lost credibility by waiting to the last minute to confirm what many thought,’ Millman wrote.”

“Moody’s Investors Service put the credit ratings of H&R Block’s mortgage-lending unit on watch for a possible downgrade, citing problems in the subprime mortgage industry.”

“‘While a sale of Option One could still occur soon, the timing is more uncertain,’ said Brian Harris, senior vice president at Moody’s. ‘We expect subprime lenders to be pressured for the rest of 2007 and very possibly into 2008 as well.’”

From Fitch Ratings. “As the U.S. subprime market stresses continue to materialize, 2005 and 2006 vintage structured finance (SF) CDOs will be under greater ratings pressure as they have substantially larger concentrations of subprime RMBS, according to Fitch analysts.”

“Ratings volatility arising from later vintage subprime RMBS will likely be experienced in 12-18 months as the actual loss experience becomes clearer, according to Senior Director Derek Miller.”

“‘Though 2006 performance will be very poor, Fitch’s more immediate concerns focus on near-term ratings volatility that will arise from earlier vintage subprime RMBS,’ said Miller.”

“For years, political leaders touted rising homeownership rates as a sign the ‘American Dream’ was being fulfilled but more than a million looming foreclosures have called the dream into question.”

“‘We no longer have a problem with loan availability … but a lot of our homeowners are one crisis away from losing their home,’ said Hope Wilson, a housing counselor in inner-city Cincinnati.”

“After stagnating at about 65 percent for much of the 1960s, ’70s and ’80s, the U.S. homeownership rate has risen slowly in the past 15 years to nearly 69 percent.”

“But with an estimated 1.5 million homeowners facing foreclosure this year, Congress is now looking at tighter lending standards to protect unwary Americans from taking on loans they cannot afford.”

“Credit counselors facing a tidal wave of panicked homeowners say many should not have taken out, or qualified for, a home loan in the first place.”

“‘Everyone wants immediate gratification. All they think is ‘I want this house now,’ said Joann Brady, director of the nonprofit Home Ownership Center of Greater Cincinnati. ‘The lender was looking only at the bottom line. The client was not reading the documents. It’s both of their fault.’”

“‘We shouldn’t make believe we’re helping people into homeownership by giving them a predatory product that creates a temporary homeownership,’ said John Taylor, president of the National Community Reinvestment Coalition. ‘Two years down the road they are on the street and… in a much worse position.’”

“‘Is it paternalistic? Call it what you want. I don’t care, I’m not running for office. I just want to keep people in homes they can really afford,’ Taylor said.”

Newsday reports from New York. “Sen. Charles Schumer, who heads the Senate banking subcommittee on housing, told an audience in Massapequa yesterday that he and others in Washington are working on legislation to regulate mortgage brokers for the first time and to end loans offer based on false promises.”

“‘It’s despicable what some of these brokers will do,’ Schumer said after recounting a story of an ailing Queens man who refinanced his home on a broker’s promise of a $1,400-a-month payment that changed to $4,000 a month after less than a year.”

“‘There are about eight houses in a two-block area with ‘for sale’ signs on them, and while I don’t know how many of them will end up in foreclosure, that’s the most I’ve seen at this time of year since I’ve lived here. And there was a foreclosure around the corner about two years ago,’ said Tina Diamond, a civic leader and school board member.”

“Schumer said a recent study shows that many single-family homes on Long Island could lose more than $4,000 in value when a house within an eighth of a mile, or one city block, is foreclosed on.”

“‘It’s crystal clear that the scope of the financial damage caused by skyrocketing foreclosures . . . [is] infecting entire neighborhoods on Long Island by depreciating property values,’ Schumer said. He added that as the subprime market explodes, foreclosures will soar, with 8,378 families in Nassau and 10,476 in Suffolk at risk of losing houses by the end of 2008.”

The Boston Herald from Massachusetts. “Home prices are rising in Boston’s fancy neighborhoods but falling in less-wealthy ones - and experts fear the Hub’s recent murder wave might make the disparity worse.”

“Average condo prices plunged 29.3 percent in Roxbury and 7.7 percent in Dorchester. Mattapan’s average house price fell 8.2 percent.”

“Broker John Ford and others attribute some areas’ woes to a number of factors, ranging from a generally soft Massachusetts real estate market to the subprime-mortgage industry’s abrupt collapse.”

“But market watchers say the recent string of murders isn’t helping. ‘Violence is obviously going to affect supply and demand,’ said broker Sam Schneiderman.”

“Dorchester broker Kenneth Osherow said he’s actually seen an increase in would-be buyers recently, although he assumes some house hunters have decided to look elsewhere. ‘After what’s gone on, sure, there will be some trepidation - and rightfully so,’ Osherow said.”

The Times Leader from Pennsylvania. “Across the country, and to a lesser extent in Northeastern Pennsylvania, subprime loans made to millions of risky applicants with poor credit and low incomes have melted into a mess of foreclosures and late payments.”

“George Hanzimanolis, president-elect of the National Association of Mortgage Brokers, said he’s heard stories of people taking adjustable-rate mortgages and getting ‘very comfortable’ with the low introductory rate.”

“They then take on other debt and can’t afford the higher payment ‘when it comes time to adjust.’ While lenders are made to look like the bad guys, ‘Consumers need to take some responsibility,’ said Hanzimanolis, who works in Tannersville.”

“The subprime loan meltdown comes at a time when the nationwide housing bubble has flattened, lowering prices and cluttering the market with unsold homes.”

“Christopher Baduini of Wachovia’s mortgage banking director for Northeastern Pennsylvania, said there is a lot of real estate inventory in the region.”

“Hanzimanolis said the stable growth has not completely insulated the region from the subprime fallout. He said there is a tightening of guidelines by lenders and the elimination of some programs.”

“He said, we’re ’seeing people calling and having to turn people away.’”

“Take a home worth $150,000, for example. In the past the bank would finance it 100 percent, but with the subprime fallout, the financing is cut to 90 percent, leaving the buyer to come up with the remaining 10 percent or $15,000. That puts the purchase out of reach for people who are not able to save enough to pay that share, he said.”

“The problems arose from trying to create more homeowners. ‘We were challenged by the government to put more people in houses,’ said Jim Bulger, president of the Pennsylvania Association of Mortgage Brokers.”

“Don’t expect a quick fix from the government. The market will correct itself, Bulger and others said.”

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