The Housing Bubble

The Voice of San Diego reports from California. “A larger number of homeowners find themselves upside-down in their homes, owing more than their home could sell for, than in previous years. And the number of them hoping to execute a short sale is also increasing.”

“There were 1,065 San Diego County homeowners in some level of foreclosure in February, according to a recent report. By comparison, 881 homeowners were in that category in the same month a year ago, and 299 in February 2005.”

“Jim Supples is a Realtor focusing mostly in the neighborhoods from Scripps Ranch to Escondido. He said short sales are growing in prevalence’- not because they’re the ideal situation for buyer or seller, but because they’re becoming a necessity. Buyers who banked on the housing market continuing to increase are now unable to refinance loans while their payments balloon out of reach.”

“‘People got into these situations, and then the market dips down,’ he said. ‘People are just getting squeezed out. Last year, it was negligible,’ Supples said of the short-sale phenomenon. ‘Two years ago? Nothing.’”

“But Tuesday, when Supples reviewed the database used by Realtors to list and search for homes for sale, he found more than 700 combinations of the phrase ’short sale’ among the 16,000 active listings in the Sandicor database.”

“Without the cushion of a personal investment in the property, the road to becoming upside-down in the house moves quickly when a market starts to decline.”

“Short sales usually mean a smaller loss of value in that neighborhood than a foreclosure auction would. And as the banks become deluged with consumers in trouble and loans in default, they’ll become more likely to accept the offers from willing buyers in a short sale scenario.”

“‘If you have a huge increase in the volume of properties, you’re going to be a little more inclined to take a reasonable offer on a property and cut your losses there,’ said Rick Sharga of RealtyTrac.”

The North County Times. “Blame it on the sky-high housing prices. In all but one year of this decade, more people have moved out of San Diego County than have moved in from other parts of the state and nation. And, not surprisingly, say analysts, the trend accelerated during the last three years, with homes never more out of reach of the typical area family.”

“The total number of fleeing San Diego County residents reached a peak of 42,034 last year. That exodus, focusing on the 12 months that ended July 1, came on the coattails of a net domestic migration loss of 37,666 residents the previous year and a loss of 32,140 the year before that.”

“‘A lot of people are moving to Texas from here,’ said Darius Khoshnevis, owner of the U-Haul on Ninth Avenue in Escondido. ‘I think it’s because of the housing market. They can buy a house there for less than half of what they would pay for one for here.’”

“Texas isn’t the only place they’re headed, Khoshnevis said. Many are going to Arizona, Nevada and Utah as well, he said.”

“The major coastal counties of San Diego, Orange and Los Angeles have been posting net domestic migration losses for years, and Riverside County has been capturing a large chunk of the movers.”

“Meanwhile, the ratio of people moving out of San Diego County to those moving in has reached such a feverish pace that truck rental companies are scrambling to keep up. Jerry Mitchell, who owns the land that a Vista U-Haul business sits on, said, ‘We will be scrounging for one-way trucks this summer because there just aren’t that many people moving in.’”

“‘I don’t think we’ll ever have housing costs that look like Kansas,’ said Ed Schafer, senior demographer for the San Diego Association of Governments. ‘But you know, if we lost like 25 percent of the value of homes, then the area would be competitive again in terms of housing.’”

The Modesto Bee. “MortgageTree Lending Corp., a Modesto-based mortgage company with 390 employees in 32 states, is being acquired by W.J. Bradley Company Merchant Partners of Denver. About 25 employees at its Modesto headquarters were laid off last week, according to spokesman Bill Campbell.”

“The company reported originating about $1 billion a year in residential mortgage loans. Its business declined significantly by 2006, however, originating fewer loans from fewer branches. Some closed, including one in Turlock.”

The Merced Sun Star. “Merced homeowners are among the most likely in the country to have subprime mortgages according to a survey published recently in the Wall Street Journal. Merced ranked seventh on a nationwide list that calculated the percentage of subprime loans among homeowners in 331 cities. Subprime loans made up 21 percent of Merced’s mortgages as of December 2006.”

“In January and February of this year, 410 homes in Merced County entered the foreclosure process, according to RealtyTrac. During the same period in 2006, that number was 43; in 2005 it was 49.”

“Cindy Pulliam, branch underwriter at a Merced mortgage banker and broker, said the jump in delinquency activity coincides with interest rate increases on loans homeowners took out during the 2005 housing boom.”

“Back then, as out-of-town investors pushed prices sky-high, some buyers may have felt pressured to accept risky loans, Pulliam said.”

“‘Our prices were increasing rapidly,’ Pulliam said. ‘People felt like if they didn’t jump in right then and do whatever it took to get a home they weren’t going to be able to afford a home down the road.’”

“Many of those mortgages had fixed interest rates in place for a two-year period that expire now, Pulliam said.”

“But with home prices plunging from their 2005 heights, borrowers can’t refinance to get out of their existing mortgages. ‘In most cases they’re ending up with more due on the home than what they can get on the loan,’ Pulliam said.”

“While some experts have pointed fingers at borrowers who may have exaggerated their incomes on loan applications, Pulliam noted that inexperienced people inside the mortgage industry played a role in the subprime meltdown as well.”

“‘We have to put some of the responsibility on some of the rookie brand new loan officers who got into the industry to make a quick buck and didn’t necessarily look out for the best interest of the home buyers,’ Pulliam said.”

“As more and more mortgages default, some subprime lenders are being forced to close up shop. New Century Mortgage, one of the biggest subprime players in Merced’s market, filed for Chapter 11 bankruptcy Tuesday and cut 3,200 jobs.”

“This isn’t the first time Merced has been featured on the pages of the Wall Street Journal. A 2005 article listed Merced as the least affordable housing market nationwide. In 2006, the newspaper projected that Merced’s home prices were 77 percent over-valued.”

The Times Mirror reports from Virginia. “They are a fairly typical Loudoun family. He is a 35-year-old engineer for a technology company in Fairfax, pulling in $80,000 a year. His wife teaches yoga. College-educated, they have two daughters. In August 2005, the housing market in Northern Virginia is piping hot. The couple buys an 1,100-square-foot condo in a brand-new Ashburn community for $336,000, using two interest-only mortgages.”

“This family would not allow their names to be used because of the sensitive nature of the situation. After a year of spiraling financial problems, the man said, the bank foreclosed on their condo, and now banks, collections agencies, hospitals and homeowners associations are after him for tens of thousands of dollars.”

“‘The knife is falling and I’m not trying to catch it. I’ll wait until it drops, then I’ll react,’ he said.”

“In fall 2005, life is good. Not for long. First, the car breaks down. They dip into their home’s equity line of credit to buy a second-hand car. Then they spend $3,000 on furniture, using credit cards. Then his wife gets pregnant.”

“As 2006 wears on, the expenses continue to mount. Next up: The housing market fizzles. The couple watches as neighbors’ identical condos sell for $315,000 and less.”

“In June 2006, he calls the mortgage lender. He knows he will soon be unable to pay the monthly payments, especially since the adjustable rate mortgage has just adjusted upward.”

“The woman at the bank tells him ‘that I was unorganized, irresponsible, that I needed to get a second job, and that my pregnant wife needed to work,’ he says.”

“Eventually time runs out. The bank repossesses the house and puts it on the auction block. Now they live in a rented house in Gainesville that his wife’s brother owns. His credit rating has dropped to below 500, from 760 before this all began.”

“‘The dream of homeownership,’ he says, ‘is a lie.’ The property he paid $336,000 for in 2005 was auctioned off on Feb. 20, and the bank had the highest bid: $277,973.”

“Jim Stasiowski, a mortgage consultant for Countrywide Home Loans in Leesburg, said his company, like many nationwide, is dealing with a major spike in foreclosures. ‘The worst of it is still yet to come,’ he said.”

“He said one of the problems is there are no licensing requirements for mortgage brokers. ‘You can be a shoe salesman one day and the next say, ‘I’m a mortgage broker.’”

“‘To an uneducated buyer, these things sound great. … The thing is — it was too easy,’ said Stasiowski.”

“A few years back I was at a photo shoot for a house featured in our real estate section. I knew the real estate agent, and asked her what the house was listed for. ‘$535,000,’ she said.”

“‘That seems pricey,’ I replied. ‘Maybe, but it should sell quickly.’”

“The house was nice and all, but it didn’t seem half-a-million-nice. I asked her how people could afford it. ‘You don’t have to put any money down,’ she said.”

“‘How’s that?’ ‘You get a first mortgage for 80 percent, and a second for the other 20 percent, and you can get in without putting up any money. My 22-year-old son just bought a house for $450,000 with no money down. It’s an interest-only loan.’”

“I left there knowing that the housing situation was in bad shape, only nobody seemed to notice at the time. How will this bubble end? Badly, I’m afraid.”

Thw Washington Post. “One in 30 homeowners in Philadelphia has been hurt by predatory lenders who target people who live in moderate-income neighborhoods and whose homes are often their only asset.”

“The study by the Reinvestment Fund, a community-development group in Philadelphia, analyzed the sales and mortgage histories of 15,500 Philadelphia properties.”

“The fund found that the likelihood of becoming victimized by predatory lenders is one in seven for borrowers who have refinanced their homes multiple times. Any mortgage creates a public paper trail that documents a borrower’s financial situation.”

“A recent study by the Urban Institute, citing federal data, found that 17.6 percent of all conventional home-purchase and refinance loans in the Washington area were made by subprime lenders in 2005, a new high for the region.”

“The Philadelphia study concludes that predatory lenders are not targeting the poorest neighborhoods. Rather, they’re seeking moderate-income neighborhoods where they can squeeze the equity of a house.”

“‘A lot of these guys are not going to the bottom of the market,’ said Ira Goldstein, the study’s author. ‘They’re trolling up a little bit because there’s more money to be had there.’”

Some housing bubble news from Wall Street and Washington. “Mortgage lender SouthStar Funding has closed its doors, the latest victim in the battered subprime lending market, a company executive said Tuesday. ‘We really felt like we could weather the storm and that we would outlive some of the competition,’ said Tyler Wood, SouthStar executive VP. ‘Wall Street’s appetite for the Alt-A and subprime market disappeared.’”

The Post and Courier. “SouthStar, which once employed about 800 people nationwide and last year generated $6.3 billion in mortgage loans, closed its entire operation. ‘SouthStar Funding LLC sincerely regrets that it was necessary to cease its mortgage lending operations,’ the mortgage firm said. ‘The recent unprecedented downturn and policy changes in the mortgage industry necessitated this action.’”

The Boston Globe. “New York mortgage broker Vertical Lend Inc. forged borrowers’ signatures, created false loan records, and charged fees that were never disclosed to customers, state regulators said yesterday as they ordered the company to stop selling mortgages in Massachusetts.”

“Also yesterday, Massachusetts ordered SouthStar Funding LLC to halt operations after regulators learned the company is no longer funding some loans it had agreed to make, said David Cotney, the banking division’s chief operating officer.”

“‘The chickens are coming home to roost,’ said James Campen, a former economics professor at the University of Massachusetts at Boston.”

The Boston Herald. “Subprime mortgage lenders are bulking up on ‘loss mitigation’ personnel in a desperate attempt to avoid foreclosing on homes now worth far less than what borrowers paid for them. The moves aren’t done for altruistic reasons: Lenders simply don’t want to foreclose on homes that will end up on their books.”

“Analyst Gerard Cassidy said he eventually sees other lenders, not just subprime lenders, moving toward hiring extra ‘loss mitigation’ personnel if the housing carnage starts spreading to other areas of the financial sector.”

United Press International. “The troubled U.S. housing market has led to nearly the same job-cut number so far this year as in all of 2006, an outplacement consulting firm said Wednesday.”

“Job cuts in the housing-related industries of real estate, construction and mortgage lending surged 346 percent to 21,245 in the first quarter from 4,764 in 2006’s three months, Challenger, Gray & Christmas Inc. said.”

“‘While many have predicted that the housing market has hit bottom, the situation seems only to worsen as home builders continue to report slumping orders,’ says said John Challenger, CEO of Challenger, Gray & Christmas.”

“‘Now we are seeing the impact hit traditional as well as sub-prime mortgage lenders as demand for loans declines and the number of foreclosures skyrockets,’ he says.”

The Associated Press. “Mortgage giant Fannie Mae, remaking itself as it recovers from a multibillion-dollar accounting scandal, is cutting its 6,500-person work force by several hundred employees by year’s end.”

“Fannie Mae also disclosed in February its decision to withhold $44.4 million in bonus money tied to company earnings targets from 46 current and former senior executives after a government-ordered review found they were undeserved on the basis of performance.”

The Chicago Tribune. “Amid rising levels of defaults and foreclosures in the home-lending industry, nearly 900 Chicago-area workers at four mortgage firms will lose their jobs, according to recent filings with Illinois employment officials.”

“ACC Capital Holdings told the Illinois Department of Commerce and Economic Opportunity in three separate filings last month that it is cutting a total of 515 jobs at three locations.”

“Meanwhile, Fremont Investment & Loan told the state that it was laying off 270 workers. H&R Block Mortgage Corp. is cutting 58 workers. In addition, WMC-GEMB Mortgage Corp. told the state that it is letting go 51 workers in Schaumburg as a result of ‘the current climate’ in the subprime mortgage industry, a spokeswoman said.”

From Reuters. “Mortgage applications fell for the third straight week as interest rates rose, reinforcing a growing view that the housing industry will further sour as fewer subprime borrowers get loan approvals.”

“‘We definitely still think we have some ways to go before we reach bottom in terms of housing activity,’ said Andrew Tilton, senior economist at Goldman Sachs. ‘You’re going to have a combination of more supply and less demand going forward as result of happenings in the subprime market adding to a situation that is already one of oversupply,’ Tilton said.”

“On Tuesday, the National Association of Realtors reported a 0.7 percent bounce in pending sales of existing U.S. homes, suggesting stabilization. ‘Even a stabilization in sales will do little to work off quickly the high level of inventories of homes for sale, which in turn means further downward pressure on prices,’ UBS said in a report.”

From Builder Online. “Credit Suisse analyst Ivy L. Zelman says possible lender restrictions involving subprime and Alt-A mortgages, which accounted for an estimated 40 percent of purchase dollar originations in 2006, may result in a shrinking pool of buyers for new homes.”

“‘Some of the investors said, ‘I’m delivering the loan back to you. Give me my money.’ And that’s basically why New Century went belly up,’ Zelman explained. ‘What people think right now is that this is just a subprime problem, and unfortunately, I wish it was. Subprime is not that significant for many (builders) but we all should realize that housing is a food chain, and there is a domino effect.’”

From Bloomberg. “Some collateralized debt obligations that invest in subprime mortgage bonds, related derivatives and other CDOs may be less diversified than they appear, raising investors’ risks, according to Moody’s Investors Service.”

“Moody’s sees ‘increasing’ correlations in performance, which suggests it will require more protection for bondholders when the project is finished.”

“The value of Canadian building permits plunged from record highs to their lowest level in a year in February. Statistics Canada reported on Wednesday a 22.4 percent tumble in permits due to a sharp decline in both residential and nonresidential permits.”

“The biggest decline was in the province of Ontario but western Canadian provinces of Alberta and British Columbia, as well as Quebec in the central region also saw significant setbacks.”

“‘The hefty retreat does support the view that housing activity will moderate in the year ahead,’ said economist Doug Porter.”

From CTV.ca. “‘February’s decline, the fastest in 13 months, occurred due to across-the-board decreases in both residential and non-residential sectors,’ Statistics Canada reported. ‘Inventory of unsold new housing has been on the rise since August 2006.’”

“The vacancy rate for U.S. apartments climbed to 6 percent in the first quarter, the highest in almost two years, as the number of available properties increased, real estate research firm Reis Inc. said.”

“The decline in prices for condominiums, combined with the large number of condos that are available for rent, has made them less attractive to investors, the study said.”

“Net conversions peaked at more than 55,000 units in the third quarter of 2005 and now stand at less than 1,000 units, according to Reis. In Fort Lauderdale, Phoenix, Las Vegas, Atlanta, Austin, and Fort Worth, the slowdown in conversions has turned to net re-conversions, Reis said.”

The Boston Globe reports from Massachusetts. “In recent years, a new breed of mortgage company, the subprime lender, exploded onto the scene. The subprime market, which grew from nothing to a $600 billion-a-year business in 2006, brought the American Dream to a larger slice of the population than ever before.”

“But the price, for many, was too high. More than half of the record 20,000 Massachusetts homeowners who received foreclosure notices from lenders last year had subprime loans.”

“Ivan and Christine Estrada could not afford the mint-green saltbox they bought in Winthrop for $315,000. Two loans from Atlanta-based SouthStar Funding LLC, whose operations in Massachusetts were halted by state regulators yesterday, financed the home’s full price.”

“Within months of buying, the couple’s $2,918 monthly payments depleted their small cushion of savings. On the loan application, his income was listed as $6,500 a month, but pay stubs from his full-time job at a rental-car company show he earned about $2,200 a month there last year, excluding overtime.”

“The Estradas said they learned about the inaccuracy only when a friend, Boston lawyer Maria Banciforte , reviewed their original loan documents after the Estradas were rejected by at least three major lenders for refinancing they sought to reduce the payments. ‘Why didn’t I catch that?’ Christine Estrada said.”

“Prime Mortgage Financial Inc. in Southborough, which served as the broker for the Estrada loan, said it has a signed application from the borrower. Prime’s loan salesman, Scott McLaughlin, said he tried to talk the couple out of the loan. ‘I told them at the time that I thought it was going to be unaffordable, but she also said she was going to be back to work soon,’ he said.”

“Christine and Ivan Estrada disputed McLaughlin’s version of events. McLaughlin ’said we would be able to refinance in six months’ if they paid the loan on time and ‘made us feel so secure that it would happen,’ Christine Estrada said. That strategy could have worked, if home prices had kept going up.”

“The couple missed their February and March payments. If they are unable to save their home, they and their three children will rent again. They will also have to contend with the fallout from foreclosure. ‘Now our credit’s ruined,’ Christine Estrada said.”

“Even selling the home might not solve their financial problems; the real estate website Zillow.com estimates the value of their property at $302,000, which is not enough to pay off their loans.”

“When Angela Mitchell refinanced her subprime loans with a new subprime loan, the single mother’s fate was sealed. Nearly two weeks ago, a judge gave her until May 1 to vacate her Dorchester condominium, which was seized in foreclosure.”

“Mitchell obtained two loans from New Century’s broker in February 2005. The combined payments started at $1,705 but would have risen this month to $1,902 if the primary loan’s ‘teaser’ interest rate, 5.9 percent, surged to 7.4 percent, her loan said.”

“A year ago, feeling burned by her first loan salesman, she found a new broker through a friend and refinanced into a single mortgage, borrowing an additional $28,000 to help pay other debts. Her friend, Mitchell said, ‘thought he was helping me out.’”

“Mitchell’s new loan increased her payments $700 a month to $2,401. It carried an initial rate of 9.4 percent, with a maximum rate of 14.4 percent over the mortgage’s life, according to documents.”

“Mitchell used more than half of the $28,000 in cash she received from the refinancing to pay other debts. She reasoned that by paying other bills, ‘I would have more money to pay for my mortgage,’ she said. In hindsight, Mitchell said, ‘It was a dumb move.’”

The Providence Journal from Rhode Island. “Rhode Island’s housing prices declined in February, with condos falling farthest, according to a report released yesterday by The Warren Group in Boston.”

“The statewide median price of a condo in February was down nearly 15 percent, to $219,500, compared with $258,000 a year earlier. Condo sales since January have fallen nearly 9 percent during the same period.”

“In February, the statewide median price of a single-family house fell about 4 percent, to $249,250, compared with $260,000 during the same month last year.”

“Bristol, Newport and Washington Counties all reported single-family house sales rose by double-digits in February, but the median prices in all three counties declined. The most dramatic decline was in Bristol, where the median price of a single-family house in February fell 31 percent, to $255,500, compared with $370,250 a year earlier, according to the report.”

From Conntact in Connecticut. “Real estate is an industry with an ever-evolving vocabulary. The buzzwords ‘frenzy,’ ‘flurry’ and ‘active’ have recently been eclipsed by ‘normalized,’ ‘changing’ and ‘lull.’”

“According to Realtors in North Haven, the total number of homes sold in 2006 dropped 11 percent from the year before, to 6,565.”

“‘That bump with subprime rates [a nationwide shakeout among subprime mortgage lenders] was unfortunate,’ (said) Paul Gradwell, president of the Greater New Haven Association of Realtors. ‘It did fuel the economy [before the collapse], but we’ve warned a lot of our agents that they might want to encourage people who have loans in some of these defunct companies to seek out other financing options.’”

“‘That frenzy of years ago when activity basically doubled [annually] is over,’ says Michael Marsden, a Realtor in Guilford. ‘In 2001 through 2003, people were asking lofty prices and getting them. Now we look at the market to be more of a normal pace. People are not putting in multiple bids on houses, they can take their time. There is some wait-and-see going on.’”

“Statewide, there were 8,073 new housing permits awarded in 2006 and 466 in January of this year.”

“‘If you price your house based on what you really want and not try for a fistful of stars, you’ll get activity, you’ll get close to your asking price,’ he says. ‘There’s too much inventory for sellers to wait for someone to meet their high asking price. In Madison and Guilford, the inventory has grown by 50 percent each year.’”

“All agree that Connecticut has become more of a buyer’s market over the past 18 to 24 months.”

“‘It’s all about value,’ says Sue Clifford, a Realtor in Madison. ‘[Unlike] the good old days where we were bidding and grabbing houses, today houses sell for close to asking price when they’re priced appropriately.’”

“‘There is no longer that impulse of ‘I have to buy it right now at asking price before it slips through my fingers,’ explains Clifford. ‘There is a bit of caution with buyers now.’”

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