The Housing Bubble

The Oakland Tribune reports from California. “Bay Area home listings rose in March at one of the nation’s highest rates, according to a survey released this week. The number of homes for sale, both old and new listings, increased 12.2 percent in March from February. The only area that topped the Bay Area was Los Angeles, which had a 12.8 percent inventory increase.”

“Inventory levels also play a role in when people sell homes. ‘Where there is a great deal of inventory, (homeowners) think it takes a lot longer to sell … so they put it on the market (earlier),’ said David Kerr, a senior sales associate at ZipRealty.”

“Sellers in Antioch, Discovery Bay and Richmond, where many homes are for sale, are putting homes on the market now, he said. Of the 25,072 Bay Area homes for sale Friday, 1.7 percent were listed as short sales, according to ZipRealty.”

The Press Enterprise. “The hotel should’ve almost been built by now, but a cooling housing market has sent a barely touched 550-acre parcel in Desert Hot Springs into foreclosure.”

“Now the company no longer owns the project and is being sued by 52 homeowners at its other Desert Hot Springs development, Hacienda Heights, who complain of shoddy construction work.”

“‘The market up here…went from being one of the fastest-growing cities in the state to where sales have softened dramatically,’ said (developer) Walter Luce. ‘The Coachella Valley was really the last part of Southern California to feel the crunch. We thought that maybe we wouldn’t be affected by it,’ he said.”

“Three weeks ago, Irvine-based attorney Ken Kasdan sued the company, accusing it of construction defects at its Hacienda Heights development including stucco and concrete foundation cracks, window leaks and roof leaks.”

“‘Overall we’re alleging very poor quality and shoddy workmanship,’ Kasdan said. The homeowners will likely seek about $250,000 each, which they believe is the cost to repair their homes, he said.”

The Orange County Register. “Chriss Street thinks if you’ve got a mortgage from a subprime lender in deep financial trouble, and that’s a good-sized bunch, you may want to gulp.”

“The county’s tax collector is concerned that some ailing lenders may be unable to get borrowers’ payments to their rightful place, such as prepaid property tax payments.”

“‘This is a very serious issue,’ says Street, who adds the unsettling notion that property owners are still liable for a tax bill, even it goes unpaid due to a lender’s failure to forward your cash to the tax collector.”

“Street’s not yet seen evidence in his tax collecting efforts of such mistakes or misappropriations. Still, O.C.’s overall late tax payments are already running at an 11-year high.”

“But one company in the subprime game claims they’ve witnessed borrowers’ mortgage payments go awry. Wall Street banker UBS sued New Century Financial, the once subprime giant now mired in bankruptcy. The UBS beef? That the Irvine lender failed to forward $3.8 million in borrowers’ payments, plus $1.7 million in escrow payments for house expenses, to UBS-sponsored owners of certain mortgages.”

“‘I’m just being prepared that one, two or many of these lenders will have used the money that should have been set aside,’ says Street, who notes that New Century forwarded its borrowers’ tax payments to his office on Friday.”

The LA Times. “California is in the midst of a major boom in large-scale marijuana cultivation operations run from inside homes.”

“‘They have cropped up in neighborhoods like never before,’ said Gordon Taylor, who heads the DEA office in Sacramento. ‘I am talking about organized crime groups who are purchasing homes in our communities and creating marijuana factories.’”

“Local authorities have discovered at least six indoor suburban pot farms in just the last month, including two this week in Rowland Heights.”

The Union Tribune. “After a new neighbor moved in across the street from Betty Phillips, the block took on a distinctive odor. Inside her new neighbor’s $580,000, three-bedroom home, police found 1,886 marijuana plants.”

“A week earlier and a few miles across town, investigators discovered about 2,100 plants worth up to $12 million in a 3,000-square-foot, two-story home, which in January had sold for more than $800,000. On Wednesday, two more pot-growing homes were found in Rowland Heights.”

“In the past nine months in California, law enforcement agencies have found 50 grow houses, most in new housing developments ranging from the Sacramento area to the Central Valley. Almost all the Northern California homes were purchased using 100 percent financing, Gordon Taylor said. The homes were so heavily financed that there was nothing for the owners to forfeit to the government.”

“Having such a criminal enterprise in a neighborhood setting is ‘fraught with potential danger,’ said Dan Simmons, an agent in the U.S. Drug Enforcement Administration’s San Diego office.”

“It was opening day at Petco Park yesterday, which meant an adrenaline rush for the Padres, and another marketing opportunity for anxious developers.”

“‘New condos for sale’ announced a large banner hanging on Park Terrace. At 7th Avenue and K Street, an advertisement for The Legend, a still-under-construction residential tower – gushed about ‘condo living at the ballpark.’”

“A block over, at 7th and J, was a poster for a planned 36-story luxury high-rise called Condominium Tower. The ad offered the chance to buy into a building ‘overlooking Padres Petco Park.’”

“It’s no secret that the real estate market is flat in San Diego – especially in the downtown area, in part because so many buildings went up in such a hurry.”

“The downtown developers need every edge they can get. San Diego real estate consultant Gary London cites ‘a blanket slowdown’ in the downtown market, ‘probably the only over-built market in the entire San Diego region. There’s too much inventory under construction,’ London said.”

“Sal Rivera, a television journalist, and his wife, Rose, recently bought a condo with a balcony overlooking Petco’s center field. ‘If we were going to turn around and sell tomorrow, then we’d be in trouble,’ Rivera said. ‘But otherwise, we’re fine.’”

“Doug Wilson, developer of The Mark, a 244-unit residential building two blocks north of Petco, acknowledged that half of the units had yet to be sold, even though the building is scheduled to open early next month.”

“But he said he wouldn’t panic, even if it takes another two years to sell the remaining condos. ‘Hey, this is not Armageddon. It’s a needed correction,’ Wilson said.”

The North County Times. “The name says ipayOne, but the Carlsbad real estate company that bought the naming rights to San Diego’s Sports Arena two years ago is not paying any longer, the arena’s operator said Friday.”

“IpayOne is in default on its $2.5 million naming rights agreement, said Ernie Hahn II, who heads Arena Group 2000.”

“On Friday, ipayOne had only one notice on its Web site, saying that it would no longer accept new listings and asked buyers and mortgage customers to make contact by e-mail. It was signed by Michael Jackman, the company’s CEO.”

“Hahn said that ipayOne made initial installments on the $2.5 million it agreed to pay over five years, but then it stopped. ‘We’ve had to send letters, reminders,’ he said. ‘It’s been less than ideal.’”

Readers suggested a discussion on subprime ‘contagion.’ “Topic: Debunking the ’subprime is contained’ meme, which is propagated from above by top U.S. economic policymakers.”

A reply, “Some are saying spill over, others say no problem. Being that alot of the debt was sliced, diced, pureed, and distributed, who’s to say any spill over will occur. News reports from various sources are contradictory.”

To which one said, “Yeah, I’m making a layered cake. I’m starting with PRIME eggs and butter, mixing in Alt-A sugar, flour and yeast then I feel like I will throw in just a smidgen of SUBPRIME dogs*@t. Because hey, I have to get rid of it and just a little bit shouldn’t hurt the overall product since it is just a small percentage of the ingredients. Any takers on the taste test?”

Others question what the prime borrowers reaction will be. “Will prime borrowers who could pay the mortgage if they accept perpetual house poverty and a very low standard of living, continue to do so if they know the value of their home has dropped?”

“We’re getting the fraud defaults. We’ll get the payment shock defaults. And we’ll get the usual divorce, illness and job loss defaults. The question is whether or not others will walk away rather than pay 50% of their income for housing.”

A reply, “I don’t think people will walk until they are forced to walk. People think their house is valued at the price they paid for it (even more) despite any contrary evidence that is presented to them, hence they will fight to keep their home.”

“Drilled into homebuyers is the mantra ‘real estate always goes up in value,’ thus any decline in price obviously must be temporary, and even a buying opportunity. If they sell out at a lower price than at which they bought then they demonstrate to themselves that they are something less than the financial astute people they imagined themselves to be.”

Another said, “That may have been the case in the past, but this time is different. These people have grown accustomed to thinking they are entitled to spend $5,000 on rims, and go out for sushi once or twice a week.”

“Once the house stops providing that lifestyle for them, they will stop paying. These are NOT responsible people who care about their reputations (that includes their credit scores). Better to rent for half the cost and still be able to party it up.”

From MarketWatch. “American Home Mortgage Investment Corp. said that it’s stopped offering some types of so-called Alt-A mortgages because of the high cost of delinquencies on those loans.”

“The warning suggests that problems in the subprime-mortgage business have begun spreading to other parts of the home-loan industry.”

“‘During March, conditions in the secondary-mortgage and mortgage-securities markets changed sharply,’ said Michael Strauss, American Home’s CEO. ‘While the market may recover…our working assumption must be that current market conditions will persist.’”

“American Home also indicated that it continues to be affected by the high cost of delinquencies, especially on Alt-A mortgages, and that it’s been forced to repurchase some of these loans.”

“The company announced that it’s stopped offering certain types of Alt-A loans that have been particularly prone to rising delinquencies and repurchases. Those are loans where the homeowner borrows a relatively high portion of the value of a property and simply states an income, rather than documenting it.”

“American Home isn’t a subprime lender. In early March, the company issued a statement to clear up any ‘confusion’ about the type of loans it offers. Most are adjustable-rate mortgages and so-called Alt-A loans, which often require less documentation.”

“American Home said Friday that earnings will be lower because investors in the secondary-mortgage market and the market for mortgage-backed securities (or MBS) offered to buy its loans at ‘materially lower’ prices.”

“Lower prices for AA-, A-, BBB-rated MBS and riskier bits known as residual-mortgage securities also triggered losses in American Home’s investment portfolio, the lender added.”

From Reuters. “Citigroup Inc., the largest U.S. bank and one of the largest U.S. mortgage lenders, is telling brokers that on Monday it will stop making some riskier home loans, documents obtained by Reuters show.”

“The changes at Citigroup’s main home loan unit, CitiMortgage Inc., would limit no-money-down second mortgages and raise the minimum credit scores needed to obtain them. Borrowers take out second mortgages when they cannot get 100 percent financing from a single lender.”

“According to e-mails obtained by Reuters, CitiMortgage will stop offering second loans to some customers who want to finance 100 percent of homes’ values and cannot fully document their own finances.”

“The unit will require 5.01 percent down on some second, sometimes called combo, loans, and 10.01 percent down where financing involves home equity or interest-only loans, the e-mails show.”

“The documents also show that CitiMortgage will raise the minimum ‘FICO’ credit score needed to obtain any combo loan to 650, and eliminate the 620-649 category. Borrowers with FICO scores below 620 are commonly labeled ’subprime,’ meaning they have higher credit risks.”

A report from the Washington Post. “At Glen Waye Gardens Condominiums in Silver Spring, 21 owners are more than 30 days behind on their monthly condo fees. Two other owners have not paid since they bought their units, one in April 2005 and the other in September 2006. Both properties went into foreclosure.”

“The lost fees, which make up 5 percent of the association’s annual budget of $1.3 million, have pushed the condo board to dip into its reserve funds to fix the roof and replace a water heater.”

“In a sign that the turmoil in the subprime mortgage industry is affecting entire communities, condominium association officers, property managers and real estate lawyers throughout the region say they are noticing more delinquencies in monthly fees.”

“‘If someone is not paying their mortgage, they’re not paying their condo fee, and the condos need money to pay bills,’ said Jeffrey van Grack, a community association lawyer in Bethesda.”

“When mortgages become too burdensome, the bill from the condo association becomes easier to ignore.”

“Phil Ochs, a lawyer who represents about 40 condo and homeowners associations in Montgomery and Prince George’s counties, said he has seen 10 foreclosures since January. In the past 45 days, 15 people living in communities he represents have declared bankruptcy to stave off foreclosure. Most of them bought their condos in the past two years, he said.”

“Normally, Ochs said, he may see one or two foreclosures and one or two bankruptcies a month. But now, that’s changed. ‘Something’s going on,’ Ochs said. ‘This is historically out of line.’”

“‘We’re starting to see delinquencies where they’re not owner-occupied. It’s not just a matter of a subprime borrower,’ said Thomas Schild of Thomas Schild Law Group in Rockville, which represents many community associations. ‘They were counting on increased equity. That equity is not happening.’”

“Clara Perlingiero said there are two units that are close to being foreclosed on in her Silver Spring condo community. In her 30 years living there, she said, there has been only one foreclosure.”

“Her building is old, and the elevators need fixing. The condo fees, which range from $275 to $400 per month, are crucial, she said. ‘We have to maintain the building because everyone loses if you don’t,’ she said.”

“Advocates for condo boards in Maryland pushed unsuccessfully this year for a state law that would have given associations priority liens over properties. That means that the association would collect unpaid dues on a foreclosed property before the lender got what was owed on the mortgage.”

“The District has such a law, so associations can collect up to six months in unpaid dues before the bank steps in. Virginia, like Maryland, gives the lender priority.”

“The bill’s backers argued that in a down market, there usually is no money left after a foreclosure sale to pay both the lender and the association. The mortgage industry opposed the bill.”

“Craig Wilson, president of a property management company in Germantown, said, ‘99.9 percent of the time, when a mortgage is foreclosed upon, the homeowners association or condominium gets nothing.’”

“At Glen Waye Gardens, monthly fees range from $396.50 to $588.75 and cover utilities, groundskeeping, snow removal, and maintenance of the furnace and air conditioning system. ‘We’re not running a resort out here,’ said Vicki Vergagni, president of the 214-unit community’s board. ‘These are living expenses.’”

“Vergagni, who has lived in the community for 32 years, said some of the most delinquent people had low incomes and weak credit or got 100 percent financing. In one case, New Century Financial, the troubled subprime mortgage company that this week filed for bankruptcy protection, financed the sale, she said.”

“Those owners ‘really had no business in terms of their creditworthiness to buy into our community,’ she said.”

“A foreclosure usually costs the association about $3,000 in legal fees. Suing the owners would just cost more money. In the past year, the association has chosen to write off $12,000 in unpaid dues instead.”

“‘The best thing you can do is get them out of there and get a paying owner,’ she said.”

The News & Observer from North Carolina. “Each spring, thousands of Triangle homes sprout “For Sale” signs as the housing industry’s most important selling season gets under way. But this year, in one of the worst housing markets in a generation, brokers are scrambling to prevent a financial frost.”

“‘We’re being a little more competitive,’ said broker Ed Willer. ‘We have to, because there are more homes on the market.’”

“In the Triangle, spring is typically when brokers can tack a 5 percent premium onto asking prices for homes, and get it. Not this spring.”

“Willer is visiting more competing houses to make sure his listings are priced right. ‘We’re taking a closer look at prices, sharpening our pencils a little bit,’ he said.”

“Sales in the area could be 10 percent lower than in 2006, said Mark Vitner, a Wachovia economist in Charlotte. ‘This spring won’t see as big a pickup as we did in spring last year,’ Vitner said, ‘but it’s better than what we’re seeing nationwide, like in Florida, where sales are down 40 percent.’”

“Last year, Coldwell Banker Howard Perry and Walston’s 800 brokers and agents held about 50 open houses per weekend. This spring, they have ramped up to 150 and aim to hold 300 open houses every weekend by mid-spring.”

“Kathy Eaton warned the 90 agents at her Stonehenge office that sales have dipped a couple of percentage points. ‘I’m telling my brokers, ‘I want our properties to sell first,’ Eaton said. ‘It may mean more open houses, hiring professional interior decorators and stagers, doing work up front so homes truly stand head and shoulders above the competition.’”

“Any sales decline could accelerate if potential buyers delay purchases, hoping that selling prices decline, and sellers put off listing their homes to get a higher price later. ‘We’re definitely seeing lower offers than a year ago,’ said broker Linda Kolarov. ‘They think it’s a buyers’ market.’”

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