The Housing Bubble

Inside Bay Area reports from California. “While the industry is defending itself against claims that the high-risk subprime loans were irresponsibly made to borrowers who shouldn’t have gotten them, a Burlingame-based mortgage broker is siding with the critics. And if that weren’t enough, Steven Krystofiak is also raising alarms about mortgage fraud, which he claims happens a lot in California.”

“It’s not just the subprime mess that angers Krystofiak. He also has concerns about mortgage fraud. ‘I could play the (mortgage fraud) game if I wanted to, but I decided not to,’ Krystofiak said. ‘In California, (mortgage) fraud has become acceptable.’”

“Not if you ask Jack Williams, president of the 4,800-plus member California Association of Mortgage Brokers. ‘There are the bad apples, but I think he is way overstating it,’ Williams said. ‘Anyone who does fraud as a mortgage broker, we are definitely going after them. We’re going to make sure they are investigated.’”

“About 20,000 mortgage brokers are licensed and overseen statewide through the Department of Real Estate via a real estate broker’s license, according to department spokesman Tom Pool. Real estate sales agents also can work in the mortgage industry under the supervision of a broker.”

“The department investigates complaints about mortgage fraud. If a complaint is upheld by the department, a broker or agent could end up having his or her license suspended or revoked, Pool said.”

“‘We don’t have the authority to unwind the (loan) or void a contract,’ Pool said. ‘Ultimately, only a (civil) court of law can do that.’”

The San Francisco Chronicle. “‘It’s usually a win-win situation,’ says Lon Parmelly. ‘I had a client who walked away with a $600,000 debt forgiven.’”

“What? Your mother forgets you owe her $60. But who forgives you for a debt of $600,000?”

“As more people are facing the possibility of foreclosure, losing both their house and their credit in a process fraught with humiliation, a little-known transaction known as a ’short sale’ may seem like a dream come true.”

“How prevalent are short sales? It’s difficult to say. In the Bay Area, the MLS has no special box to check divulging whether a sale is a short one or not, though many agents write it into the comments.”

“Parmelly says she has noticed that lenders have been ’staffing up” their loss-mitigation departments, but they are still extremely understaffed. Indeed, according to real estate agent Damion Matthews of Prudential, San Francisco, the increase in short sales has led to a problem. Many lenders are so busy that they don’t respond to short-sale offers.”

“Last month, Matthews put an offer on the short sale of a Rincon Hill condo on behalf of a client and waited three weeks for an answer. ‘I called the lender over and over,’ he says. ‘There was no way to get ahold of a human being. Later, I heard that they never got around to looking at the offer. The condo went into foreclosure and was auctioned off.’”

“Some local cities and counties are seeing dangerously high foreclosure rates. According to Realty Trac, Oakland currently has the 22nd highest foreclosure rate in the nation, with one foreclosure for every 146 households, almost double the national average.”

“Other smaller cities also reveal escalating problems for many homeowners. Realty Trac currently has 1,902 foreclosures, default notices and bank-owned sales listed in Antioch, amounting to one in 15 of its 29,466 households.”

“Short sales do have one downside for sellers: Lenders claim whatever debt they’ve forgiven as a loss on their taxes and issue a 1099 form to the seller for the amount. ‘It’s taxed as earned income,’ says Parmelly, adding that, depending on the loss and the seller’s tax bracket, it could amount to a significant increase in taxes.”

“I accept that whatever banks, regulators and homeowners can do to stave off foreclosure is probably for the good of all, but forgiving a $600,000 loan? Whatever happened to personal responsibility?”

The Los Angeles Business Journal. “Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate, said that the decline in sales volume may represent a more normal market as the higher levels of the past few years were inflated by the activity of investors who sought to make a quick buck.”

“‘In 2005 and 2006 there was quite a bit of investment buying,’ she said. ‘Once those buyers left, that reduced volumes tremendously.’”

“‘We’ve seen stability in sales. We’ve not seen any major price erosion anywhere in the state,’ said Robert Kleinhenz, deputy chief economist for the California Association of Realtors.”

“But Kleinhenz warned that it was too early to tell if the market has bottomed out, given how the collapse of the subprime sector may have some lingering effects on the psychology of buyers.”

“One sign of that, he said, is the average time a house for sale sits on the market in Los Angeles County. That time has crept up recently to 9.6 months, which is…higher than the country’s long-term average of about 8.3 months.”

The LA Times. Downturns in the housing market are heartbreaking for homeowners. As real estate sales decline and prices stagnate, middle-class homeowners stop splurging…they stop using their houses like ATMs or even slot machines. Such a housing-related slowdown may already be underway, judging by this week’s economic indicators.”

“For a sneak peek of what may come to Southern California, keep an eye on the Inland Empire. Gung-ho developers have built acres of new homes east of Los Angeles County over the last decade.”

“But supply is outpacing demand, and many houses are losing value. In March, home sales year over year in Riverside and San Bernardino counties fell 47.3% and 46.6%, respectively. Prices are likely to fall further as developers continue building.”

“More than a quarter of the mortgages originating in the Inland Empire since 2002 have been sub-prime loans. The region has the third-highest foreclosure rate in the U.S.: More than 10,000 mortgages there went into default in the first quarter of this year.”

“Even as ‘for sale’ signs clutter the landscape, government finance officers and economists say that disaster has yet to strike. Hopefully they are right. But if they’re wrong, the Inland Empire’s experience might prove a cautionary tale about where we’re all headed.”

The Merced Sun Star. “Explosive growth has earned Merced County a new title, the 10th-fastest-growing county in California, according to new data from the state Department of Finance.”

“The population estimates are based in part on the amount of new housing units constructed, which means the data could be skewed by the number of new homes now standing empty.”

“In Livingston, for example, Livingston Union School District Superintendent Henry Escobar said he’s learned that new houses don’t always mean new people. While the city has seen more than a dozen new subdivisions over the last few years, the school district has added a grand total of 50 new students since 2004, said Escobar.”

“‘We were ready to deal with this growth and we began to plan for it,’ said Escobar. ‘We have a new school site, we have everything ready to go, except for the kids.’”

“County Supervisor Deidre Kelsey said she too had some doubts about the new population estimates, given Merced’s unique housing situation.”

“‘I do think the numbers are probably up, but I don’t think they’re quite as high as what the Department of Finance is predicting, just because of the known fact that we have a lot of out-of-town investors that have bought here and are now sitting on those houses,’ said Kelsey.”

Readers suggested a topic on personal consumption and the economy. “When is this recession going to get here? Gas prices are going up, housing market is in the dumps and there beginning to have major job layoffs. The ever resilent consumer keeps spending, something is gonna have to give here soon.”

A reply, “I think that depends on the degree to which mortgage equity withdrawal (MEW) lead or lags the consumer spending that it supports. Do people borrow against the house and then go out and buy the Escalade, or do they use the money to pay off maxed out credit cards?”

“As MEW dries up, is this future spending that they’ll have to forego, or past spending that they’ll have to pay high rates on? The degree of each will affect the timing and degree of the consumer spending slowdown, and the likely recession that it leads to.”

“Early on, it looks like it’s the big ticket items (cars etc.) that have been affected. It will probably take a while for moderately profligate consumers who are living beyond their means on their credit cards hit their credit limits and can’t use a REFI to roll their debt into their mortgage.”

“How long it takes before they burn through all their available credit depends firstly on their burn rate, and will later be affected IMHO by credit contraction, which we haven’t seen.”

One asked, “How can you tell a recession is not already here, but just unreported?”

A reply, “Exactly. I work at the ground level of the economy these days, at a nonprofit that assists those with low to moderate incomes. This month alone my clients have included an aerospace engineer, an orthotist, several software engineers, and a hydrologist, not to mention countless realtors, two mortgage loan officers, two furniture sales people–both of whom were earning in excess of $100K before the housing bust; and a new car salesman.”

“All are either newly unemployed or marginally employed (significantly reduced income due to lack of sales). They all report that they are currently living off of their savings. I’d say that the recession is here.”

To which was said, “At least your clientele apparently had enough sense to save some money for the lean times. It bodes ill for the rest of the national economy that the national savings rate has recently remained in negative territory for the longest period since the 1930s.”

From Money Magazine. “Newlyweds Erik and Brandi Quam can’t really afford their home. The monthly carrying costs on their two-bedroom condo in Arlington, Va. run about $2,500 a month, and they fear the bill could go higher still as their adjustable mortgage resets to higher interest rates. It’s already a tight squeeze: They’ve taken in a roommate to help pay the bills.”

“Unfortunately, they can’t afford to sell either. Thanks to a falling housing market and a prepayment penalty of about $11,500, they’d owe the bank more than their place is worth. The irony is that the Quams should be able to afford their place: It cost just $219,000 when a still-single Brandi bought it.”

“The primary mortgage on the Quams’ condo was fixed at 5.25 percent, but Brandi had also taken out a smaller variable-rate loan. As rates rose in 2005, she went looking for a better deal.”

“Shortly thereafter, she says, she got a call from broker Robert Hoover of CPA Mortgage in Maryland. He found her a new loan with what she says she understood to be an initial 1 percent rate, with only small increases in the first five years. And since she had equity (her condo had appreciated), she could even take a little cash out to pay off some bills. The transaction earned the broker and his firm about $12,600.”

“It took a few months before Brandi realized what she had done. The mortgage was something called an option ARM. It was true that Brandi could make initial minimum payments of about $800.”

“But those weren’t enough to cover the interest she was actually being charged, which was higher than the rate used to calculate required payments. The unpaid interest was added to the loan balance, a phenomenon called negative amortization.”

“Barring a market turnaround, they’re stuck for at least another year and a half until the prepayment penalty phases out. They’ve had to turn down job offers because they can’t move.”

“Who is to blame here? Yes, Brandi should have asked more questions and scrutinized the fine print. The idea of a mortgage with a 1% rate seems, on its face, too good to be true. Brandi says she did know she’d eventually have to make higher payments, but she planned to move before that happened.”

The Herald Tribune reports from Florida. “Craig Meadow is in financial hot water after contracting with Punta Gorda-based Ideal Homes Inc. for a $305,000 dream home that the builder never completed. He said he has been devastated financially. Meadow is among a growing group of consumers contending with struggling or defunct builders in Southwest Florida.”

“The fallout from their problems, mostly the result of the hyperactive housing market of 2004-05, is also filling a lot of the time of planning and building officials from governments around the region.”

“The past year has been unprecedented: Sarasota-based Jade Homes closed, leaving 75 unfinished houses; Avalon Homes, also of Sarasota, left 50 houses unfinished; and St. Petersburg-based Construction Compliance Inc. left more than 400 houses unfinished.”

“North Port building official Tom Lifsey can no longer keep a count of the panic-stricken homeowners, the liens, the abandoned houses and the lawsuits, he said.”

“‘I don’t know how many times I’ve said it: ‘I would love to help you, but this is a civil matter,’ Lifsey said. ‘Unfortunately, in Florida, there’s usually nothing we can do.’”

The Palm Beach Post. “The pink walls of the 1960s-era Rutledge Inn fell to bulldozers last year. Owned by three generations of the Crouse family, the hotel was razed to make room for Mirasol Beach of Singer Island.”

“Mirasol Beach was to be an 18-story condo resplendent with spa, fitness center, library, theater, lounge and billiards. No more. Last week developer Taylor Woodrow Plc pulled the plug on the project.”

“‘I wish we had never sold it,’ Doris Crouse said after being told of the developer’s decision. ‘It’s just dirt now,’ she said.”

“Mirasol Beach isn’t the first project to level a piece of Old Florida only to be canceled. Two years after the beloved Crab Pot restaurant was shuttered, plans for the 17-story condominium that was to be built in its place went belly up. The site, on Riviera Beach’s mainland, is up for sale.”

“Just 10 months after bulldozers rolled over the Pot, the overheated condo market started cooling. Barbara Fox, a real estate agent and longtime Crab Pot patron, said, ‘I understand change.’ Her office at Marina Grande overlooks the Pot site. ‘But really, replace it with something. Don’t leave it bare.’”

The News Press. “The Bonita Bay Group’s decision to cut 30 positions is the latest in a series of terminations and layoffs by developers and builders sparked by the sluggish real estate market. ‘The downturn in the real estate market is putting pressure on the company,’ spokeswoman Mary Briggs said.”

“Briggs said the Bonita Bay Group does not plan to cut any more jobs. ‘We have every confidence that things are going to turn around,’ she said. ‘It’s just taking longer to do so than we had hoped.’”

The Sun Sentinel. “Real estate agents across South Florida kept pointing to this week, hoping state legislators would revive the housing market with a bold plan to fix the property tax crunch.”

“But now that legislators have pushed off the tax talk until June, dispirited agents say they have little hope of salvaging the spring selling season as they face at least another month of soft sales.”

“‘It’s just terrible what they did,’ said Bob Melzer, an agent in Boca Raton.”

“Many residents say they’re trapped, unable to buy larger or smaller homes because their tax bills would double or triple.”

“‘The market is going to come back once we provide some equality and sanity to our tax structure,’ said Bob Goldstein, chairman of the Realtors Association of the Palm Beaches.”

“And there’s no guarantee that the changes legislators settle on will help the real estate market in a meaningful way. One proposal to roll back taxes to 2005 levels was criticized for not giving homeowners enough savings.”

“Year-over-year sales dropped 22 percent in Palm Beach County in March and 25 percent in Broward. Palm Beach County’s median price of $375,100 was down $18,600 from a year ago.”

“Agents had hoped a resolution to the tax problem this month would at least give buyers the confidence to make offers before hurricane season begins June 1.”

“‘This delay is going to mean a further standstill,’ said Beverly Rothstein, an agent in northern Broward. ‘Buyers are stuck and sellers are extremely unhappy.’”

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