The Housing Bubble

The San Francisco Chronicle reports from California. “As other states adopt stricter regulations on subprime lending practices, California has not rushed to restrict an industry that spent $17.9 million in campaign contributions and on lobbying in the state during the past four years. Regulators and lawmakers across the nation have scrambled in recent months to stem the tide of foreclosures prompted by the crisis in the subprime lending market.”

“In the nine-county Bay Area, the number of loan default notices in the first quarter of this year was 6,730, up 160 percent from the same period a year ago. The number of foreclosures in the first three months of this year hit 1,493, up 839 percent from the first three months of last year.”

“Ed Smith Jr., VP of government affairs for the California Association of Mortgage Brokers, said the mortgage industry is among the most regulated in the nation and that lawmakers don’t need to get involved.”

“‘The market has self-corrected itself,’ he said. ‘Many of the mortgage products that were around six months ago are not around anymore.’”

“But the subprime crisis has some homeowners on the verge of losing their houses. Yvonne Mau, of Pinole, who pulled equity out of her home to build an extra room in 2003 for her elderly father, has since refinanced several times to cover her mortgage payments.”

“To make matters worse, Mau had to quit her job to take care of her father as well as her daughter, who has a learning disability.”

“Mau’s latest loan requires a $4,718 monthly payment for the first two years followed by payments of $6,097.37. She estimates her monthly family income at about $3,500. ‘I know we are at fault for stupidity, but these companies shouldn’t be doing loans that people can’t pay back,’ Mau said.”

“So far, 34 states and Washington, D.C., have adopted those recommendations, which consumer groups say don’t go far enough. California hasn’t adopted the guidelines yet.”

“The process can easily take at least six months, said Tim Lebas, a deputy commissioner for the Department of Corporations, which licenses lending companies. That explanation doesn’t sit well with at least one lawmaker.”

“‘It is simply inexcusable,’ said state Sen. Mike Machado, D-Linden (San Joaquin County), who chairs the Senate Banking Committee and has put the budgets of the real estate and corporations departments under review.”

“‘By threatening their budget, they’ve become more responsive, and we are asking them to adopt these (as) emergency regulations,’ Machado said.”

From News 10. “Foreclosure activity in the first quarter of 2007 set a record in Sacramento County. Sagging home values and adjusting mortgages are largely blamed for the 3,077 notices of default sent to Sacramento County homeowners in the first three months of the year.”

“And nowhere is the wave of foreclosure activity more dramatic than in 95832.”

“A News10 analysis of statistics and property records shows that in the first three months of 2007, more than two percent of the homeowners in zip code 95832 defaulted on their mortgages. At 22 defaults per 1,000 homes, 95832 may lead the state in foreclosure activity for the first quarter of 2007.”

“One third of the 57 homes in default in the first quarter of 2007 are in a subdivision called ‘The Meadows.’ It’s hard to find a block on a street in the Meadows without a foreclosure. Real estate signs litter the neighborhoods.”

“‘They are people who were put in bad situations, put in bad loans,’ said Holly Hisel, a foreclosure specialist with Coldwell Banker. ‘I think that’s where the majority of these are coming from.’”

“Of 23 houses on Richfield Way, five went into default in just the first three months of this year. ‘It seems like I post (an auction listing) every other day on Richfield,’ said auctioneer Bryan Moulton.”

“At a recent courthouse auction, a five-bedroom, four-bathroom 3,500 square foot house on Richfield Way that sold in July 2005 for $526,000 was offered by the bank for $295,000. There were no takers.”

“Jacqueline Hippard spoke to News10 on the front porch of her home on Expedition Way that was just days away from a foreclosure auction. Hippard and her husband Jeffrey said they paid $10,000 in late 2005 on a lease-purchase option, but the owner of the house stopped making payments to the lender.”

“The Hippards have hired a lawyer and are fighting the bank to maintain possession. Jacqueline Hippard admits it’s a longshot.”

The North County Times. “Sales of apartment complexes throughout San Diego County declined by 11 percent during the first quarter of this year over last year,, according to a report.”

“George Carlson, apartment specialist with Burnham, attributed the slowdown to buyers waiting for prices to fall.”

“‘Potential buyers recognize the market has softened and expect lower sales prices,’ he said in a statement. However, he added, sellers are reluctant to lower asking prices.”

“Carlson predicted that the market will normalize, saying that the ‘record-high prices that coincided with the condominium conversion frenzy are gone for the near future.’ Investors who might have put their money into selling condos are now looking at rental income, he said.”

The Mercury News. “With stratospheric housing prices pushing an unprecedented flow of college graduates out of the state, a prominent think tank says California faces a worrisome shortage in future decades: A lack of highly skilled workers to buttress the state’s quality of life.”

“Much of the worry is prompted by the new exodus of college graduates. Historically, college graduates have flocked to California from elsewhere in the United States. But according to PPIC’s analysis of Census data, since 2000, more college graduates have been leaving California for other states than are arriving.”

“‘It’s safe to say that certainly we haven’t seen this kind of flow out of the state in the past,’ said Hans Johnson, a PPIC demographer who co-authored the report. ‘Probably what’s happening now is unique in California’s history.’”

The Rocky Mountain News reports from Colorado. “Debra Dotson discovered the hard truth Tuesday, that the house she has lived in for 10 years was no longer hers. She joined thousands of others who have seen their adjustable mortgage rates climb, their monthly house payments climb and their hopes of holding onto their houses plummet into foreclosure.”

“Dotson…grabbed what looked like a great refinance opportunity in 2004, then lost her job in November 2005 and is scraping by in 2007. Dotson’s home, which she bought for $117,000 in 1997, was auctioned to World Savings Bank for $159,333. She has to be out of the house in July. ‘I don’t know where to go,’ she said. ‘I feel lost.’”

“Now (it’s) in the hands of the bank that had sold her the adjustable- rate mortgage in 2004 after she converted it from a 30-year loan with a rate fixed at 7.5 percent. It was a mistake, she said.”

“‘I hesitated, but I did it,’ Dotson said, adding that she never sought out the ARM but instead was offered it through the bank.”

“Last year, Denver had more than 5,100 foreclosures, and 2007 was off to a blistering pace when, through February, 1,057 foreclosure notices had been given. Statewide, Colorado was hit by 9,254 foreclosure filings in the first quarter of 2007, putting the state on track to top last year’s record foreclosures by about 25 percent.”

“Last year, 28,453 foreclosures were filed statewide. This year, that number could rise to about 36,000.”

From KOAA TV in Colorado. “News First has learned that complaints are being filed with state regulators against several people involved in a mortgage deal that’s left a young family in a bad situation.”

“Not only are they facing foreclosure, but it appears the Colorado Springs home they paid $284,000 for is crumbling beneath them.”

“It’s the first home for Tim Archer and his wife Alicia. They admit they had no idea what they were getting into when they bought the home last year. ‘Very, very bad. I’d rather rent again. As of right now, I’d rather rent again,’ Tim Archer said.”

“We know the home sold on April 21, 2005 for $200,000. It then appraised on September 15, 2006 for $284,000.”

“The loan application that shows Archer makes $7,500 a month. Archer says he told the mortgage broker he averages around $4,000 a month, and the $7,500 amount is only a high end that he makes a couple of months a year.”

“‘It was our first house. We were excited we were getting approved for a house, no more renting,’ Archer said. So he signed all the papers he was given. But now, his house payments are up to $2,500 a month and rising. ‘We don’t want to lose our home, but we might not have a choice,’ Archer said.”

“Another broker told the Archer family they’re upside down in the loan and can’t refinance out.”

“We tried to track down everyone involved. Several said there’s much more to the story and that the home buyers are at fault. They told us the Archer family wanted to get into a house fast and were warned about all the pitfalls. But no one would agree to an on camera interview.”

The Arizona Republic. “Having trouble selling your house so you can buy that new dream home? No worries. Some builders will let you trade in the old place as part of the deal for a new one.”

“The new programs are driven by a drop in new-home orders and soaring cancellation rates that have left many builders with an excess of unsold homes. Cancellations shot from 1 percent in January 2005, the midst of the housing boom, to nearly 29 percent in March, according to Hanley Wood Market Intelligence.”

“Although some companies are seeing an improvement over last year, cancellations were still running high the first quarter of 2007. At Scottsdale-based Meritage Homes, cancellations stood at 28 percent. At KB Home, it was 31 percent. Pulte Homes lost 25 percent of the sales to cancellations in its Southwest division, which includes Arizona.”

“‘The resale market is slow right now,’ said Dan Tartabini, sales director at KB Home. ‘We want to make sure people who buy from us that have a house to sell get to the finish line.’”

“Upper-end builder T.W. Lewis of Tempe, buys select resale houses from buyers of its built but unsold homes. The resale must appraise below $500,000. The company will consider paying 90 percent of that price.”

“Alfredo and Raquel Matute wanted to buy a new house in the north Valley but were concerned about getting a decent price. They knew resale prices were falling, and they didn’t want to ‘give the house away,’ Alfredo said.”

“Yet they also wanted a new, bigger house so they could start a family. They thought the time was right since builders were overloaded with unsold houses and were offering big inducements to buy.”

“The couple decided to buy in a Maracay Homes project in north Phoenix. They signed up for a referral program that set them up with an agent who priced their house at $409,000 in a neighborhood where similar homes were listing for $420,000 to $435,000.”

“The house sold in three weeks for $400,000. The couple originally paid $220,000 for the house 3 1/2 years ago, so they could afford to be flexible on the price. ‘We were kind of aggressive,’ Alfredo said. ‘We knew we were taking a high risk, but I told my wife: ‘This is the best time to sell this house. The (resale) prices are going down.’”

“Some analysts see these programs as a sign that builders are in trouble and doing anything it takes to lock in sales. ‘These trade-ins signal the real trouble some Phoenix builders are experiencing now,’ said Jim Belfiore of Phoenix-based Belfiore Real Estate Consulting ‘We thought in December home-building was starting to make a real turnaround. But this move signals real desperation by some.’”

“John Burns, a California-based analyst said he has noticed another sales tactic recently: Builders putting mortgage experts into their sales offices. That means builders are trying to eliminate cancellations before they happen.”

“‘They don’t even want to go into contract with people who can’t close,’ Burns said.”

The Arizona Daily Star. “Home builders are deeply lowering prices to sell houses quickly, according to market research from Bright Future Business Consultants. The median new home sold for $241,020 in April, down 9.5 percent from $266,265 a year ago, ‘the largest decrease in any price on a monthly basis in recent history,’ said analyst John Strobeck.”

“‘But it’s a good decrease,’ he added. ‘That’s reflecting the current market much better and it’ll help move the product that’s out there.’”

“Prices likely will continue to decrease because they are inflated, Strobeck said. There are around 10,000 homes in the resale market now, about twice the normal number, he added.”

Some housing bubble news from Wall Street and Washington. “A high-ranking Treasury Department official on Wednesday chastised mortgage lenders for too-often failing to verify the income of borrowers with blemished credit histories, blaming the practice for rising defaults and foreclosures.”

“‘Sound underwriting and, for that matter, simple common sense suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower,’ Comptroller of the Currency John C. Dugan said in a speech.”

“‘But the norm appears to be just the opposite,’ said Dugan, whose agency regulates nationally chartered banks. ‘Nearly 50 percent of all subprime loans last year accepted stated income,’ meaning the underwriters did not verify the information provided by borrowers on loan applications.’”

“The head of the mortgage banking industry’s trade group claimed mortgage brokers and lenders focused only on short-term profits benefited from the housing boom, but didn’t do enough to examine whether borrowers could repay.”

From Reuters. “Dugan cited a Mortgage Asset Research Institute study that found 90 percent of borrowers reported incomes higher than those found on file with the Internal Revenue Service and almost 60 percent of the stated incomes were exaggerated by more than 50 percent.”

“Another survey of more than 2,100 mortgage brokers, reported by Inside Mortgage Finance, found that 43 percent of mortgage brokers who use low-documentation loan products know their borrowers cannot qualify under standard debt-to-income ratios.”

“‘Let’s not sugar-coat what’s going on here,’ said Dugan. ‘The practice of inflating income is at best misleading, and at worst, fraudulent.’”

The Associated Press. “The heads of trade groups representing mortgage bankers and brokers traded barbs Tuesday over who’s to blame for the housing market’s woes.”

“John Robbins, chairman of the Mortgage Bankers Association, says he is ‘mad as hell’ at ‘a few unethical actors’ that have sullied his profession’s reputation.”

“‘Who made this mess?’ Robbins asked. ‘The short-term folks. People who get a commission when the deal happens. For them, it’s the number of loans that counts. Good loan? Bad loan? Who cares? For them it’s all about their commission,’ he added.”

“In reaction, the president of the National Association of Mortgage Brokers, e-mailed a statement that said: ‘It is truly unfortunate (Robbins) has attempted to shift blame away from Wall street, federally chartered banks, state-chartered lenders and underwriters for the subprime situation we find ourselves in today.’”

“Harry Dinham, president of the brokers’ group, added that congressional hearings have shown that ‘most residential mortgage loans are quickly sold into the secondary market — in fact most lenders are really just brokering the transaction but afraid or ashamed to admit it,’ he added.”

The Palm Beach Post. “Robbins made his comments in a speech at the National Press Club, where he called for tougher licensing standards.”

“‘Frankly, it’s too easy to hang a shingle and call yourself an expert in mortgages,’ said Robbins, whose trade group represents the real estate finance industry. ‘We need licensing of brokers, with a threshold that will weed out those unwilling to be responsible.’”

“Robbins said Congress should not rush to legislate when the market already is fixing itself, driving out those who took too many risks. For example, New Century Financial Corp. and more than 30 other subprime lenders have gone bankrupt this year.”

“‘Many of those who most abused the system are already out of business,’ he said.”

The LA Times. Robbins warned against excessive regulation in response to the sub-prime mortgage crisis, saying an overreaction could prevent millions of Americans from buying homes. ‘We don’t want to revert to a time when, without perfect credit, you couldn’t buy a home,’ said Robbins. ‘Yet regulatory or legislative overreaction could prompt a return to just that — to raise the bar.’”

“‘We appreciate the industry’s stated intentions, but they guarantee nothing,’ said John Taylor, CEO of the National Community Reinvestment Coalition. ‘We must reject any superficial, tinkering-around-the-edges approach from an industry that has yet to take responsibility for a foreclosure crisis, which they have described as simply a ‘market correction.’”

From CNN Money. “The subprime mortgage meltdown has been a shock to industry insiders, but now they say it’s hitting harder and faster than expected, even to those who predicted the crisis in the first place.”

“Michael Marriott, managing director for Credit Suisse, said, ‘Last October, I predicted the subprime market would collapse and many issuers would go out of business. But the violence and speed of the market sell-off surprised people.’”

“David Lowman, CEO of JPMorgan Chase & Co.’s global mortgage business, said, ‘35 percent of what once could be done, can no longer be done,’ referring to mortgage loan products that have effectively been taken off the shelves.”

“Duane LeGate, president of House Buyer Network, a specialist in short sales and foreclosure prevention, said one of the real estate agents he works with had six deals blow up within four days because, ‘The loan originator told him, ‘We’re not offering [these products] anymore.’”

“According to LeGate, this kind of thing just started to happen in the past month or so.”

“‘Anything that smacks of no-income and no-documentation is history,’ said Allen Hardester, director of business development for mortgage broker Guaranteed Rate. ‘Anything above 85 percent to 90 percent loan-to-value, anything non-owner occupied, anything ludicrous as to value, like someone stepping up from a $1,000 a month payment to a $6,000 a month, is history.’”

“Lenders are also scrutinizing applications much more carefully, and many don’t like what they find. Lowman said he had recently looked at a low-documention application for a UPS driver who earned a quarter of a million dollars last year, or so the application stated.”

“‘If you took into account every person with a lawn care service on the side, there wouldn’t be a blade of grass left in the United States,’ he said.”

From Bloomberg. “New York Attorney General Andrew Cuomo issued a subpoena to the real estate appraisal unit of First American Corp. in his investigation of whether mortgage brokers pressured appraisers to inflate property values.”

“First American’s eAppraiseIT LLC, which values up to 15,000 homes a year in New York, was asked for information about appraisals performed throughout the state, President Anthony Merlo Jr., said in an interview.”

“‘It’s a very good thing, what the attorney general is doing,’ Merlo said. Cuomo’s office was focused on ‘who’s exerting the pressure’ on appraisers, he said.”

From Florida Today. “Troubles in the housing industry are not over, according to a leading economist with the mortgage agency Freddie Mac.”

“Amy Crews Cutts, deputy chief economist with Freddie Mac, said the big problems in the industry now are the continued large supply of homes on the market and the overuse in the past year of riskier ’subprime’ mortgages, a good number of which went to homebuyers who shouldn’t have received them in the first place.”

“‘The up cycle went so long, a lot of people in the industry haven’t seen a down cycle before,’ said Emile Haddad, chief investment officer for homebuilder Lennar Corp.”

“At the conference, the most pessimistic of the panelists was Mark Kiesel, executive vice president of Pimco Funds, a bond-management firm. In a report issued this month titled ‘Still Renting,’ Kiesel said he remains convinced that he made the right decision sell his house in early-2006, after owning a home for eight years.”

“Kiesel…expressed concern that an extended downturn in the housing market likely will lead to slower job creation, softer corporate profits, tighter lending standards, and weaker consumer and business confidence. ‘We’ve been sailing downwind on this boat for the last 10 years, and now we’re sailing into the wind,’ Kiesel said.”

“A sign of continued trouble, according to Kiesel, is that the inventory of homes for sale isn’t going down that much at a time when homebuilders are offering buyers incentives to make a deal.”

“Kiesel doesn’t see a quick turnaround for the industry. ‘This thing is going to drag out longer that many people think’ — a year or more, Kiesel said.”

“There currently is turmoil in the subprime segment of the industry, and banking trade groups are pushing for reforms, something Congress is considering.”

“‘We know it’s going to be bad,’ Cutts said, referring to problems in the subprime market. ‘How bad, nobody knows.’”

“Among the problems, Cutts said, is that many borrowers lied or misrepresented their financial positions to lenders, and there has been an increase in lending fraud in the industry. ‘The sophistication of the fraud is mind-boggling, and it is very professional,’ Cutts said.”

The Boston Globe reports from Massachusetts. “The housing slump isn’t over yet after all. After getting off to a strong start in 2007, home sales in Massachusetts fell 1.7 percent in April compared to the same period last year, and the median home price declined 2.3 percent, to $345,000, according to the Massachusetts Association of Realtors.”

“April’s sluggish pace is bad news for home sellers and brokers, who were hoping that robust sales in January and February meant the deep downturn that began last year was at an end. For prospective buyers, however, the data suggest they wield the upper hand during the crucial spring selling season.”

“‘This is like a retailer having a bad Christmas season,’ said Babson College finance professor Richard Bliss. ‘It doesn’t matter what happens the rest of the year, [because] you’re never going to make up what you lost in the peak season.’”

“Michael Ball said he misjudged the market when he purchased a small Cape on the South Shore in July 2005, to renovate and resell. He purchased the worn but charming house when Massachusetts real estate prices were at a peak.”

“By the time he finished the work and put the house on the market last October, home sales were in freefall. He dropped the price $35,000, to $635,000, and hired an agent last month after failing to sell it on his own. He said he could not go much lower on price, because of remodeling costs.”

“‘Everyone who goes in to see it loves it,’ said his agent, Maryann Zaccardi. But buyers, ‘faced with an abundance of inventory, feel that there’s no real need to act quickly.’”

The Sun Chronicle. “Sales fell slightly from a year ago and properties remained on the market longer, according to a report Tuesday by the Massachusetts Association of Realtors.”

“While the figures showed a slowing of erosion in the Massachusetts real estate market, local brokers were hard pressed to find silver linings in the flat performance.”

“David Joyce of Tri-Town Real Estate in Norton, said…he has yet to see a solid turnaround in home sales. ‘Right now, the homes that are selling are the most aggressively priced,’ he said.”

“Many potential buyers appear to be hanging back and keeping their options open.”

“‘The housing market continued to trend in a positive direction for the month of April,’ said Realtors association President Doug Azarian. ‘While the number of detached single-family homes sold was down, the 1.7 percent decrease year-to-year was the lowest we’ve seen in the month of April for the past three years.’”

The Boston Herald. “The Bay State housing market can’t seem to shake off a spring cold. Market tracker the Warren Group yesterday reported that Massachusetts house sales fell by 1.9 percent in April, when compared with year-earlier levels, the third straight monthly decline.”

“Sales have fallen every month since January, when the first gains in two years left brokers hoping the housing bust had finally ended. ‘We had some momentum, but now we’ve slipped back a bit,’ Warren CEO Tim Warren said.”

“Warren added that median house-sale prices dropped to $319,314 last month, down 4.7 percent from April 2006 and 12.3 percent from June 2005’s $364,000 peak.”

“Warren blamed the condo and house declines in part on the state’s foreclosure crisis, which has seen record numbers of properties face seizure for mortgage nonpayment. He said lenders advertised 4,833 foreclosure auctions in 2007’s first four months, ‘and that’s got to have an impact on the real estate market’s recovery.’”

“Warren previously predicted home prices would bottom out this summer, but now expects declines to continue into fall or winter. ‘Buyers are out looking, but it just seems that prices haven’t firmed up,’ he said.”

“The median price of single-family homes fell for the 12th straight month in April, while sales fell for the third month in a row, according to a report released today by The Warren Group.”

“‘Prices have been declining steadily as well, but not at the rate seen during a mid-2006, when they declined 8 or 9 percent from year-before numbers. Foreclosures are taking a toll in the housing market at large. Our statistics show more and more homes are coming closer to the auction block, as the distressed homeowners are finding it difficult to sell their homes in this still-slowing market,’ said Timothy Warren Jr.”

The Gloucester Daily Times. “Pond View Village, a heralded experiment at turning a former industrial site into 124 units of heavily subsidized affordable and market-rate housing, has been unable to sell condos in a glutted market and has defaulted on its main lender.”

“Christine Cousineau, the nonprofit’s executive director, told the Times that the Massachusetts Housing Investment Corp. ‘could have foreclosed in December.’”

“‘They’ve got financial challenges,’ said bank consultant David Sidon, speaking for the Gloucester Investment Corp. ‘Property values have come down so much they’ve messed up the original business plan.’”

“The nonprofit, Cousineau said, was depending on the sale of the 41 condo units to create the cash flow needed to keep the project on course.”

“More than a year after they went on the market, only eight units, those held below market rates, have been sold. The remaining 33, including 26 at market rates ranging from $229,000 to $359,000, have been taken off the market temporarily.”

“But with the condo market in a deep slump, prospects in the foreseeable future are dim, Cousineau said. ‘They’re not making offers,’ she said. ‘There’s so much inventory on the market, so much to compare to.’”

“Further inhibiting sales at Pond View Village was the acquisition in late December 2005 of its next-door neighbor, the city’s largest apartment complex with 272 units. The buyer, Forest Management Properties, quickly converted 92 apartments to condos and flooded the market.”

“Cape Ann Housing Opportunity missed the May 1 deadline for paying $40,888 of its $62,351 real estate tax bill to the city, according to a municipal lien certificate. CAHO has also failed to pay off its general contractor, Cutler Associates, which was unable to pay subcontractors.”

“James Murphy, attorney for North Shore Construction, said Cape Ann Housing Opportunity stopped paying Cutler, which stopped paying its subcontractors. ‘We like working for Cutler, but we also like getting paid.’”

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