The Housing Bubble

The Sacramento Bee reports from California. “First it was individual homeowners who turned to the auction block to sell fast at a discounted price. Then home builders. Now come the banks. Home loan lenders, stuck with rising numbers of repossessed homes, will auction 242 houses next month to bidders in Sacramento, Modesto and San Mateo.”

“It’s the biggest home auction in Northern California in the wake of a five-year housing boom. The auction especially signals a new sales rival to home builders, investors and individual sellers: the banks.”

“Robert Friedman, chairman of REDC, said buyers typically get a 10 percent to 20 percent discount from asking prices, while banks get quick results. ‘It’s just a business decision. You sell them quickly and take your hit,’ Friedman said. ‘In the long run they do it better by taking this route.’”

“Keith McLane, who runs a separate Carmichael-based home auction firm, said the sheer number of houses being auctioned next month “illustrates the quantity of foreclosures that are out there.”

“Foreclosures.com reports that banks owned 661 homes in April in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties. That’s up from 92 in April 2006.”

“Statewide, banks owned nearly 5,500 homes in April, according to the Web site. The same month in 2006 it was 1,111. Many of those still haven’t reached the market, said Foreclosures.com’s Alexis McGee.”

“Demand is high when they do, said Luann Richardson, a Fair Oaks-based real estate (agent). ‘Everybody wants a deal right now. There’s very strong demand for a deal,’ she said.”

The Santa Barbara Independent. “Why isn’t anyone talking about it? I’m talking about the rapidly oncoming tsunami disaster of 250-300 condos coming to market in the downtown business area this summer and fall and into 2009.”

“One project with six affordables and six market-rates has failed abysmally. The affordables were immediately filled, while the market-rates are still on the market as prices plummet a year after completion.”

“Common wisdom tells us the same is likely to happen to many, if not all, of the high-end units coming to market downtown this year and next.”

The Santa Monica Mirror. “According to Santa Monica City Manager P. Lamont Ewell, Santa Monica’s economy continues ‘to improve modestly.’ With Santa Monica’s varied tax base, the City should be able to withstand economic fluctuations.”

“These mixed economic pictures have caused the City to propose a $16.7 million decrease in expenditures, which is 3.7 percent less than the current year’s revised budget. Property transfer taxes are being projected to decrease by 21 percent due to the increase in foreclosures.”

The Central Valley Business Times. “A slowdown in housing demand in the Central Valley and in the Riverside-San Bernardino area of Southern California is being cited as the reason for a drop in projected new home starts this year.”

“‘Residential permit activity had been projected to be in the 155,000-175,000 unit range for the state. Based on activity for the first few months of the year, we have modified the projection to the 135,000-155,000 range,’ says Alan Nevin, chief economist for the California Building Industry Association.”

“He says because potential homebuyers are sitting on the sidelines, hoping prices will drop further, the market remains soft. The entire estimated drop is in single-family homes.”

The Marin Independent Journal. “A Novato mortgage company has laid off nearly all its employees, becoming the third Marin brokerage in just over a month to issue pink slips. Pro30 Funding laid off about 40 staffers last week, retaining a handful of others while the company cleans out its 22,000-square-foot office.”

“While the mortgage industry has been buffeted by defaults nationwide, particular in the ’subprime’ sector, Pro30 founder Bill Coleman said 99 percent of his clients had good credit records.”

“In many cases, he said, borrowers were defaulting on the loans without making a single payment, perhaps so they could live without housing expenses for six to nine months during the foreclosure process.”

“‘The appreciation started to decline, and people looked at their payments and said they’re not going to make money,’ Coleman speculated. ‘It wasn’t a business issue; it was the fact that the industry turned upside down almost overnight.’”

“The closure of Pro30 Funding follows 36 layoffs this month at Paul Financial LLC, a San Rafael-based mortgage company that had 180 full-time workers San Rafael, Santa Rosa and Irvine.”

“Late last month, Novato-based GreenPoint Mortgage laid off 70 employees, nine of whom worked out of the company’s headquarters. Paul Financial and GreenPoint said they are not subprime lenders, but felt the residual effects of nationwide problems in the subprime mortgage industry.”

“When prices began dropping in many markets in late 2005, borrowers’ options narrowed as banks tightened lending requirements, pushing more people into default and foreclosure.”

“Coleman said he gave employees a warning ‘a while ago that things were not looking good.’”

The Press Register reports from Alabama. “Darlene Hill was making a living in Mobile as a real estate investor when she devised a sophisticated con job against lenders that would net her far more money than just robbing a teller with a gun. By the time her enterprise collapsed last year, according to FBI investigators, she had bilked banking institutions and mortgage companies out of $9 million.”

“And if not for the money that the companies recovered from foreclosures, the total loss would have been a good deal higher, investigators say.”

“Experts contend that the damage extends far beyond lenders. Consumers get hurt, they say, when fraud artificially pushes up housing prices that eventually come crashing down. In extreme cases, entire neighborhoods have been flooded with foreclosure sales.”

“‘It’s never good to have a lot of homes for sale, for any reason,’ said Patty Bergstrom, a spokeswoman for the IRS Criminal Investigation Division in Atlanta, which is recognized as a hot spot for mortgage fraud. ‘It affects a lot of people.’”

“To make things work, Hill needed help. She recruited a mortgage broker named Antonio Harrison of Mobile, who has admitted to submitting fraudulent loan applications. Another participant in Hill’s scheme, Jocelyn Easter of Mobile, worked as a loan closer for Harris Title and later for Hill.”

“John Mechem of the Mortgage Bankers Association, said con artists often employ unscrupulous appraisers to assign bogus values to properties in order to get more money from loans. When the mortgage company eventually goes to foreclose on the property, he said, it finds that the true value is much less than the loan amount.”

The Madison County Journal from Mississippi. “Foreclosures in Madison County have increased 154 percent over the past year, public records show, one indicator of the glut in the housing market, in part because of overbuilding, analysts say.”

“What’s more, defaults on loans and mortgages have increased 177 percent, records show. In every month of this year, the number of foreclosures increased over the same month in 2006, the statistics show.”

“Vickie Graves, a mortgage loan originator in Madison and 24-year veteran of the industry, said…she blamed a general glut in the market that can only be solved by the laws of supply and demand.”

“‘When there’s too much out there, then the market makes that correction,’ she said.”

“Graves said some consumers have over-extended themselves. ‘They’re anxious to get into that $500,000 home, instead of that $250,000 home they need to be in,’ said Graves. ‘Builders, realtors, mortgage people, no one should accept all credit or blame in this case.’”

“Anyone who takes a trip through some of south Madison County’s high end neighborhoods, she said, will be able to confirm the sluggish pace of higher-end home sales. According to the Jackson Realtors Association, the average list price of a home in Madison and Ridgeland is about $358,000. The median price for a home in the South was $181,000 in April, a Realtors report shows.”

“There were 953 homes listed in the Madison-Ridgeland area, more than any other real estate market in metropolitan Jackson, according to the Realtors association.”

“David Breland, a builder in Madison, said that doctors, lawyers and others with no building experience have gotten into the business. ‘They don’t know the ins and outs, and they don’t know how to make a house,’ said Breland. ‘They don’t know until the smoke clears that they’ve lost money on the thing.’”

“Even experienced builders are seeing difficulties. Breland noted that he has had one home on the market for over two years. If builders cannot sell a house within six months, he said, the builder begins losing money on the property.”

“Graves blamed the bad sub-prime mortgage market for some of the problems. These sub-prime mortgage arrangements, she said, were not always in the best interests of homebuyers. ‘Sub-prime lenders are tightening up on what they offer. There are less unique products than six months ago,’ said Graves. ‘Wall Street has tightened up on that.’”

“Madison County Tax Assessor Gerald Barber, a member of the Mississippi Appraisal Board, said that he thinks criminal activity has been a large part of the problem of rising foreclosures.”

“‘Mortgage fraud is huge, billions of dollars are involved,’ said Barber. ‘A lot of foreclosures, in my opinion, are coming from mortgage-fraud related situations.’”

The Dallas Morning News from Texas. “When it comes to foreclosure woes in North Texas, there’s plenty to spread around. While big cities Dallas and Fort Worth have the most home foreclosures, some suburbs, including Arlington, Garland, Grand Prairie and Mesquite, are also seeing large numbers of home loan defaults.”

“In the northern suburbs, Frisco is playing catch up with a 57 percent jump in residential foreclosure postings in the first half of 2007.”

“‘Among the suburban cities in the North Texas region, the city with the highest number of residential postings filed during the first half of 2007 was the city of Arlington with 1,488 foreclosure notices,’ George Roddy, CEO of Foreclosure Listing Service, said in the new report. Garland is second with 967 postings.”

“‘I think it has a lot to do with demographics in those cities,’ Mr. Roddy said, citing the large number of affordable homes, which appealed to first-time homebuyers.”

“Frisco, with 267 postings, had the third-highest gain among North Texas suburbs. In fashionable Frisco, buyers who now face foreclosure may have overreached, Mr. Roddy said. ‘It’s the place to be and where you see big houses,’ he said.”

“Through the first half of 2007, more than 21,000 residential foreclosure postings have been recorded in North Texas. That’s about a 14 percent increase from the same period of 2006, according to Foreclosure Listing Service.”

Some housing bubble news from Wall Street and Washington. “Concerns about inflation trumped worries about the slumping housing market last month in the minds of Federal Reserve officials who voted to hold interest rates steady. While Fed officials said the downturn in housing was turning out to be more severe than expected, worries about inflation continued to dominate the May 9 discussions among Fed Chairman Ben Bernanke and his colleagues, according to minutes released Wednesday.”

“‘Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation,’ the minutes said.”

From Bloomberg. “‘The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year, somewhat longer than previously expected,’ the minutes said.”

“Almost all Fed policy makers consider inflation to be ‘uncomfortably high,’ the minutes added. ‘All participants agreed that the risks around the anticipated moderation in inflation were to the upside; and some noted that a failure of inflation to moderate could entail significant costs.’”

From Forbes. “‘Recent readings on sales and inventories of new homes had been interpreted by the staff as suggesting that the ongoing contraction in residential investment would continue for longer than previously expected,’ the minutes said.”

“The general sentiment was mirrored in Federal Chairman’s Ben Bernanke’s May 17 address, when he said that increased deliquencies and foreclosures would continue to weigh on the market ‘this year and next.’”

From Fitch Ratings. “Fitch Ratings has revised M/I Homes’s (MHO) Rating Outlook to Negative from Stable.”

“The Outlook revision to Negative for MHO reflects the more challenging outlook for homebuilders, the current and expected near term deterioration in certain credit metrics for the company, and pressures from credit tightening, which particularly affect the entry level buyer (a targeted customer at M/I Homes), and high cancellation rates, which add to speculative inventory totals.”

“The housing sector is in the midst of a meaningful, multi-year downturn. MHO has been increasing its sales and marketing efforts, focusing on reducing speculative inventory (enlarged by unusually high cancellation rates), reducing its lot supply, reassessing its land positions, renegotiating option contracts and, where possible, reducing overhead and direct construction costs.”

“During this current downturn MHO, like most builders, has leveraged the financial flexibility of land options, walking away from overpriced lots (forfeiting its deposits). These builders also have reported meaningful charges associated with write downs of land values.”

“MHO was the 21st largest U.S. single-family homebuilder in 2006 as ranked by Builder Magazine.”

The Post Dispatch from Missouri. “Bill Taylor appears to be back in the trenches, battling the nationwide slump in new house sales that’s also affecting local builders.”

“The CEO of 53-year-old Taylor-Morley Homes has sold the equity in his headquarters building, and has scaled back his company’s share to 10,000 square feet from 20,000.”

“‘We have had to let some people go, but so have most builders,’ said company spokeswoman Judi Wayhart. ‘But, he (Taylor) says it was much worse in the ’80s. This is a 53-year-old company, and he’s (Taylor) been through this four times.’”

“‘We don’t know what has made the new house buyer go into his cocoon, because the interest rate is not that bad,’ said Pat Sullivan, executive VP of the Home Builders Association of St. Louis & Eastern Missouri. ‘It’s puzzling. They don’t usually go into the cocoon until the interest rate reaches about 8 percent.’”

“‘One thing is for sure, when the market slows you don’t want to be holding too much land,’ Sullivan said.”

From CNN Money. “Imagine you’re a homeowner, and you discover that instead of the expensive subprime mortgage loan you signed on for, you actually qualified for a prime mortgage with much lower interest rates.”

“‘I reviewed several hundred [subprime] loans recently for our wholesale division,’ said Allen Hardester, regional director of development for mortgage-broker, Guaranteed Rate, ‘and all of them, with one exception, qualified for a prime-rate loan.’”

“Some consumer advocates blame loan officers and mortgage brokers who steer borrowers away from prime loans because they can make much more money from the subprime market. ‘I have a friend who interviewed for a job with my company,’ said Hardester. ‘He told me, ‘I’m not coming to work for you. I can’t make enough money.’”

From Reuters. “Fitch Ratings on Wednesday cut the residential primary servicer rating for subprime mortgages of NovaStar Mortgage, Inc., a unit of NovaStar Financial Inc., citing uncertainties over the company’s profitability.”

From NPR.org. “Ameriquest was a high-flying sub-prime lender during the housing boom, and was accused of predatory lending by state prosecutors. The company now faces a class-action lawsuit from borrowers.”

“Some of the creative ARM products that flourished of late included interest-only and payment-option loans. How prevalent were these loans? Nearly 23 percent of all mortgages taken out in 2005 were interest-only ARMs, and more than 8 percent were payment-option ARMs, according to First American LoanPerformance.”

“In certain once-sizzling markets, the numbers were much higher: For example, 34 percent of all new mortgages in California in 2005 were interest-only.”

The Boston Herald. “A Rhode Island lawyer claims he has found a chink in the legal armor of subprime mortgage giant Ameriquest, one that could give hundreds of thousands of homeowners grounds to wriggle out of their loans.”

“Attorney Christopher Lefebvre said he is representing 200 current and former Ameriquest homeowners in Massachusetts and other states, many now facing foreclosure - who are suing to undo mortgages taken out through the California-based lender.”

“The homeowners he is representing contend they were either not given all the correct mortgage paperwork, or that it was provided in a confusing or misleading way.”

“Lefebrve contends paperwork problems were common during the recent hectic boom in subprime mortgages. ‘People got sloppy,’ he said.”

“Federal bankruptcy regulators Friday urged a bankruptcy judge to expand the scope of a probe of New Century Financial Corp., the Irvine-based subprime lender that failed earlier this year.”

“The U.S. Trustee wants the examiner to have the power to examine New Century’s accounting for 2005 in addition to records from 2006, which were already on the agenda because the company admitted accounting irregularities would require the restatement of reported financial results for that year.”

“HSBC Holdings Plc plans to sell bonds backed by some of the last subprime mortgages made by bankrupt New Century Financial Corp., once its biggest rival in the business.”

“More mortgages that New Century made in its last months before filing for bankruptcy on April 2 will probably turn up in future deals, said Alla Sirotic, a Fitch analyst in New York. HSBC’s bank will be on the hook for repurchases of any loans with defects that normally would have required an originator to buy them back, Fitch’s Sirotic said.”

“‘Where typically in the past we’ve accepted New Century’s’ loan warranties ‘we’re no longer accepting those,’ she said.”

“The numbers looked compelling. Buy this investment-grade collateralized debt obligation and you’ll get a return of up to 10 percent, Credit Suisse Group said.”

“Investors snapped up the $340.7 million CDO, a collection of securities backed by bonds, mortgages and other loans, within days of the Dec. 12, 2000, offering. The CDO buyers had assurances of its quality from the three leading credit rating companies, Standard & Poor’s, Moody’s Investors Service and Fitch Group Inc. Each had blessed most of the CDO with the highest rating, AAA or Aaa.”

“Investment-grade ratings on 95 percent of the securities in the CDO gave no hint of what was in the debt package, or that it might collapse. It was loaded with risky debt, from junk bonds to subprime home loans. During the next six years, the CDO plummeted as defaults mounted in its underlying securities. By the end of 2006, losses totaled about $125 million.”

“The failed Credit Suisse CDO may be an omen of far worse to come in the booming market for these investments. Sales of CDOs worldwide have soared since 2004, reaching $503 billion last year, a fivefold increase in three years, according to data compiled by Morgan Stanley.”

“Many of the world’s CDOs are owned by banks and insurance companies, and the people who regulate those firms rely on the raters to police the CDOs.”

“‘As regulators, we just have to trust that rating agencies are going to monitor CDOs and find the subprime,’ says Kevin Fry, chairman of the Invested Asset Working Group of the U.S. National Association of Insurance Commissioners. ‘We can’t get there. We don’t have the resources to get our arms around it.’”

“Joseph Mason, a finance professor at Philadelphia’s Drexel University and a former economist at the U.S. Treasury Department, says the ratings are undermined by the disclaimers. ‘I laugh about Moody’s and S&P disclaimers,’ he says. ‘The ratings giveth and the disclaimer takes it away. Once you’re through with the disclaimers, you’re left with very little new information.’”

From Nine MSN. “A weakening US housing market is dragging down the world economy, with growth in world gross product, or WGP, expected to fall to 3.4 per cent in 2007 from four per cent last year, the United Nations says.”

“‘Currently, the primary drag for the world economy is a notable slowdown in the United States of America, as its housing sector is falling into a substantial recession and business investment is weakening,’ the UN report said.”

The Herald Tribune reports from Florida. “Many of Southwest Florida’s home builders continue to struggle with a sluggish market. Pulte Homes announced Wednesday that it was cutting nearly 2,000 jobs nationally in a massive restructuring aimed at saving $200 million annually. The company said that the slowdown has left it with overhead that far outstrips demand for its houses.”

“The cuts mean that as many as 25 percent of the 55 employees in Pulte’s Sarasota-Manatee division will lose their jobs. Other large home builders in the region have made similar job cuts.”

“‘We’ve got to keep up with the competition,” said Steve Kempton, Pulte Homes’ Sarasota division president.”

“‘This is tough, but I don’t want people to think we don’t have confidence in this market,’ said Steve Kempton, Sarasota division president. ‘We’re just trying to right-size our business to position ourselves for long-term success in the Sarasota-Manatee market.’”

“In 2005, Pulte built 560 homes in the region worth about $170 million. The company has five developments in Southwest Florida, ranging from Manatee County town homes to Sarasota County golf communities. Prices range from $218,000 to more than $500,000.”

From TC Palm. “DiVosta Building Corp. executives said Wednesday the company will consolidate its Treasure Coast and Palm Beach operations to an office in Orlando and lay off an unspecified number of local employees.”

“‘My understanding is that DiVosta employees will receive severance packages,’ said Beth Cocchiarella, a spokeswoman for Pulte Homes, the parent company of DiVosta.”

“DiVosta is the fourth largest builder on the Treasure Coast. Since December, the company’s South Florida operation announced three separate layoffs totaling 266 employees.”

“‘We’re resizing the company to better position us to compete in the long-term,’ Cocchiarella said. ‘This is a result of the continued downward trends in the homebuilding sectors.’”

“‘This reflects another step that homebuilders are taking to cut back on production levels,’ said Brad Hunter, who follows housing trends on the Treasure Coast and South Florida for Metrostudy’s South Florida division. ‘As we undo some of the over extension of ‘04 and ‘05, naturally some builders have to cut costs and consolidate parts of their administration.’”

“Jack McCabe, CEO of a real estate consulting firm in Deerfield Beach, said the consolidation of DiVosta’s South Florida division doesn’t bode well for the economy.”

“‘We’re just about to see the domino effects of this,’ McCabe said. ‘What happens next year is you’ll see Circuit City, Best Buy, Brandsmart, all those big box retailers are going to feel that slowdown which was substantially driven by consumer spending and the housing market.’”

“‘With the loss in home values, credit tightening up and people saving instead of spending, there will be a substantial loss of jobs,’ McCabe said. ‘We’re definitely heading into a recession with all this pressure.’”

The Orlando Sentinel. “The Donald bails! Back in March I wrote a column on this pipe dream, a 52-story condo with prices starting in the million-dollar range. Did anyone really think downtown Tampa could support something like this? The real estate agent told me people would be moving in by mid 2009.”

“I said I’d dive in the Hillsborough River from the top floor if that happened. Looks like my bathing suit stays dry.”

“Real estate mogul Donald Trump has pulled out of the $300 million, 52-story Trump Tower condominium project in Tampa, according to a lawsuit filed Friday in U.S. District Court.”

“Companies have been distancing themselves from the project. Eric Fordin, a project director with the Related Group, a Miami developer that considered taking over the project, said Wednesday that ‘we’re not involved in the deal in any way.’”

“Fordin said he was launching a due diligence review for Related Group when ‘all these lawsuits started piling up’ against Trump Tower and SimDag, and the Related Group never entered into any agreements for acquisition or control.”

The Tampa Tribune. “City officials cheered last week when Gov. Charlie Crist approved $2 million for the Riverwalk project. But that euphoria is gone now that the Trump Tower condominium project, which promised to contribute up to $700,000 to build a prominent Riverwalk segment, is on hold while Donald Trump battles the developer in court.”

“‘If they do not build, then we’ve got a key connection that is not being made,’ said Lee Hoffman, the city’s Riverwalk manager.”

“For example, the Heights project developers are contributing $4 million to the project. Developers for Venu, a condo project in the planning stages for Kennedy Boulevard and Ashley Drive, promised to build an $800,000 piece.”

“SimDag LLC, the Trump Tower developer, was to build a 450-foot piece to connect the southern edge of the Brorein Street Bridge to nearby MacDill Park.”

“Mayor Pam Iorio said the city has a couple of options if Trump Tower does not get built. Tampa can build a regular sidewalk connecting the southern and northern ends of the Riverwalk and if a developer for the site comes through later, that developer can build its own Riverwalk segment.”

“‘Not a very appealing option,’ Iorio said.”

“SimDag’s troubles also could affect the Tampa Museum of Art’s new building. SimDag made a three-part pledge to the museum in 2005. The company made its first payment. The company was to make a second payment when the condo was topped off, and a final payment was to coincide with the grand opening.”

“An art museum official said Wednesday that the museum wasn’t counting on the money.”

“Even a power name like Trump may not be enough to save a luxury condo project in Tampa’s sluggish downtown real estate market. It takes money. Money from lenders. Money from buyers. In the end, SimDag LLC couldn’t come up with enough from either source.”

“‘In this real estate downturn, Tampa has been one of the hardest-hit markets in Florida,’ said consultant Jack McCabe. ‘And any time you have a negative stigma like this site has, it takes some time before people are willing to overlook it.’”

“The $300 million Trump Tower Tampa was announced in early January 2005, at time when Tampa’s condo market was coming alive. Developers were proposing new projects every month. If any of them would make it, experts said at the time, it would be the one bearing Trump’s name.”

“Even during the condo frenzy when the Trump tower was announced, lenders typically required developers to sell a set amount of units before getting financing. In the current market, however, some lenders require close to 100 percent sales. Now many lenders aren’t lending for condo towers at all.”

“National City Mortgage, which is involved in several condo towers in downtown Florida cities, has stopped partnering on others for now, said Paul Ramos, state manager for the company.”

“‘Banks may still lend on condo projects, but they want to know what your market is going to be,’ Ramos said, noting that his mortgage division still works with individual condo buyers but limits the number of units it will finance in each condo project.”

“Hillsborough County has enacted a hiring freeze and moratorium on new building construction in anticipation of budget cuts later this year. County Administrator Pat Bean also told employees to expect layoffs.”

“Residents will notice the cutbacks, Bean warned. ‘The loss in funds means citizens may experience limited access to some services and most programs will likely be scaled back substantially,’ Bean wrote.”

“The city of Tampa instituted a hiring freeze in April. Hillsborough government is one of the county’s largest employers, with a work force of about 6,000 people.”

“How long the hiring and new building freezes hold will depend on how much the county’s property tax revenue is cut. Officials estimate the cuts at between $46 million and $217 million. The county this year collected about $800 million in annual property tax revenue.”

“County Commissioner Al Higginbotham said Bean’s moves to freeze hiring and building new projects is prudent. He said commissioners simply don’t know how much money to expect next year. ‘How can we honestly discuss any new projects?’ he asked.”

The Post Dispatch. “Many builders have joined…in laying off people and selling excess inventory at discount prices, or at least trying to.”

“‘The Bank of America in Tampa (Fla.) called me the other day, and asked what kind of discount would you get in the market today,’ said a real estate developer. The developer spoke on condition of anonymity.”

“‘I asked what kind of property, and they said ‘a lot of scattered homesites with almost-finished homes, about three or four subdivisions, about 80 lots.’”

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