The Housing Bubble

The North County Times reports from California. “Real estate appraiser Todd R. Lackner’s second job as mortgage fraud investigator began when he stumbled onto a suspicious-looking transaction while online one day last March, he said. Within weeks, he was chest-deep in dozens of investigations, and was helping federal investigators get the goods on real estate scammers who commit what are known as inflated-sale and-crash schemes, Lackner said.”

“He said he remembers well the day the first case came to light. He was doing an appraisal of a home in San Diego and was checking the sales information on comparable properties, Lackner said. He noticed that one of them had sold for $70,000 more than the listed price.”

“So, he did a drive-by to check out the property, he said. There was no one living there, he said, and the house was run-down, with an overgrown lawn.”

“It turned out, he said, the real estate agent who had represented the buyer, had been involved in the purchase of 17 properties over a period of just a few months. All of the sales were suspicious, because the sales prices were significantly higher than the list prices, Lackner said. Ten of the properties later foreclosed, he said.”

“‘Then, I knew I was onto something,’ Lackner said. ‘I said, ‘how can people get away with this?’ Those who are caught, tried and convicted will face many years in prison, as they should, said Lackner, who has worked as an appraiser since 1989.”

“Lackner said he wants to see justice served. The average bank robbery nets the robber about $5,000, and why should crimes that involve much more money be any different, he asked.”

“‘If you look at some of these (mortgage fraud) cases, on one day alone, someone did the equivalent of robbing 10 or 20 banks in one day,’ Lackner said.”

“A November 2006 FBI report on mortgage fraud said, ‘appraisal fraud has a snowball effect on inflating real estate values, with fraudulent values being entered into real estate multiple listing services and then used by legitimate appraisers as comparable values for determining market values for neighboring properties.’”

“According to the U.S. Department of Treasury’s Financial Crimes Enforcement Network, in 2006, California had more than one-third of the nation’s suspicious loan activity at federally insured lenders.”

The Modesto Bee. “Con artists are… making a fortune ripping off homeowners and lenders through assorted fraudulent real estate schemes.”

“‘Real estate fraud is so prevalent, we can’t even keep up with the amount of complaints coming in,’ said Marlisa Ferreira, the Stanislaus County deputy district attorney assigned to prosecute real estate fraud.”

“‘There’s all kinds of scams out there, and they’re using appraisers to do them,’ warned Steven Smith, a real estate appraiser and consultant from San Bernardino. He said he’s known as ‘the fraud guy’ because he’s been researching it since 1999.”

“Smith said appraisers, knowingly or unknowingly, are used to inflating property values so larger-than-deserved home loans can be obtained. Those loans usually aren’t repaid, triggering foreclosures.”

“There are organized real estate fraud rings throughout California, including Modesto. ‘There’s a lot of guilty hands out there,’ he said.”"

The Voice of San Diego. “The last release of the Case-Shiller Home Price Index for San Diego shows that…San Diego prices were still falling as of March.”

“It’s interesting to note that the size-adjusted median price and even the ‘plain vanilla’ median price actually tracked the Case-Shiller HPI decently enough right up until December of last year, which is when the subprime lending market began to tighten up.”

“This divergence supports the theory that recent median price increases are an illusion caused by a declining proportion of lower-priced home sales, and that they do not represent an actual increase in market prices.”

The Press Telegram. “This year’s Tour des Artistes on Saturday in the East Village Arts District. At this year’s event will be an extensive tour of lofts, historic buildings and live/work spaces.”

“Not only can tour visitors check out the lofts, but they can buy some. Two units in the Cooper Arms building will be auctioned off on Monday. ‘We’ll probably start the bidding at $100,000 and go up from there,’ said Connie Waddell, who works for the auctioneer.”

“The Temple lofts is selling more than 20 lofts at prices from $400,000 and up, with several large lofts at discounted prices of around the mid $600,000s.”

“Realtors Kathy Sasha and Debi Garcia-Benson both Realtors say the lofts are being discounted to move them in the sluggish housing market, even though half the lofts in the 82-unit project have been sold.”

The Star Tribune reports from Minnesota. “When Jerry Loh sold property he owned along the Gunflint Trail several years ago, he put the money right back into real estate, buying a condo in Florida and two pieces of land along the North Shore. His plan was to sell the Minnesota tracts to a developer for a tidy profit that would help finance his retirement.”

“Three years later, he’s still waiting. Loh dropped the price $35,000 on one of the parcels and $110,000 on the other. Still no offers. ‘Four years ago you could have sold this no matter what,’ said Loh, referring to his 11- and 19-acre hillside parcels. ‘There’s definitely been a pullback.’”

“‘The froth is off and the foam has subsided,’ said Scott Harrison, a longtime developer. ‘It’s been sobering for people to realize that real estate can’t grow 20 percent on an annual basis.’”

“Two years ago, real estate appraiser Holly Harwig was so busy she hired her son to help manage the volume through the summer. Today, she works alone and is down to two appraisals a week, leaving her with enough spare time to (do) things she couldn’t even consider two years ago when she was doing at least two appraisals a day.”

“From time to time Harwig comes up with a number that’s less than the one assigned by the County Assessor’s office. ‘It’s a rarity, but it’s happened more than I’ve ever seen,’ she said.”

The Journal Sentinel from Wisconsin. “The number of unprofitable banks in Wisconsin jumped in the first quarter, part of a national trend in which a challenging interest rate environment and lagging mortgage market are squeezing bank earnings.”

“The percentage of Wisconsin savings banks, banks focused mostly on mortgage lending, that didn’t turn a profit in the first quarter was 21.6%, up from 8.1% a year earlier, according to a new report by the Federal Deposit Insurance Corp.”

“David L. Donihue, a bank consultant in Milwaukee, said mortgage-oriented banks that benefited from refinancing until last year are seeing the biggest dip in earnings.”

“‘Banks that put heavy reliance on refis, their profits are either down or they’re losing money,’ he said.”

The Courier from Iowa. “All of the housing numbers were down in the first quarter for the Cedar Valley when compared to 2006. Statistics for foreclosures are difficult to obtain, but the Black Hawk Abstract Co. tracked the total number of foreclosures in Black Hawk County, including commercial.”

“The numbers showed an increase in average monthly foreclosures from 23 in 2005 to 29 in 2006. So far in 2007, the average number of monthly foreclosures has shot up to 33.25.”

“‘The foreclosures are up all over,’ said Karen Atwood, CEO of Consumer Credit Counseling Services of Northeast Iowa. ‘The subprime market has contributed to this.’”

“‘People just cannot meet those high-interest loans,’ said Atwood. ‘It forces people to use credit cards to pay bills as they try to keep those subprime loans good. Eventually they go bad. And it is bad for the entire community as it causes people to lose faith in buying a home.’”

The Naperville Sun from Illinois. “The threat of foreclosure affected 57 percent more Naperville families in 2006 than it did in 2005, according to a recent report by a Chicago affordable housing advocacy group.”

“‘The 2006 numbers were in some ways just the tip of the iceberg,’ said David Rose, the National Training and Information Center analyst who authored the report. ‘There were a lot of these ARMs written out there, and there are a lot of them that are going to reset this year, and I suspect that in 2007…it is going to be an even worse year.’”

“Rose is concerned about what this trend may mean to home buyers. ‘I worry right now that the industry may go a little bit the opposite direction and start really tightening up on credit, and it may be more difficult to get a loan,’ he said.”

“He’s also worried about the impact an ‘influx of relatively less expensive houses’ is going to have on the market, as banks that foreclose on homes typically sell them ‘for whatever they can get to cover their investment.’ That means residents looking to sell homes in the same neighborhoods as these foreclosed properties might not be able get the price they want, Rose said.”

“‘A foreclosure in your neighborhood is going to reduce the value of your property. It’s as simple as that,’ he said.”

The Journal from Illinois. “The number of foreclosures on homes in Des Plaines nearly doubled from 2005 to 2006, according to a study done by the NTIC. According to their data, Des Plaines has seen an almost 300% increase in foreclosures since 1993, and from 2005 to 2006, the number of foreclosures went from 100 to 195, a 95% increase.”

“NTIC’s study found a 36% increase in Chicago foreclosures from 2005-2006, the largest increase in 15 years, as well as sizable increases in Arlington Heights (30%), Buffalo Grove (58%), Glenview (73%), Elk Grove Village (24%), Mt. Prospect (34%), Prospect Heights (23%) Niles (67%), Wheeling (86%) and Schaumburg (70%).”

“‘It’s pretty clear that almost half of the foreclosures in 2006 were early defaults, meaning they were on loans that were less than 24 months old, and about 40% were ARMs (adjustable rate mortgages),’ said NTIC Executive Director David Rose.”

“Of the 195 foreclosures in Des Plaines in 2006, 48% were early defaults, and 38% were early defaults from ARMs, according to the NTIC data.”

“The result of these foreclosures, according to Rose, is often a decline in property values throughout the neighborhood. ‘We’re seeing boarded up homes in neighborhoods we would’ve never seen them before,’ he said. ‘We’re talking about homeowners to begin with, so we’re not talking about really, really poor people.’”

“‘When we started working on this, it was basically high cost loans that were getting people into trouble. Now it’s these ARMs that aren’t covered by the Illinois High Risk Home Loan Act,’ said Rose.”

“The state law was intended to shield people from predatory lending, but according to NTIC data, 92% of the 2006 foreclosures had low interest rates that fall out of the scope of state protection.”

The Citizen Patriot from Michigan. “The number of homes entering foreclosure in Jackson County has skyrocketed from 88 in 1997 to 874 in 2006. This year’s number could break county records. More than 420 homes in Jackson County have been listed as foreclosed since January.”

“‘The way things are, it doesn’t matter what neighborhood you’re in, there’s probably a home that’s been foreclosed on,’ said Jackson city Assessor Jan Markowski.”

“Jackson had an upswing in new mortgages and refinanced properties in 2004 and 2005 when interest rates were less than 5 percent, said Mindy Reilly, register of deeds for Jackson County. ‘Now we’re seeing the consequences of that,’ she said.”

“Acting County Administrator Randy Treacher has been getting monthly updates on the number of foreclosures in the county for about the past year. ‘That’s not something any of us expected,’ Treacher said. ‘Foreclosures are to be expected in a down economy, but not at the rate they’re going here.’”

Some housing bubble news from Wall Street and Washington. Reuters, “Accredited Home Lenders Holding Co., a struggling subprime mortgage lender, said on Monday it agreed to be acquired by private equity firm Lone Star for $400 million. Accredited Home cut 1,300 of its 4,200 jobs in the first quarter, when lending volume sank 47 percent from a year earlier and delinquencies tripled.”

“‘It’s the end of the specialty mortgage player, for now,’ analyst Matt Howlett said. ‘You need a big balance sheet to compete, and diversified sources of funding. It’s everything the pure subprime lenders don’t have.’”

“The terms value Accredited Home at $15.10 per share, 72 percent below where it traded one year ago.”

The News Tribune. “Noting an operating environment that is ‘more challenging than it has been in recent years,’ Federal Deposit Insurance Corp. Chairman Sheila Bair warned that regulators and bankers ‘need to ensure that new global capital standards do not threaten the safety net.’”

“That net of capital on hand stretched during the first quarter as bank income fell. The FDIC said income fell because of ‘the housing slump, unfavorable interest rate conditions, slower growth in the U.S. economy and higher levels of problem loans.’”

“‘Higher expenses for credit losses at large banks and narrower net interest margins at smaller institutions posed the biggest challenges,’ Bair said.”

From Bloomberg. “In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.”

“Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase.”

“‘The economy is in better shape than people give it credit for,’ said Jamie Jackson, who oversees government debt trading at RiverSource Investments, which manages $100 billion of bonds. ‘People exaggerated the pass-through effects of the housing weakness. If the Fed were to do something by year- end it would be a tightening.’”

“The chance of at least one cut in the overnight lending rate between banks has fallen to 29 percent from 83 percent since the start of May, options prices show.”

“UBS AG, among the biggest bond bulls this year, changed its forecast on June 1 for the Fed to begin cutting rates in October from August.”

“UBS, along with Merrill Lynch & Co., Goldman Sachs Group Inc., had been predicting a housing-led recession would result in at least three rate cuts this year.”

“‘The case is building more and more’ for Fed rate increases, said Richard Schlanger, who manages $4 billion in fixed income. ‘We are definitely seeing more and more people moving away from the Goldman and Merrill argument that the Fed is going to cut multiple times.’”

The Associated Press. “Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 house in Weston, Fla., a few miles west of Fort Lauderdale.”

“Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.”

“The growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice. And after being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit scoring system beginning later this year in a way it contends will end this little-known but potentially high-impact mortgage loan loophole.”

“Ginny Ferguson, a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it.”

“‘These companies are encouraging consumers to commit fraud. On a standard home loan, there’s a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan,’ Ferguson said.”

From Forbes Magazine. “These days just about every mortgage is flipped by a lender to another one or sliced up into pools of securitized packages that are sold on Wall Street. The financial engineering helped oil the housing boom by making credit more available.”

“But stalled housing prices and rising defaults have revealed a mess: In the rush to flip paper, lots of the new lenders or pools don’t have the proper paperwork to show they even hold the mortgage.”

“There is a case in Kansas with no documents to show a bank owns the loan it says it does. In another, ownership of a loan was recorded on a single date in the name of two different lenders.”

“For the lenders, a possibly bigger threat on the horizon is that homeowners’ lawyers will bust up the ‘holder in due course’ doctrine that makes it easier for subsequent owners of an IOU to collect. The rule is enshrined in many federal and state statutes, but a judge could nonetheless find a way to side with the homeowner, particularly if a loan is purchased after it goes into default.”

“‘It’s clearly the direction to go,’ says Ohio Attorney General Marc Dann. He recently announced he’ll amend his suit against defunct lender New Century to possibly list as defendants the banks overseeing pools that bought its loans. ‘These pools are more than innocent holders.’”

From Crains Detroit Business. “Subprime mortgage lending decimated many of Detroit’s older neighborhoods 40 years ago as an ill-conceived federal response to the 1967 riot. Today, private lenders are promoting the same potentially damaging practice.”

“Detroit was picked as the principal target. HUD directed tens of thousands of subprime loans into the city’s changing neighborhoods to individuals who could not afford the cost of maintenance or resale, resulting in massive foreclosures, abandonments and wide- spread destruction of stable blocks of housing.”

“Today, history is repeating itself. Detroit leads the nation in foreclosures, and subprime lending is seen as the principal cause. With property values down, many subprime borrowers cannot resell their homes without a loss. Nor can they pay the broker’s fees, repair costs or closing expenses involved in a resale.”

From MarketWatch. “Defaults in subprime mortgages have led some lenders to adopt stricter standards in approving loans, imposing more discipline on borrowers and the lending industry alike.”

“But the biggest shift in mortgage trends has come from consumers themselves, who have been fleeing to the relative safety of fixed-rate loans over the last 15 months.”

“ARMs made up a 41.9% share of all mortgage originations in January 2006 but have ‘plummeted’ since to an 18.4% share in March 2007.”

“A survey recently released by TransUnion’s TrueCredit.com also showed a year over-year decrease in the number of those with ARMs. According to the survey, 24% of American homeowners with a mortgage said they were concerned about the monthly cost of their loans; 13% are worried they’ll end up owing more than what their home is currently worth. In addition, 11% are worried about a payment increase when their ARMs adjust.”

“Citing statistics from a recent Federal Reserve survey of loan officers, Doug Duncan, chief economist for the Mortgage Bankers Association, said that 56% of loan officers were tightening their standards for subprime mortgages and 45% were tightening standards on nontraditional or Alt-A loans. Subprime loans are made to borrowers with weaker credit histories; Alt-A loans often are low- or no-documentation loans.”

“‘You can still get a no-down payment (mortgage),’ he said, ‘but you’re going to have greater wealth…and more evidence of that (financial) strength than you had a year ago.’”

“The TrueCredit.com survey also spotted some borrower misconceptions about the true cost of a mortgage, finding that 62% of those surveyed think the average homeowner with a 30-year fixed-rate mortgage will make interest payments of no more than 100% of the loan’s face value over the life of the loan.”

“In reality, a homeowner with a 6.75% rate will pay closer to 150% more than the amount of the loan itself, said Lucy Duni, director of consumer education for TrueCredit.com, in a news release.”

“‘On a $200,000 mortgage, that would mean payments totaling $466,000,’ she said.”

The Boston Globe reports from Massachusetts. “After more than a year of plunging sales, lonely open houses, and proliferating for-sale signs, realtors said many sellers are finally willing to lower prices. As a result, houses sell. ‘The mantra for sellers is price, price, price,’ said Linda O’Koniewski , a broker in Melrose. ‘You have to be better priced than the competition. This market is unforgiving if you overprice.’”

“‘It’s pretty clear the market hasn’t found a bottom yet,’ said Terry Egan , editor at the Warren Group, which publishes real estate data. ‘The pace of sales has been pretty steady, but inventories are still only slightly lower than a year ago.’”

“‘This is how corrections work,’ said Alan Clayton-Matthews , a professor of public policy at the University of Massachusetts at Boston. ‘When there’s excess supply, prices will adjust to clear it. And they’re not going to adjust upward.’”

“Sellers who aren’t flexible learn buyers won’t stick around. Katrina and Ross Fujita had negotiated a $370,000 purchase price for a Hyde Park home that was listed at $389,000. When the owner balked at making repairs identified by the home inspection, the Fujitas rescinded the contract and walked away.”

“They found another home in better condition in nearby Dedham for the same price.”

“Kris and John Cain spent some $7,000 on new landscaping and kitchen renovations that included new counter tops, fixtures, and appliances. They priced the home at $425,000, about $50,000 less than similar homes were going for two years ago.”

“They received two offers, accepting one that was $11,000 over asking price. The home sold in five days. ‘When you’re seeing houses that are on the market for a long, long time, you worry about selling your house,’ Kris Cain said.”

“Roseland Property Co. and Lennar Corp. stopped work on Portside at Pier One because of cost increases and softness in local real estate, according to Massachusetts Port Authority, which owns the property.”

“Roseland spokeswoman Nancy Sterling said the project was delayed because the developers recently switched general contractors and, to cut costs, are requiring subcontractors to submit new bids for parts of the project. ‘That is taking longer than we thought,’ Sterling said.”

“Developers were about to enter the construction and sale phase at a time when building costs have increased sharply and the once-hot condo market has cooled. Downtown condominium sales decreased 8 percent in the second quarter, compared with a year earlier.”

“Last fall, Roseland took the unusual step of replacing its primary contractor on the project, Skanska USA Building Inc. with Suffolk Construction Co.”

“Kerim Evans, vice president of operations for Skanska USA, said…he was told by Roseland that Suffolk’s estimate for the project was ‘less than 1 percent different than where it was when Skanska priced it,’ he said. ‘It’s no mystery that the project is over budget.’”

The Eagle Tribune. “Foreclosure auctions in (Lawrence) nearly quadrupled over the first three months of this year compared with the same period last year.”

“In addition, the 87 auctions held during the first quarter of 2007 are more than half of the 145 auctions that resulted from failed mortgages during all of 2006. The 148 foreclosure petitions filed over the first three months of this year more than doubled last year’s first quarter totals.”

“‘When you’re seeing a dramatic jump of about 300 percent in the first quarter over the same time last year, it doesn’t bode well what’s going to happen this year,’ said Andrea Ryan, housing manager of the city’s Department of Community Development.”

“Rafael Delarosa of Lawrence testified yesterday that he could wind up losing his three-decker house on Stearns Avenue because of some false and misleading advice he got two years ago. ‘She told us the minimum we’d be paying (a month) would be $2,500, including taxes and insurance,’ Delarosa said of his mortgage broker.”

“But Delarosa wound up with mortgage payments of $3,700, with the insurance and taxes included. And the 30-year fixed-rate mortgage he expected turned out to be two loans, one for two years and the other for 15 years.”

“He and his wife earn a combined $2,400-a-month in Medford. They were counting on rent money from the triple-decker to help pay off the mortgage. But one of the apartments is vacant and new tenants are unlikely after he put a ‘for sale’ sign in his yard three months ago.”

“The mortgage brokers with the most Lawrence homeowners winding up in foreclosure last year don’t have strong ties to the city, according to A. Michael Ruderman, a graduate student at the University of Massachusetts Lowell.”

“‘Five of them are far away from Massachusetts,’ he said, noting they were from California.”

The Sentinel Standard. “Delinquent property taxes in Ionia County are producing record-level foreclosures and could lead the county into a financial crisis, according to county officials.”

“Commission Chairman Jim Banks thinks he knows part of the reason. ‘When you can borrow 110 percent of the value of the house if you can’t keep it you let it go back,’ he said. ‘We need to take this seriously on how we are to proceed. There is a financial crisis.’”

“The 2007 forfeitures, which are based on 2005 unpaid taxes jumped to 506, a 34 percent increase from the previous year’s 375. ‘Thirty-four percent tells me something is wrong,’ said Ionia County Treasurer Nancy Hickey.”

“She added, ‘When I started around 20 years ago if we had a dozen in a year that would be a lot.’”

The Cape Cod Times. “The starter home is back. An increase in the number of homes selling for less than $300,000 is among the real estate trends reported yesterday by Barnstable County Register of Deeds John Meade.”

“‘Today, there are starter homes to be had in the $200,000 range that weren’t there three or four years ago,’ Meade said.”

“The median sales price for individual commercial and residential properties last month was $325,000, down nearly 11 percent from May 2006. Total sales volume, however, was up 13.8 percent, from the same month this year. The sales growth marks the second consecutive month of increases, following more than a year of almost constant drops in volume.”

“In a less positive trend, foreclosure numbers continued to surge in May, when 22 foreclosure deeds were filed with the registry, the highest single-month total in 10 years. The filings bring the year’s total to 73 foreclosures.”

“The annual foreclosure total for each of the years from 2000 to 2005 never exceeded 46 foreclosures. In 2006, Barnstable County had 87 foreclosures.”

“Meade attributed the rapid increase in foreclosures to the decline in sales value. When prices drop, homeowners can owe more on their mortgage than they are able to get for their house on the market.”

“‘In a declining market, it is going to be more difficult for anyone who runs into financial difficulty,’ Meade said. ‘You’re going to have foreclosures resulting because they are not able to move their property on the open market.’”

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