The Housing Bubble

In Business Las Vegas reports from Nevada. “With Nevada ranking first in the nation in foreclosure rates in the first quarter of 2007 and again in April, the mortgage lending industry and consumers are taking notice. Foreclosures in April were 225 percent higher than April 2006. And insiders say what some call a crisis and others call an industry correction could reshape the mortgage-lending industry for all stakeholders.”

“Mortgage Lending Division Chairman Scott Bice said much of Nevada’s foreclosure problem was caused by speculative buyers. ‘Of the 24,000 listings on (the Greater Las Vegas Association of Realtors Web site) 50 percent are vacant, up from 40 percent,’ Bice said.”

“Tom Powell, chairman of the Mortgage Advisory Council and chief executive of IntoHomes Mortgage Services in Northern Nevada, agree, saying that the last five to 10 years of bullish housing markets spurred speculators on.”

“Powell said speculators, who bought from developers, saw their investments appreciate before they were even completely constructed, and then sold those vacant homes for profit. But when the market plunged in mid-2006 many speculators were caught short, he said.”

“And foreclosure rates will continue to climb, since the majority of Nevada mortgages are less than 3 years old, the average time by which a mortgage will default.”

“Bice said the industry would have to sift out the truly needy, troubled borrowers from speculators who got in over their heads.”

“The stormy economic year ahead will be characterized by disheveled coiffure, garbage cans on the lawn and a migraine headache, especially for residential housing developers.”

“The economic downturn in Nevada, which is mild compared to housing slumps in other parts of the country, will last at least through 2007 and into 2008, according to Keith Schwer, executive director of the Center for Business and Economic Research at UNLV.”

“‘There is going to be some unpleasantness ahead,’ Schwer said.”

“Before the economy improves, the residential real estate sector will continue to lag, dragging down the Southern Nevada economy with it. Schwer said there has been a greater decline in jobs for construction in Nevada than nationally, since construction makes up a larger sector of the local economy.”

“‘Our state will be impacted…more than the rest of the nation,’ Schwer said.”

“Schwer said the faster prices come down, the sooner the market will correct itself. In the meantime, he said developers should look to make money through niche markets, especially affordable housing.”

“‘Even though housing is going into the tank, there is still money to be made,’ he said.”

“What should people watch for to determine if the housing market is rebounding? National housing analyst John Burns said the apartment market is a good indicator.”

“The reason is that as the gap between homeownership costs and rental costs narrow, buyers are more likely to purchase a home, Burns said. ‘The gap between ownership and renting reached an all-time high in most markets last year, and is beginning to narrow as rents rise and prices fall,’ Burns said.”

“Burns said he doesn’t have good data on the cost of renting a new condo versus a new apartment but suspects the differential is narrowing more quickly as prices on new condos have fallen rapidly in many areas over the past year.”

“As for the rest of this year, Burns said landlords may not be able to raise rents very quickly because builders stole their most qualified tenants in previous years and rental condos and homes are providing the apartment market competition at the higher end of the market.”

“The value of building permits issued by Las Vegas during the first five months of 2007 is down 43 percent from the first five months of 2006 from $860 million to $598.”

“Overall, some 14 percent of households can afford homes in Las Vegas versus 40 percent for the nation as a whole.”

The Arizona Republic. “Arizona, California, Nevada and Florida led the nation for skyrocketing home prices a few years ago. Now these states are leading the nation for increases in foreclosures.”

“Data from the Mortgage Bankers Association of America show these states posted the biggest gains in new foreclosures during the first quarter of 2007. Arizona fared slightly better than the other states and is at the bottom of the dubious list.”

“The four states have another thing in common. Speculators sparked their home price run-ups a few years ago. It happened in 2004-05 for Arizona. Investors left Las Vegas after pushing up prices 50 percent there and came to the Valley to do the same. By 2006, prices had shot up 50 percent in metro Phoenix, and most speculators moved on.”

“Despite its recent spike in foreclosures, more than tenfold in the past year, Arizona still ranks in the bottom 10 for the overall number of people losing their homes.”

“In metropolitan Phoenix, which makes up more then 75 percent of the state’s housing market, home prices are down about 5 percent from a year ago. More foreclosures could work to drive down home prices further.”

The East Valley Tribune from Arizona. “A 25-year veteran of the development business, Gilbert homeowner Anthony Amendola knows how to spot quality construction. That’s why he hired Toll Brothers, a national builder he respected, to build his more than $500,000 luxury home.”

“But on his first walk-through shortly before the deal was set to close, Amendola realized his dream home was a nightmare. Sinks, cabinets and faucets were missing. Gaping holes surrounded outlets. The electricity wasn’t turned on. ‘My reaction was complete disgust,’ he said.”

“Some believe the frenzied pace of construction during the housing boom led to shoddy workmanship as builders struggled to find enough qualified laborers to meet demand, a theory industry observers say is likely true in some cases.”

“For homeowner Brian Eastley, the problem comes down to quality control. Eastley walked by the construction site of his home daily, finding new issues, such as cracking in the foundation slab and stucco. He addressed those problems with Toll but still faced more when the home was done, including bubbles and trowel marks on walls.”

“‘They’re only as good as the labor they’ve hired,’ he said.”

“During the height of the housing boom, builders were so busy that they couldn’t find enough skilled labor, said John Fioramonti with research firm Hanley Wood Market Intelligence. Job superintendents were spread too thin and many didn’t have experience in mass production, he said.”

“‘It was a real aberrational time in terms of the volume that was going on,’ Fioramonti said. ‘Nobody had a good handle on how to deal with it.’”

“Supervisors were under horrendous pressure, and most builders weren’t restricting sales, (building inspector) Tony Hecht said. City building inspectors were also overwhelmed, he said.”

“Toll homeowner John Kenneally ’s battled sink holes in his yard created by water runoff from the roof. Window wells in the basement have also filled with mud when it rained, and water has seeped in through the walls, Kenneally said.”

“Workers have come out repeatedly to try to fix the problems, though not without the pressure of repeated calls, he said. Kenneally worries that his home’s value may be hurt.”

“‘We’ve had mold, and now I’ll have to fill out a mold disclosure if I go to sell or rent the house,’ he said.”

The Gazette reports from Colorado. “Front lawns, driveways and foreclosures. These days, they’re a part of every Colorado Springs-area neighborhood. Against a backdrop of escalating numbers in Colorado and the nation, the Springs and El Paso County were on pace through May to approach a nearly 20-year-old record for most foreclosures in a single year.”

“For the five years ending in 2006, the area saw more than double the number of foreclosures of the previous five years combined. In some parts of the city, one in five homes is in foreclosure.”

“Rising foreclosure numbers, said Fred Crowley, a local economist,’certainly can’t increase prices, and probably will decrease values.’”

“The problem has been building for years and won’t go away overnight, local experts say. El Paso County tallied 1,433 foreclosures through May. That puts the county on pace to approach the 1988 record of 3,476.”

“The Gazette analysis shows foreclosures can be found in almost every area, from ritzy Cedar Heights to middle-class Fountain, from rooftop-packed Briargate to sprawling eastern El Paso County.”

“Among single-family neighborhoods, the highest foreclosure rate was found in an area in southeastern El Paso County. There, 20.9 percent of homes, or a little more than one in five, was in foreclosure at one time from 2002-2006.”

“A separate Gazette analysis of lending practices shows subprime mortgage loans are linked to the rise in El Paso County foreclosures. Of all new mortgages in the county in 2005, only 13 percent were subprime loans, according to First American LoanPerformance.”

“Yet, holders of subprime loans accounted for nearly half of all foreclosures in March, the most recent month for which there was data.”

“Kathi Williams, director of the Colorado Division of Housing,…said some pockets of the state are seeing falling property values now. The end of the state’s foreclosure woes is nowhere in sight, and holders of subprime loans remain candidates for foreclosure, Williams said.”

“Many homeowners with subprime loans and rising interest rates don’t have enough equity in their homes to refinance their mortgages and move into a fixed-rate loan, Williams said.”

“In other cases, some subprime lenders allowed borrowers to exaggerate incomes or provide phony Social Security numbers, Williams said. When those homeowners try to refinance, they’re finding tougher borrowing regulations and can’t get a new loan, she said.”

“‘It will take us a while,’ Williams said, ‘to get all this mess cleaned up.’”

“El Paso County’s mounting foreclosure problem has its roots in the national meltdown of mortgages: unscrupulous lenders making loans to borrowers with shaky credit history using loans that had little chance but to go bad.”

“In El Paso County, subprime mortgages have ended up in foreclosure at more than 15 times the rate of loans to borrowers with good credit. Nearly 4 percent of subprime mortgages in the county were in foreclosure in February, compared with just 0.25 percent of loans to prime borrowers, according to LoanPerformance.”

“‘What happened is that we allowed people who had made little mistakes with their credit to make much larger mistakes with a mortgage,’ said Wayne Bland, a board member of the Colorado Mortgage Lenders Association.”

“Early in the decade, mortgage bankers began aggressively marketing subprime mortgages as a way to get people into homes, and as a way for investors who fund mortgages to get higher returns.”

“Investor ‘appetite for risk kept increasing,’ said Bland, a longtime local mortgage banker. ‘They thought they could mitigate risk by charging a higher rate, but they guessed wrong about how many would go into default.’”

“Many subprime loans made locally were marketed primarily to low- to moderate-income homeowners as a way to reduce their monthly payment by refinancing the mortgages they already had. Other borrowers used subprime loans to buy their first homes.”

“At the same time, lenders loosened their borrowing requirements for these subprime loans. And in many cases, borrowers may not have understood all the terms and conditions of the loans, experts say.”

“‘We took loan counseling out of the equation and borrowers were shopping for mortgages just like they do for car loans; by the monthly payment,’ said Robert Hutchinson, a longtime local mortgage banker.”

“‘There are mortgage products out there that can be a financial trap if the borrower doesn’t understand what they are getting into,’ Hutchinson said.”

“The median period, or midpoint, between mortgage origination and foreclosure for county loans that went into foreclosure from 2002-2006 was less than 2½ years, a period that declined during all but one of the five years in the analysis.”

“Subprime borrowers ‘were very clearly put into loans they couldn’t afford by the time they ended up in foreclosure,’ said economist Fred Crowley. ‘They were convinced to get into a mortgage they couldn’t afford, and couldn’t get out of later because they would have owed a penalty to refinance.’”

“Most subprime loans were intended to be a bridge to traditional mortgages once the borrower demonstrated a solid payment history, said Victor Pelster, owner of Springs-based Anchor Mortgage Inc., which makes subprime and traditional loans.”

“‘The plan was that the borrower would eventually be able to refinance into a fixed-rate prime mortgage,’ Pelster said. ‘Those in foreclosure probably weren’t able to refinance because their circumstances didn’t improve enough’ to qualify from a prime loan.”

“The subprime lending industry’s problems were compounded by a weakening housing market that made it more difficult for borrowers with delinquent loans to sell their homes, said Pat Libbey, owner of CitiLine Mortgage Co., which makes subprime and prime mortgages.”

“‘Once the market started cooling off, the weaknesses of these borrowers started to be exposed,’ Libbey said. ‘When you have a 100 percent loan, you have no vested interest if you can’t afford to make the payments. That’s especially true if you haven’t built any equity because the market is declining.’”

“Much of the blame for the subprime lending crisis belongs to mortgage brokers who put borrowers ‘into loans that were not in the best interest of the client,’ said Kevin Guttman, a former subprime broker who now owns Springs-based My Mortgage Co.”

“‘Does the borrower have the ability to repay this loan, or is it just a transaction to me and I know I’m going to get paid’ whether or not the loan defaults, Guttman said.”

Some housing bubble news from Wall Street and Washigton. MarketWatch, “The outlook for U.S. home building is the worst in 16 years, the National Association of Home Builders reported Monday. The builders’ housing market index fell by two points to 28 in June, the lowest since February 1991.”

“The market probably won’t turn around until next year, said David Seiders, chief economist for the builders. ‘We expect housing to exert a drag on economic growth during the balance of 2007.’”

“The index has fallen 11 points from 39 in February to 28 in June. The index was at 42 a year ago and peaked at 72 two years ago. All three components of the housing index fell in June. The index for single-family home sales dropped from 31 to 29, also the lowest since 1991. The index for expected sales fell by two points to 39, the lowest since September. The index for buyers’ traffic dropped by one point to 21, the lowest since January 1991.”

“‘Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of nonprice incentives to work down sizeable inventory positions,’ said NAHB President Brian Catalde.”

From Reuters. “Merrill Lynch & Co. Inc. plans to delay selling off some $400 million of assets seized from a hedge fund managed by Bear Stearns, CNBC said on Monday.”

The Street.com. “Late last Friday, Merrill seized $400 million in collateral a day after Bear Stearns successfully shopped nearly $4 billion in securities tied to Alt-A and subprime mortgage loans.”

“Bear sold the loans in order to meet calls from lenders to cover the fund’s short-interest investments, where the vehicle had made bets that certain securities or indices would decline in value.”

From Briefing.com. “Today’s Wall Street Journal has an article on the subprime woes that calls specific attention to a Moody’s downgrade on Friday of 131 bonds backed by pools of subprime loans.”

“The downgrade keeps the subprime issues front-and-center, as does the related report in the article about the troubles being experienced by one of Bear Stearns’ in-house hedge funds which is working feverishly to raise new capital to avoid liquidation, according to the paper’s source.”

The Associated Press. “Moody’s said it also put 237 securities on review for further downgrades, including 111 of those already downgraded Friday. The downgrades affects both investment-grade and below-investment grade debt, including securities that had been rated ‘Aa’, ‘Aaa’ or ‘A’ and below, Moody’s said.”

“A sour housing market, combined with rising interest rates, makes it tough for buyers with little or no equity in their homes to refinance into a mortgage with a lower payment.”

“Moody’s and fellow ratings agency Standard & Poor’s have been criticized for not properly evaluating the risks of investments tied to residential mortgages, but the agencies have defended their track record.”

From Moodys. “Most of the securities affected had prior ratings of A and below. However, a small portion of the securities had ratings of Aa or Aaa.”

“Second lien subprime mortgage loans securitized in 2006 are defaulting at a rate materially higher than original expectations. Those loans were originated in an environment of aggressive underwriting and lack protection from home owner equity.”

“The combination of this risk layering with slowing home price appreciation has caused significant loan performance deterioration and is the primary factor in these rating actions.”

“The benchmark ABX credit default swaps index, a measure of subprime mortgage performance, sagged to record lows on Friday on data showing rising delinquencies on risky loans and fears that the recent sharp spike in yields could cause more subprime problems, traders said.”

From Bloomberg. “OceanFirst Financial Corp., the Toms River-based banking company that shut its subprime mortgage unit last month, may repurchase $14.6 million of loans sold to investors.”

“The bank said it has negotiated ‘numerous’ cash settlements for claims tied to mortgages, even though the sales didn’t include a promise to buy them back if the loans soured, according to a regulatory filing by the bank.”

“London house prices rose at the slowest pace in five months in June as the cost of a home fell in more than half of the U.K. capital’s boroughs, Rightmove Plc said.”

“Values fell in 17 of the city’s 32 districts, the U.K.’s biggest real-estate Web site said in a statement today. ‘London is falling behind the rest of the country,’ said Miles Shipside, Rightmove’s commercial director. ‘We can expect a drop in house prices over the next few months.’”

“‘It is significant because the end of a boom, or the mini- surge that we’ve seen since prices they slowed down in 2004, is often signaled by London slowing down,’ said Rightmove’s Shipside.”

From Forbes. “The world is awash in cash. Global liquidity is a phenomenal force. Some economists like the Conference Board’s Gail Fosler call it ‘the garden of Eden.’”

“IMF economist Gary Schinasi told me in Washington some time ago that ‘there could be a tsunami of credit evolving into a perfect storm. If counterparty relationships between banks and hedge funds start unraveling that could prevent financial institutions from rolling over their positions.’”

“As Fosler, The Conference Board’s chief economist told me: ‘This is a bubble, which could be as large or larger as the financial crisis we saw in the late 1990s.’”

“A private report on June 18 may show the National Association of Home Builders/Wells Fargo index of homebuilder sentiment held at 30 for a second month, economists predicted. The gauge hasn’t been lower since February 1991.”

“‘Housing is still trying to find its low point,’ said Lynn Reaser, chief economist at the Investment Strategies Group of Bank of America Corp. in Boston. ‘Builders have a lot of inventory, and prices probably need to fall further. Housing will remain a drag on the economy as the bottoming-out is likely to take a number of months.’”

“Defaults by subprime borrowers, those with a poor or patchy credit history, are adding to the risk that more homes may be returned to the market, economists said. ‘The housing market is teetering on the margin,’ Richard DeKaser, chief economist at National City Corp. in Cleveland, said in an interview this week.”

The Record reports from New Jersey. “A Hoboken developer, Remi Cos., plans to jump-start sales of its new condo development with a public auction next Sunday. The auction is occurring against a backdrop of lower demand and lower prices for condos nationwide. ‘We can sell the units quickly, and people can get a discount,’ said Remi CEO Erik A. Kaiser.”

“James Hughes, a Rutgers economist who has studied the state’s housing market, said the results of the Velocity auction will be an important indicator. ‘If they are able to auction all the units off at reasonable prices, maybe there’s demand there at specific prices. But if it falls on its face, we’re in real trouble…and we may have an oversupply of units,’ he said.”

“The minimum bids in the auction start at $295,000 for a 790-square-foot one-bedroom unit. That previously had an asking price of $450,000. A three-bedroom, three-bath, 1,549-square-foot condo has a minimum bid of $545,000, compared with an earlier asking price of $865,000. Monthly condo fees range from $347 to $680.”

“‘An auction is really letting consumers set the price,’ Kaiser said. ‘The market is going to pay what the market is going to pay. We know there are going to be bargains and deals. Why not create a new way to let the consumer tell you now what the price is going to be, rather than wait six months?’”

The Star Ledger from New Jersey. “The house in Manalapan went for more than $1 million. And that was only the first time it was sold.”

“Within days after the first deal, the same buyer and seller closed on at least two additional mortgages on the house, each time using different attorneys, title agents and banks who had no clue the property was already mortgaged to the hilt, illegally obtaining millions more in financing.”

“Mortgage fraud in New Jersey is increasing at a faster rate than anywhere else in the country. The number of complaints from financial institutions in New Jersey grew more than 208 percent last year, according to a report.”

“‘We’ve seen an increase in fraud every year since 1997,’ said Sean McCarthy, an FBI special agent who is looking at the Manalapan sale. It has apparently become the most lucrative way to rob a bank. According to McCarthy, the losses to mortgage fraud now far exceed those from counterfeit checks and other banking schemes.”

“New Jersey’s property values have been rising, making fraud more inviting. A major Camden drug dealer who was later convicted told cohorts that flipping dilapidated houses was more profitable than selling drugs, and a number of criminal gangs have been tied to illegal mortgage schemes.”

“Attorney Jaimee Sussner said she has seen complicit closing attorneys, appraisers more than willing to inflate the value of a property, and mortgage companies ready to look the other way in order to quickly close on any deal possible.”

“‘No one is looking,’ she said. ‘And there’s even less attention on high-end deals, so if you’re determined to steal, you might as well steal a lot of money.’”

The Daily News from New York. “You can forget about oceanfront views from high-rise balconies and takeout from Nathan’s Famous. Mega-developer Thor Equities, which has reportedly laid out more than $100 million so far to rejuvenate Coney Island, has given up on plans for a highly profitable residential component to its Las Vegas-style amusement park project.”

“‘Thor has believed from the beginning that the amusement and entertainment aspect of the project was the most important aspect of the project,’ Thor spokesman Lee Silberstein said.”

“Now, the plan will have no residential component and no 50-story tower, as had been proposed, Silberstein said. ‘It’s significantly smaller,’ Silberstein said of the overall project. He refused to divulge specifics of a revised plan or to say how Thor would profit without the sale of luxury condos.”

The Record Online from New York. “You don’t need these eye-popping numbers to know young people are fleeing our region: Between 1990 and 2000, the number of residents ages 20-34 in Orange, Ulster and Sullivan counties dropped by 25,000 while the rest of the population grew by 51,000.”

“You knew things were bad before last week’s Sunday Record story, ‘Young, Gifted and Not Coming Back.’ You watched your sons, daughters and neighbors leave for better jobs, cheaper housing and lower taxes.”

“‘I want to kiss goodbye overpriced bills from Central Hudson, overinflated gas prices, insurance, taxes and living expenses,’ wrote one resident who’s moving to South Carolina. ‘I’ll be able to buy a house for half of what mine sells for, and I’ll invest the rest to live off the dividends, along with working. New York — thanks for kicking us (out).’”

The Baltimore Sun from Maryland. “Maryland’s number of borrowers in trouble spiked sharply in the first three months of the year. The share of loans in the foreclosure process in the state rose nearly 30 percent compared with the first quarter of last year, according to a Mortgage Bankers Association survey. The share of borrowers behind on their payments rose nearly 20 percent.”

“The increase in loans in the foreclosure process here was the largest in nearly 10 years.”

“Delinquencies and foreclosures dropped during the housing boom. But more borrowers began to fall behind as boom turned to slump. The final three months of 2006 was the first time since early 2002, in the aftermath of the last recession, that the inventory of foreclosures increased year over year.”

“‘I think there is a clear indication that the number of foreclosures is only going to increase,’ said Phillip R. Robinson, executive director of a Baltimore legal-help group.”

“Borrowers in the state were behind on about 36,700 mortgages in the first three months of the year. That’s about 3.5 percent of all mortgages.”

CNBC on Maryland. “When the tech bubble went bust in 2000, Maryland homeowner Rick Boardman took his money out of the stock market and put it in something he thought would be safer, real estate. ‘We thought it was a good investment, but also something we could enjoy and might change our lifestyle too,’ says Boardman.”

“He and his wife bought 20 acres of valuable waterfront property in Maryland confident it would turn an easy profit. Boardman remembers the summer of 200 as a time when ‘everything was just boom, boom, boom, especially on the eastern shore.’”

“Boardman built two homes; one to sell, which would finance the other, his dream home. But the $2 million home has been on the market for over a year, and Boardman can’t make the mortgage payments anymore. Work on his dream home stopped.”

“‘What was our dream has become a financial nightmare. Our goal now is just to get out with something to pay off the debt,’ says Boardman. ‘We’ve come to the absolute end of the road.’”

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