The Housing Bubble

The Mercury News reports from California. “Home prices in parts of (Silicon Valley) are finally falling. That should be great news for prospective buyers. But fewer are lining up for the loans these days. ‘The problem seems to be that people are skittish right now because of what they’re hearing about the market and foreclosures,’ said Ed Moncrief, executive director of Neighborhood Housing Services, which is based in San Jose.”

“‘I don’t want to rush. I’m going to be very methodical about putting together my plan,’ which for him means saving more money for a down payment, said Jamel Evan Wright Sr.,who manages a bank branch in San Jose ‘I would not pull that lever if it does not make sense. Unfortunately, I know too many people who have overextended themselves.’”

The New Sentinel. “Three years ago, builder Tom Doucette was ‘moving at 100 miles per hour’ trying to keep up with the demand for new homes at his project sites. Potential buyers were ‘camping out’ at his FCB Homes subdivisions, hoping to snatch up a piece of real estate at the peak of the housing boom. Business is no longer a blur for Doucette.”

“In Lodi, the number of building permits issued for detached single family homes has plummeted from 396 for all of 2005 to just 18 so far this year, according to city records. And in Galt, permits have fallen from 179 in 2005 to 38 so far this year.”

“Lodi builder Dennis Bennett, who started his company in 1977, said there are a number of reasons for the building slowdown. The media should take some blame for continuing to highlight the trend, he said.”

“Large, corporate home builders are also part of the problem. They’ve flooded regional markets with new homes creating ‘huge inventories.’ That, in turn, lowers sale prices for smaller builders. He noted that this is the fourth housing slowdown he’s seen since starting work in the ’70s.”

The Tribune. “21st Century Mortgage Co., a Paso Robles-based firm that was one of the largest local lenders specializing in high-risk mortgages, has closed after 10 years in business.”

“Noting that she could no longer maintain daily operations, president Linda Kennedy — in a letter to investors dated Aug. 17—said the closure was the result of a ’significant reduction in revenue for the company’ because of the real estate market downturn.”

“‘By definition, the hard-money loan business is a high-risk, high-reward investment.When the real estate market was going extraordinarily well, it was a high-gain—and looked low risk—investment,’ said Joe Diehl, an attorney in San Luis Obispo who represents 21st Century.”

“When it became clear that the firm only had enough money for two weeks of payroll, Kennedy said she notified her five employees (down from a peak of 23 in early 2006) and sent letters to investors. ‘I rode out the ’80s and the stuff in the ’90s,’ Kennedy said. ‘I was just not making it through this cycle. It’s not just me. It’s nationwide.’”

“‘We haven’t received payments on some of our investments for the last six months,’ said Mike Mora of Arroyo Grande. He and his wife invested nearly $300,000 in 21st Century in six investments just more than one year ago.”

“By this June, only two of their six investments were still making interest payments, taking their monthly interest income down to $1,100 a month from more than $3,000 a month, he said.”

The Santa Cruz Sentinel. “Santa Cruz Mortgage has suspended its mortgage banking division, another sign that upheaval in the residential lending industry is hitting home.”

“Brent Edwards, manager of the branch office on Seabright Avenue, said the decision means Santa Cruz Mortgage will act as a mortgage broker, lending money from other sources, but not as a mortgage banker, lending its own money.”

“Until recently, investors assumed home mortgages were a can’t-miss investment, and mortgage companies had no trouble selling them to raise cash to make more loans. Then as property appreciation stalled and homeowners were unable to refinance their adjustable rate mortgages, fewer investors were willing to take the risk.”

“‘I think it’s a good thing to protect ourselves,’ Edwards said. ‘It’s way too risky to continue to fund loans. Investors were dropping like flies. Hopefully things will blow over. When things change, we’re going to go back to doing it.’”

The Desert Sun. “A hot July failed to spark a flurry of activity in the Coachella Valley’s real estate market. Overall sales volume slid 23 percent in July compared with the same month last year, two reports show.”

“Home sales almost always languish in July as part of a seasonal downturn. However, research shows they were further driven down by tighter underwriting standards on the part of increasingly cautious lenders, said Greg Berkemer, executive VP of the California Desert Association of Realtors.”

“Also, the adverse psychological impact of sub-prime mortgage turmoil and news of increasing foreclosures is having an effect, Berkemer said.”

“‘There is still demand for real estate in the desert, and those sellers who have come to terms with the market, their need to price accordingly and are willing to dress their properties are being met with success,’ said Sid Kirkland, broker associate in La Quinta.”

“‘There is a lot more work involved in getting transactions to stay together and to close,’ Kirkland said.”

“About 165 new homes sold in the valley in July, a 30 percent drop from the same month last year, DataQuick reported. Realtors emphasize the time is ripe for buyers, with nearly 8,600 homes in the valley to choose from, a barrage of ‘New Price’ and ‘Reduced’ signs and reasonably low interest rates.”

“Many potential home buyers are getting mixed signals, prompting them to simply sit on the sidelines and wait it out, real estate agents said. What’s certain is buyers increasingly have gained the upper hand.”

“‘Buyers haven’t had much sway over the last five years,’ Berkemer said. ‘Sellers were kind of like, ‘Take it or leave it.’ Now it’s the buyers’ turn to play a little, ‘take it or leave it.’”

Readers suggested yesterdays proposal as a topic. “I think a good topic is the bailout now being pushed by president Bush.”

One replied, “I really don’t know of anyone who supports any bailout encouraging greed and fraud. This extends from my ‘Rush Limbaugh’ Father-in-law to my ex Hippie friend. However, upon closer scrutiny I do think that the bailout is meant to help the Lending Institutions who don’t want a bunch of FB’s returning their keys.”

One is skeptical. “Ain’t gonna be no bailout. Don’t worry folks. Any of these politicos can say whatever they want, but it won’t change reality, which is there’s no money to bail anybody out. It’s already been spent, packaged, exported, whatever.”

Another points out the speculators. “They discuss the events as though it has only been people with primary residents that drove themselves into using sub-prime loans to purchase a home. They fail to mention the multitudes of people who have been following the ‘get rich quick with realestate approach.’ These fools including the fools who lent the money to them should be prosecuted.”

“The amount of money required to bailout the $600B in resets that will be coming out will be staggering. Tell you representatives no bailout and no rate cut.”

One saw this. “I heard on CNN that he wants to eliminate the tax on a short sale. That’s going to help out the idiot flippers.”

A reply, “True. But it will also help accelerate the decline of prices. Since they are now less underwater, they will be more incentivized to dump the aligators. More sales means faster prices motion.”

One sees a downside. “I want every FB who mails the keys, short sells or bails on a recourse HELOC to get 1099′d. After all, they didn’t have any skin in the game in the first place, and their FICOs were already lousy, so what’s the penalty? At least if they get a 1099, this little lesson will follow them for years in the form of a non-excusable tax burden.”

Another pointed out, “The vast majority FBs will never have to pay any extra taxes even without changing the rules (therefore, this rule change will be worthless). ‘There’s a very important exception to the debt-relief-equals-taxable-income rule. Although lenders must send 1099-C forms reporting taxable income whenever cancelled debt is $600 or more, the tax bill itself is forgiven if the homeowner is bankrupt or insolvent.’ Link here.”

“How many FBs aren’t insolvent? What real assets do they have?”

The Palm Beach Post in Florida. “‘Locally, I don’t expect the proposal from the White House to have much impact on area homeowners,’ said Jim Sahnger of Palm Beach Financial Network in Sewall’s Point. ‘As many subprime borrowers who originated loans in the past few years did so at elevated home prices, many will be unable to qualify, as they won’t have enough equity for the (president’s) program.’”

“In Palm Beach County, one in every 542 households was in foreclosure in July, according to the county clerk’s office. Foreclosure actions quadrupled compared with July 2006.”

“Most of the local real estate experts hit at speculators - so prevalent in Palm Beach County and the Treasure Coast in the boom years - and applauded Bush for saying the federal government wasn’t responsible for rescuing them.”

The Bradenton Herald in Florida. “Shortly after Bush’s announcement, Turner Matthews, an attorney who has specialized in bankruptcy and real estate law for almost 30 years in Manatee County, said he was skeptical whether the plan was truly meant to help the homeowners.”

“‘You can be sure, at the bottom of this, it isn’t helping the borrowers,’ Matthews said. ‘My question is: Why should the government have to be the one to bail the lenders out?’”

“‘If you have ever had to try and reach a mortgage lender or a mortgage company, it is impossible,’ Matthews said. ‘In fact, the attorneys who are representing these companies in foreclosures, they can’t even get them to respond to them and they are their attorneys.’”

“The number of Manatee foreclosure filings this year continues to significantly outpace 2006, with approximately 1,342 filings already. The county’s previous highest annual foreclosure filing record was 901 in 2002.”

“‘Most of these people that are in these situations, they just got duped. And they are not equipped to deal with these lenders,’ Matthews said. ‘Every time you get on the phone with them, you talk to somebody different.’”

“‘That is what the industry is like,’ he added. ‘So I don’t see how Bush’s plan is going to help anybody. It sounds great on paper, but that is because nobody really understands the problems these people are going through.’”

The Monitor in Texas. “More than 27 percent of all McAllen-area loans are subprime, the highest rate in the country, according to LoanPerformance. In Brownsville and Harlingen, the rate is close to 22 percent, the sixth highest in the nation.”

“Most locally based lenders already specialize in government-insured loans, said Valerie Cardenas, head of the lending department for IBC Bank in McAllen. Those kinds of loans require more stringent income verification and often are smaller than subprimes, but still appeal to low-income borrowers with low credit ratings.”

“Many also note that FHA loans have always been available to low-income borrowers and say that expanding the program won’t provide any new options for borrowers.”

“‘Those loans were available all along,’ said Sam Saxena, owner of Rapid Mortgage in Edinburg, who brokered some subprime loans for area lenders, as well as government-insured loans. ‘FHA is essentially a product that has been around for decades.’”

The LA Times in California. “To qualify, applicants must prove that they have been making their payments and landed in trouble only when the so-called teaser rates that enticed them into their mortgages expired and the loan reset at a higher rate. The payment increase must occur between June 2005 and December 2009. The borrower must have at least 3% equity in the house and a history of sustained employment.”

“The program also wouldn’t apply to mortgages larger than $362,000, ruling out many homeowners in California and other high-cost states. ‘It’s not enough,’ Peter Morici, a University of Maryland economist, said. ‘We have a lot of people whose mortgages are greater than the value of their houses, and this program won’t do anything for them.’”

“‘It’s a Band-Aid, and not a very big one at that,’ Morici said.”

The Mercury News in California. “Bob Cooley, mortgage broker in Walnut Creek, said that Bush’s plan is too small and too slow to make much of an impact on those facing foreclosure. ‘But let’s see the details. And how fast can this be turned around?’ he said.”

“Cooley said he and his partner have done fewer than 10 FHA loans in the past year because few homes are priced that low in the East Bay. Prices are dropping, however, especially in high foreclosure areas.”

The San Francisco Chronicle in California. “In the Bay Area, where the median home price in June was $665,000, highest in the continental United States, fully 61.9 percent of mortgages taken out in the first half of 2007 were above the $417,000 level, making them ineligible for FHA guarantees even if the limit is raised, according to DataQuick.”

“‘Based on the median home prices in the Bay Area, this FHASecure refinance program would not appear to be appropriate for most people,’ said Rick Harper, director of housing services for Consumer Credit Counseling Service of San Francisco.”

“Between April and June, 2,206 homes in the nine-county region were lost to foreclosure, a ninefold increase from the comparable period in 2006. Another 7,696 Bay Area residents got notices that they were in default on mortgage payments.”

The Press Enterprise in California. “Chapman University Economist Esmael Adibi said that he objects to a proposal to bail out lenders that made a lot of money making risky loans. ‘I have no doubt some homebuyers bought homes without knowing what kind of mortgage they were getting into but at the same time I have no doubt that the lenders were fully aware,’ he said.”

“Gene Wunderlich, president-elect of the Southwest Riverside County Association of Realtors and an agent in Murrieta, said he agrees with Bush’s idea that the government should not save individuals who knowingly bought houses they could not afford.”

“‘What I am not in favor of is a general bailout because people were greedy or stupid,’ Wunderlich said.”

From KVBC.com in Nevada. “There could be some help on the way for thousands of Las Vegans facing foreclosure on their homes. That’s if President Bush gets his plans approved.”

“Christine Young of Henderson, refinanced her four bedroom, nearly 2,000 square foot home more than a year ago. And at the time was convinced she was getting into a fixed mortgage. ‘It wasn’t fixed. A year later, our arm came up and now we can’t make our arm payment and it’s $700 more than what we were paying and it’s due September 1st.’”

“Christine blames predatory lenders for signing her up on a mortgage she tried so hard to avoid in the first place. ‘I thought this guy was the nicest and most honest guy.’”

“There are thousands of people across the country already in default, facing foreclosure. Nevada is the number one state for foreclosures, up 93 percent from this time last year.”

“To avoid foreclosing, Pam put her house on the market several months ago. She’s hoping to sell before they lose the house or lose out even more. ‘We started at $389,000 and now at $299,000. So we lost $90,000 on what we were counting on,’ Pam said.”

The Asbury Park Press reports from New Jersey. “Westminster Communities and Paramount Homes representatives say they are concentrating on selling the condominiums they have built and will continue to do so despite a housing market that, in Metro Homes’ Dean Geibel’s words at a business luncheon last week, is ‘frozen in place.’ ‘The marketplace is not good,’ said Sam Gershwin, president of Westminster Communities. ‘We’re building for those people who have bought units and finishing the rest of the buildings we have on the way.’”

“‘When we or someone else can figure out when the marketplace is going to change and people want to buy real estate, we will get involved again,’ Gershwin said.”

The Boston Herald from Massachusetts. “Think the subprime mortgage meltdown was frightful? Now consider the prospect of your home losing half its value.”

“The whopping 86 percent rise in home prices from 1996 to 2006 was ‘a classic speculative bubble, driven largely by extravagant expectations for future price increases’ and not economic fundamentals, Yale University professor Robert Shiller wrote in a paper accompanying his speech at the Jackson Hole Economic Symposium.”

“‘The worst downturn in the real estate market in my lifetime resulted in a 15 percent decline’ over five years, said Tim Warren, CEO of The Warren Group. ‘So I have a hard time getting my arms around a 50 percent decline.’”

“‘I think that the fundamentals in Massachusetts are relatively strong, and there’s still strong demand for housing,’ said Bob Buckley, who works with commercial and large-scale residential real estate. There will be ’some price adjustment’ as the market responds to subprime mortgage problems, he said, but New England is somewhat insulated thanks to its tight zoning controls.”

“And John Ford of Ford Realty heartily disagreed with Shiller’s warning, saying that while Dorchester and Mattapan will get hit hard thanks to a glut of low-verification and creative financing loans, ‘Boston proper will hold its own.’ Worst-case, he said: Boston-area home prices decline 5 percent to 7 percent over the next 12 months.”

“‘I don’t think there’s any signs of panic here,’ Ford said. ‘Yes, prices might drop. But 50 percent is totally unrealistic.’”

“New data shows that home foreclosure petitions in Massachusetts jumped nearly 67 percent last month compared with the same month a year earlier.”

“That makes it 18 straight months the total has risen compared with the previous year. The information comes from the Warren Group, a Boston-based publisher of real estate data.”

The Cape Cod Times from Massachusetts. “While the Cape saw a roughly 27 percent increase in foreclosure petitions in July, it was not the hardest hit region of the state for the month.”

“Foreclosure petitions more than doubled in Essex and Nantucket counties and doubled in Hampshire County in July. During that time, Middlesex County, which includes Cambridge, saw a nearly 92 percent increase.”

“In July, there were 35 completed foreclosure deeds recorded at the Barnstable County Registry of Deeds. That’s more than four times the number of foreclosures recorded at the registry in July 2006.”

The Republican from Massachusetts. “Foreclosure auction announcements have more than doubled in Hampden and Hampshire counties over the first seven months of the year, according to data released this week.”

“Franklin County’s auction announcements almost doubled, by 92.5 percent, to 77 in the first seven months of the year. Terence F. Egan, editor-in-chief for The Warren Group, said this week that Western Massachusetts lagged behind the state in the real estate boom and has lagged in the real estate slump.”

“‘That may tell us that the worst is yet to come in terms of foreclosures, because the downturn in the real estate market really hit Western Massachusetts much later than it did in the eastern part of the state,’ he said.”

“When home prices start to slide, ‘that’s when troubled borrowers start hitting a real wall,’ he said. ‘Borrowers who end up in difficulty with their payments really start seeing their options dwindle,’ said Egan, and a greater number of the petitions to foreclose start working their way to actual foreclosure.”

“The number of petitions to foreclose, the first step in the auction process, are running at more than 2,000 a month statewide, he said, whereas last year they were running at about 1,300 a month. ‘That’s a pretty clear indication that this is going to remain a trouble spot for some time to come,’ Egan said.”

NPR reports on Massachusetts. “In 2005, Tami Amato bought a modest two-family home for herself and her three children in Boston’s Dorchester neighborhood. She bought the home with an adjustable rate loan that was fixed for just the first two years.”

“Amato says she could afford the initial 6.4 percent rate. And she says her lender promised her the loan payments would never go up, because she could refinance before they did. But she says that wasn’t true and that the interest rate rose to 9.4 percent.”

“‘I thought, ‘I can’t do this,’ Amato says. ‘It was just too much money.’”

“Today, Amato’s house is full of moving boxes and almost devoid of furniture. Afraid that the bank is going to foreclose any day, Amato has been moving her belongings into storage.”

The Queens Chronicle from New York. “The subprime lending crisis that has devastated many of the borough’s working-class communities took on new urgency last week as experts predicted another wave of foreclosures in the coming months.”

“In July alone, Queens saw 882 foreclosure filings, the most of any borough, according to a report released last weekend by Sen. Charles Schumer. That tally marks a 56 percent increase from February, when foreclosure filings reached 566.”

“Industry analysts say more problems are right around the corner. In the fourth fiscal quarter of 2007, which ends Sept. 30, a wave of adjustable-rate mortgages first issued in 2005 are expected to reset.”

“Queens is already home to the shortest-lived mortgages of all properties in the city that eventually go into foreclosure. In 2004, for instance, the average foreclosed mortgage lasted just under four years before the loan defaulted. In the first half of this year, the lifespan had shortened to about two years.”

“A federal bill would (place) limits on the steep fees that often find their way into the fine print of subprime loan contracts. The bill, introduced by Schumer, would also make brokers more liable for their loans and offer them incentives to follow fair lending practices.”

“The senator is the author of a recently passed bill that requires all lenders to register their credentials with the federal government. Now, he’s hoping to tighten the reins even more.”

“‘The mortgage crisis has created a perfect storm for homeowners in New York and across the country,’ Schumer said. ‘We need all hands on deck to stem the rising tide of foreclosures.’”

The Staten Island Advance from New York. “Those caught in the subprime lending squeeze shouldn’t expect a good cry on Mayor Michael Bloomberg’s shoulder.”

“Sounding more like a Dutch uncle than a rich uncle, the mayor yesterday put much of the blame for the crisis on homeowners who took bad loans in the first place.”

“‘What happened here is a bunch of people who really didn’t have the wherewithal to get mortgages got mortgages. If they didn’t have access to those mortgages, the elected officials would scream you’re discriminating against them,’ Bloomberg contended during his weekly radio address yesterday.”

“The mayor made his comments yesterday on the lending crisis in response to a reporter’s question about how foreclosures might affect New York.”

“‘It can’t help. I mean, there are people who have subprime loans and variable-rate mortgages and when they get reset they’re going to get very badly hurt,’ he said. ‘We’re not immune to this. … We will get hurt less, I think, than the rest of the country. But make no mistake about it, it’s not good for America and it’s not good for New York.’”

“‘Buyers are not totally innocent in this process. Consumers have not been truly honest with themselves as to whether they could afford the mortgages, and some consumers, frankly, were not ready for homeownership,’ Simone Wegge, an economics professor at the College of Staten Island, testified last month.”

“‘Some of them lied about their incomes,’ Bloomberg added. ‘Now they said the salesman convinced them to do it. OK. But we live in a world where, when you put your signature down, you’re supposed to know what you’re signing, and we have to take responsibility.’”

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