The Housing Bubble

The East Valley Tribune reports from Arizona. “Hundreds of Valley real estate agents rallied in Scottsdale on Friday in hopes of kick-starting the sluggish real estate market by thinking positive and being proactive. During the boom, real estate agents could sit and wait for buyers and sellers to come to them, said Rosey Koberlein, CEO of Tucson-based The Long Companies.”

“Now, it’s time to stop being passive, Koberlein said. ‘You know your market. You know your statistics. Be confident,’ she said.”

“Whatever business people are in, they need to think thoughts that will empower them to create positive results, self-described LifeSuccess consultant Nicholas Tutora told the audience. ‘Don’t wait for the ‘experts’ to tell you where the market is,’ he said.”

CNN Money reports on Arizona. “When the market began its downturn in early 2006, some of the smartest economists in the country, as well as the CEOs of major home-builders and the National Association of Realtors, predicted that prices would rebound by mid-2007. Instead the experts have been humbled by the depth and breadth of the downturn.”

“In some cases the inventory glut will take years to clear, even at heavily discounted prices. Phoenix currently offers about 55,000 listings, the highest in the Arizona capital’s history, in addition to an estimated 15,000 spec houses.”

‘”Builders have now dropped new three-bedroom, single-family homes as low as $130,000,’ says Frank Owens, a local real estate analyst and headhunter for the home-building industry. ‘That’s unheard of. The lowest we’d see a year ago was $200,000.’”

The Arizona Republic. “Arizona’s mortgage regulator has shut down a handful of Valley firms for fraud and other illegal lending practices this year, but at least 40 other investigations are stalled because there is no money to fund them.”

“The Arizona Department of Financial Institutions has only two consumer investigators to keep up with those complaints, more than 800 of them this year. Five years ago, the state agency received fewer than a few hundred mortgage complaints a year.”

“Dozens of investigations into mortgage fraud and other bad loans are waiting until the agency’s investigators can get to them. A typical mortgage investigation takes months or more to track because of extensive paper trails and the many people involved.”

“‘We were shorthanded to begin with, but now we have run out of money,’ said Felecia Rotellini, superintendent of the Department of Financial Institutions.”

“It’s the biggest crackdown in the state’s lending industry since the real-estate recession and savings-and-loan debacle of the late 1980s.”

“‘It’s just the tip of the iceberg,’ Rotellini said about the firms the agency has been able to stop from operating illegally.”

“Mortgage fraud and other bad loans from many of the firms recently shut down or under investigation are contributing to the Valley’s 15-year foreclosure high that is dragging down the housing market.”

“‘People came into the mortgage business and did some bad and ugly things,’ said Amy Swaney, past president of the Arizona Mortgage Lenders Association.”

“Legislation to license the almost 15,000 mortgage officers and originators in Arizona stalled with the bill that would have given the Department of Financial Institutions more resources for investigations. The number of mortgage brokers and branches that the Department of Financial Institutions regulates has more than tripled since 2001, while its budget has remained almost flat.”

“‘Mortgage fraud can be traced to a lack of oversight and honesty in Arizona,’ said Sen. Jay Tibshraeny, Chandler, who backed the mortgage-fraud legislation. ‘We have to license the people taking borrowers’ personal information and working with them to make one of their biggest financial decisions, getting a mortgage. Real-estate agents have to be licensed, and no one says that’s a bad thing.’”

In Business Las Vegas from Nevada. “The price of existing and new homes sold in the Las Vegas Valley during the third quarter dropped 8 percent or more in 29 of 51 ZIP codes, a real estate information service reported. The third quarter numbers released by DataQuick reflects discounting by homebuilders and the increased willingness of owners of existing homes to cut prices to make a sale.”

“Las Vegas housing analyst Dennis Smith said he’s not surprised by the drops reported in many neighborhoods. His own statistics for the third quarter, he said, show a 7.9 percent drop in new-home prices from the third quarter of 2006. Prices of existing homes fell 10.6 percent, he said.”

“‘It is going to go lower,’ Smith said. ‘Like all statistics, they lag a little bit.’”

“The biggest drop in prices was recorded in 89118, in unincorporated Clark County. The area bounded by Interstate 15, Tropicana Avenue, Warm Springs Road and Rainbow Boulevard saw its prices dip 27 percent to $185,895.”

“In 89146, which is bordered by Charleston, Rainbow and Decatur boulevards and Spring Mountain Road, prices fell 21 percent to $225,000. The biggest decline in Henderson was in 89015, in the eastern part of the city, where prices fell 17.5 percent to $259,950.”

“In North Las Vegas, the steepest decline was in 89081, which fell 12 percent to $275,500.”

“The number of foreclosure filings in the Las Vegas Valley increased in the third quarter, according to Realtytrac. The Las Vegas market had 14,948 foreclosure filings on 11,482 properties from July to September, the firm reported.”

“That’s a 29 percent increase from the second quarter this year, and a 200 percent gain from the third quarter of 2006.”

“The increasing number of foreclosures has prompted national lenders and asset management companies to schedule an auction of more than 200 foreclosed-upon homes at noon Sunday, Dec. 2. Dave Webb, a principal with Hudson & Marshall, said the foreclosure filings show no sign of slowing. Investors composed nearly one-third of Nevada’s defaulted loans.”

“‘There was a lot of overbuilding combined with investors using risky subprime adjustable rate mortgages to purchase homes,’ Webb said.”

“Buyers speculated that home prices would continue to rise and that they could easily refinance or sell at a profit, he said.”

“‘That didn’t happen, and now Nevada is overburdened with foreclosed homes,’ Webb said.”

The Reno Gazette Journal from Nevada. “Federal reports Thursday reflecting the nation’s housing slump came as no surprise to a Nevada expert who has watched the state stumble for months on end.”

“‘It’s nothing new. The local numbers have been showing it for quite a while,’ said Brian Kaiser, analyst at the Center for Regional Studies on the University of Nevada, Reno campus.”

“For the third quarter in Washoe County, the median sales price of a new home fell 11.8 percent, to $351,840, from a year earlier, according to a report earlier this fall by Kaiser, who draws his conclusions from Washoe County assessor’s office data.”

“Kaiser said there’s no question the housing market locally and nationwide is hurting. ‘I don’t think we’ve hit bottom yet,’ he said. ‘It’s nothing drastic, but a continual slide we’re still going down.’”

The Lahontan Valley News from Nevada. “Due to the nationwide slump in the residential housing market, plans to build a massive industrial, commercial and residential project in Hawthorne have been indefinitely postponed.”

“The project, which would have included…upwards of 2,000 housing units, has been postponed ‘because of the plummeting housing market,’ according to Shelley Hartmann, executive director of the Mineral County Economic Development Authority.”

“Hartmann said Bob Conner, CEO of Peninsula Floors, Inc., of Livermore, Calif., the company that was to build the project, ‘is rethinking the project but has put it on hold until the economy gets better.’”

“‘Mr. Conner told me that his company’s sales volume is about 50 percent off from what it was last year. But he told me he hopes to eventually build the project in Hawthorne, but on a smaller scale,’ Hartmann added.”

“Mineral County Commissioner Jerrie Tipton said, ‘The housing downturn is taking place in Nevada and all over the United States. People are purchasing less flooring and building materials, and Peninsula Floors just doesn’t think it is time to start up this big project.’”

“Fallon attorney Mike Mackedon, who has represented Mineral County in its dealings with Conner and Peninsula Floors, said, ‘There’s a crisis in the housing industry, and it has been sudden and reflects a steep decline. Peninsula Floors Company has seen recent layoffs.’”

“The continuing decline in home construction and sales has affected Nevada’s overall economy as well as the state’s housing market.”

“The Nevada Department of Taxation reported Thursday that taxable sales in the state fell in September, the six consecutive month showing a decline. A prime reason for the slump was caused by construction-related downturns in the housing sector, the department indicated.”

Readers suggested a topic around the latest proposal to freeze interest rate resets. “Banks, U.S. near deal to freeze subprime rates: report. Now this is a new twist.”

One posted. “A continued attempt to reward bad behavior on the borrowers part. However a freeze will do nothing more than prolong the inevitable. Of course that’s what we do best.”

Another wrote, “What a country! Raise fixed interest rates on prime borrowers while lower income interest rates on savers while simultaneously destroying the dollar — AND — try to freeze the interest rate (which predicts the rate of default in theory) of the risky loans!”

One saw fallout, “So if they can/do freeze rates, I guess we will find out how many these homeowners were speculators. Speculators make money on increased value of the homes, otherwise they will bail. Also, what will do to the holders of these mortgages, such as the Florida state fund which had a run on the deposits?”

“Again, Washington DC is not thinking about the unintended consequences of their actions.”

Another wants details, “I have a question about this meme. All this talk about teaser rates; do they in fact exist in any significant numbers?”

“I know neg-ams have teaser payments, but that just means the interest gets capitalised into the principal balance. So if they freeze the rate on a neg-am (or to a lesser extent a 5/1 ARM), you’re still going to see payment shock when the loan resets or recasts to full amortisation.”

As did this poster, “What are the mechanics of this deal. As we all know, mortgages are put into large packages (CDO’s) and sold to investors. These bond holders are expecting a specific return on their notes. The banks may not have the right to alter the terms of these mortgages once they are sold.”

“If they pass a law altering the nature of these bonds, then it would create more instability in the financial markets. If they monkey with mortgage bonds today - they may toy with credit card bonds tomorrow. Why would anyone invest in a US bank bond when the terms can be changed at will?”

“Even if the banks are just working with the mortgages on their books, it seems like a bad deal. As everybody knows, the first few years of a mortgage, you pay mostly interest. Massively rolling payments to the back to the note is not really a great solution. Extending the note only adds interest to the front.”

“Eventually, they have to get their principal back. Also, banks are short on cash right now and really can’t afford to be a reformed Scrooge this Christmas. They need money not kind spirits. It also seems very unfair that some people would get their rates frozen while others would not based on whether a bank sold their mortgage or not.”

“I still do not see this slowing down price drops. There’s just too many empty houses. The problem currently is oversupply. These people can either stay in their current houses, or rent some other house. Either way, they are using exactly the same amount of supply.”

One had some answers, “They can NOT pass a statute altering the terms of contracts in existence. Such the a thing would be an ex post facto law - ex post facto means ‘after the fact’ - and it is explicitly prohibited by that thing called the US Constitution.”

“The best they can do is to beg the financial institutions to delay the rate increases (a freeze) if the institution can. And therein lies the catch. If the institution only services the loan and does not own, they can not alter to the terms of the loan UNLESS every single investor/owner of the loan agrees.”

“Given that the servicing companies can not even figure out who owns the loan to file the foreclosure case properly (ex: getting kicked out of Federal Ct in Ohio), it is highly doubtful that they could find the owners of the loans to get their agreement to changing the terms of the resets.”

“If the servicing companies do not have the agreement of the owner’s of the loans and fail to reset the rates per the loan requirement, then they get sued by the loan owners for the lost interest income.”

One was skeptical, “I think this will have minimal impact as it will only affect a small portion of the toxic loans out there. Banks can only adjust the terms on loans they originated and control - basically what they got stuck with in the SIVs before they could dump them on some poor unsuspecting schmuck. But I don’t believe they can adjust any of the terms on the junk sold on wall street, heck the investors are having a hard time even proving in court that they hold title on properties they are trying to repo.”

“To me it just looks like an attempt to save the bacon of the big national banks who are likely to go under if they can’t resolve their SIV dilema quickly.”

The Wall Street Journal. “A government-led plan to freeze interest rates on certain troubled subprime home loans drew criticism both from investors who foresee losses and from some analysts warning that it will merely prolong the pain of the mortgage crisis.”

“As much as $362 billion in U.S. subprime home mortgages with adjustable interest rates are due to reset at potentially higher rates in the coming year, according to Banc of America Securities, risking a wave of defaults by borrowers unable to afford the new monthly payments. That in turn could exacerbate a wave of write-offs by investors who now own those mortgages.”

“Fund manager Alan Fournier predicted that the plan being pushed by the Treasury Department will prolong the pain of the housing slump. He said it would merely delay inevitable foreclosures for some people who can’t afford their homes, while allowing holders of mortgage-backed securities to put off marking down their assets.”

“‘This reduces the pressure short-term to bring everything to a clearing price,’ Mr. Fournier says. ‘We really just need to let it wash through.’”

The Boston Herald. “Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, said that while the freeze plan sounds interesting on paper, it may be very difficult to implement in reality.”

“Many subprime mortgages were packaged up in huge investment vehicles and sold to investors across the world, he said.”

“Treasury might be able to get large mortgage-related companies like Citigroup, Wells Fargo, Washington Mutual Inc. and Countrywide to go along with a freeze - but then those firms have to sift through a massive morass of investment vehicles to determine which mortgages can legally have their reset rates frozen, he said.”

The Star Tribune. “Why would lenders agree to pass up the billions that they’re set to collect on rising mortgage rates? ‘What they want to avoid is customers mailing in their keys and walking away,” said banking analyst Mark A. Morgan. The value of houses is falling so fast as to wipe out the equity that many subprime owners have in their houses, he said.”

“‘If you look at delinquency loss curves, everything is going straight up,’ Morgan said. ‘That’s the uncertainty that’s motivating them to freeze’ rates in the hope the borrowers can keep paying. As one former Wall Street banker once said, ‘A rolling loan gathers no loss.’”

“In a statement, Michael Heid, co-president of Wells Fargo Home Mortgage, said the bank will keep in mind contractual obligations to investors who provided the cash for home mortgages, as well as the needs of customers.”

“Some critics are wondering whether lenders are simply postponing a day of reckoning for themselves and for financially distressed homeowners.”

“‘Everyone is pretending,’ said Prentiss Cox, associate professor of law at the University of Minnesota. ‘Nobody’s accepting the loss that’s out there. Nobody’s recognizing the loss and booking it.’”

From Forbes. “The mayhem in the global markets is the fault of ’snooty’ financiers who thought they were cleverer than everyone else, said Germany’s finance minister, Peer Steinbrueck.”

“He said that the credit crisis, triggered by the collapse of the U.S. housing market, also raised serious questions about transparency, and whether market participants really have enough information to evaluate risks.”

“‘Of course, this crisis did not originate in the hedge funds, but it raises the question of transparency because we are having to deal with so much packaging, securitization, impenetrable jargon,’ he told the Financial Times. ‘The truth is, nobody knows where the risks are.’”

The Bradenton Herald reports from Florida. “A record 372 foreclosure actions were filed against Manatee homes in November, the Manatee County Clerk of Circuit Court’s office reported Friday. That shattered the previous monthly record, just set in October, and pushed this year’s record-setting total to 2,254 cases. Very Reyna, a clerk who handles foreclosure actions as they are filed, had only one word for it: ‘Overwhelming.’”

“‘Every day we get a load of cases dropped off and it usually takes us until the next morning to get through them,’ she said. ‘By the time we’re done, the next load’s here.’”

“‘Foreclosures are still happening for the same reason they’ve always happened: loss of a job, death and divorce,’ said said Rich Workman, president of the Florida Association of Mortgage Brokers. What’s different now is that the homes’ market value has fallen below what is owed, Workman said. Hurting the most are those who bought at the housing boom’s height, he said.”

“A sizable portion is speculators who did just that, said Pete Minarich, a CTX Mortgage Co. branch manager in Bradenton. ‘There are a lot of people simply choosing not to make payments” and walking away to limit their losses, he said.”

“Gilbert Smith, a bankruptcy and collections attorney in Bradenton, said local foreclosure filings might drop in December as lenders hold off because of the holiday season, but likely will return to high levels in January.”

“Workman said foreclosures won’t drop until property values start going up. Until then, he half-jokingly urged Floridians to pray for snow - in hopes of persuading winter-weary northerners to look southward.”

“‘If they have a bad winter, we’ll have a great spring,’ he said.”

The Sun Sentinel. “It’s the neighbors who must make up the money when condo owners don’t pay their share of maintenance fees and special assessments. And while failing to pay isn’t a new problem, it seems to be happening more frequently now, callers tell the South Florida Sun-Sentinel’s condo line.”

“Many of the delinquents are investors walking away from property, or owners who can’t afford adjustable-rate mortgage payments that have ballooned.”

“At the Deerfield Lake condo in Deerfield Beach, 18 of the 75 owners have stopped paying since earlier this year. They are angry over a $1,400 special assessment imposed by the board to renovate roofs on the covered parking areas. They have refused to pay that as well.”

“Gregory Ward, a Fort Lauderdale attorney, is seeing similar problems throughout South Florida as a result of associations having to file liens and foreclosures against so many owners.”

“‘Anecdotally, we’ve been hearing of a lack of timely repairs and problems with the day-to-day operations, such as garbage removal, because boards are now so preoccupied with collecting that they can’t administer the property,’ he said.”

The Naples News. “It took a few weeks, but local government money managers throughout Collier County have pulled at least $78.6 million out of a state-operated investment fund. And they aren’t alone.”

“Local government money managers around Florida have taken out nearly $10 billion, about 40 percent, of the pool’s assets after its mortgage-backed holdings were downgraded.”

“‘We had been pulling money out since the rush on the foreclosures took place,’ Collier County Clerk of Courts Dwight Brock said Friday. ‘We foresaw there would be a rush. When everyone started pulling out, it was sort of like Black Friday in the Depression.’”

The News Press. “Officials representing hundreds of local governments with their money locked in a state fund frozen 24 hours earlier tuned in to a Friday afternoon conference call with a 16-member advisory board and staff of the State Board of Administration.”

“They rejected SBA efforts to survey depositors on what losses they can stomach, and instead demanded to deliver a message to Gov. Charlie Crist and SBA trustees CFO Alex Sink and Attorney General Bill McCollum seeking reassurances of state support and confidence.”

“Crist and trustees of the State Board of Administration are to meet again Tuesday to consider whether to allow at least emergency withdrawals, and how to deal with continued jitters over $2 billion in mortgage-backed investments held by the fund.”

“‘One or two cows start running then the stampede begins,’ said Richard Pinsky, representing local housing authorities that now have $22.6 million in operating funds and investments they can’t touch.”

“‘Had we all just held tight, most likely no one would have lost a nickel,’ said Polk County Clerk of Courts Richard Weiss, who admits he was at the front of the pack in the run by withdrawing $450 million earlier this month.”

“The largest remaining player in the investment pool is Florida’s state-run property insurer, Citizens Property Insurance. The insurer has $1.9 billion in the frozen fund. Spokesman Rocky Scott said there is no immediate need for the assets, but Citizens had been forced to withdraw from the investment pool to keep pace with the diminishing fund.”

“The insurer’s own investment guidelines require that it hold no more than 10 percent of the state pool. Otherwise, it can afford to wait for its money.”

“‘Capital preservation for us is most important,’ said Citizens’ CFO Sharon Binnun.”

The Palm Beach Post. “The pool offered slightly better returns than money market funds and established a track record of safety, making it a no-brainer for government officials such as Palm Beach County Treasurer Jim Beard.”

“However, the pool became less of a no-brainer a couple of months ago, when Beard noticed that the so-called asset-backed securities in the fund’s portfolio put it at risk of being hurt by the mortgage market’s meltdown.”

“Beard said he grew suspicious as the state fund’s yields ballooned to 5.5 percent in August and 5.7 percent in September, well above the rates paid by money market funds.”

“‘How is this possible?’ Beard recalled wondering.”

“Beard and other investment specialists in the county’s clerk and comptroller’s office began questioning state board officials about mortgage-related risks. Uncomfortable with their answers, Beard decided to look elsewhere for a haven for the county’s money.”

The Herald Tribune. “Another Manatee County bank has been slammed by the real estate downturn. First Priority Bank of Bradenton posted a loss of $4.8 million in the third quarter as its bad loans soared by more than 500 percent. The loss is a major hit for a bank of First Priority’s size.”

“First Priority already is looking to raise additional capital through a stock sale, President George Najmy said Friday. ‘I don’t think anybody anticipated the real estate market to take as severe a downturn as it did,’ he said.”

“The bulk of the problem loans involve residential real estate acquisition and development projects, he said, with 8 to 10 loans ranging from $2 million to $4 million. The bank was one of the area’s most aggressive lenders when times were good. Najmy said the bank has stopped acquisition and development lending.”

“‘With the economy turning, that growth is coming back to bite us a bit,’ he said.”

“First Banks Inc. of St. Louis completed its purchase Friday of floundering Coast, paying a rock-bottom price of $12.1 million, or $1.86 per share. That is $10 million less than the First Bank’s original offer, a sign that Coast’s loan problems had deepened in recent weeks.”

“First Banks will move quickly to jettison the Coast name, which some say represents one of the biggest business busts in Manatee County history.”

“Coast’s shareholders voted Monday to sell to First Banks, even though they did not know what the final price would be. In the merger agreement signed in August, $1.86 per share was the lowest the price could sink before either bank could back out of the deal.”

“The 71/2-year-old bank had little choice but to sell at any price, given its crippled financial condition and damaged reputation since the loan crisis was revealed in January. The stock was trading at $16 before the problems surfaced. At that price, Coast would have fetched $104 million.”

“First Banks will take on more than $80 million in bad loans, more than 100 borrower lawsuits, and a federal lawsuit by shareholders who claim they were bilked by Coast officials who masked the bank’s troubled condition.”

“Many of its overdue loans involve borrowers with investment homes who stopped making payments when their builders went out of business and left unfinished homes.”

“As the housing market continues its retreat, developer William Vernon is soldiering forward with his Rivé Isle project in Manatee County.”

“He has simply invested way too much to back down now.”

“Vernon, a Longboat Key resident with upscale housing projects across Florida, has spent $30 million developing the Rivé Isle Golf and Nautical Estates and more than four years cutting red tape to get it approved.”

“The time may not be ripe for even more $1 million homes in the region, but Vernon is convinced he has a product like no other, and the long, arduous road he has traveled to develop the project is fueling his ‘market-be-damned’ attitude.”

“It is anyone’s guess when the project will be fully built out and populated. ‘If it was back three, four years ago, I’d probably say a couple of years. People were buying anything and everything,’ Vernon said. ‘Now, they’re a little more careful.’”

“That reality has struck many area developers as sales have stalled or halted in a number of high-profile developments.”

“The SevenShores project, for example, announced earlier this year it would suspend sales and offer deposit refunds for its 352-acre development on Perico Island. That followed an earlier price cut as high as 22 percent for some units.”

“Vernon has had to reassess his own pricing. Less than a year ago, Rivé Isle announced that the minimum asking price for a lot and home was $1.5 million. Today, it is $1 million.”

“Vernon may be in a better position than some developers to weather the current economic storm. He bought the land for River Wilderness and Rivé Isle in the mid-1990s for a now-paltry $6 million.”

“It could prove to be a bumpy ride. The median sales price for homes in the Sarasota and Bradenton markets has dropped more than $100,000 since it was about $350,000 at the start of 2006. Inventory remains high across the region, including for high-end developments like Vernon’s.”

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