January 4, 2008

Hope That’s As Audacious As It Is Misplaced

It’s Friday desk clearing time for this blogger. “Bill Dryburgh a Realtor in Punta Gorda, believes the local market will begin to rebound in 2008 for one simple reason: ‘We’re close to, or at, the bottom right now,’ he said. Arthur Broslat of Re/Max Palm Realty in Port Charlotte agrees, noting land values can’t depreciate much more. ‘You can’t lose $40,000 on a $10,000 lot,’ he said, referring to vacant lots that sold for $50,000 in 2005 now listed for $9,000 to $12,000.”

“But other issues will continue to plague the market, Broslat said. Lower land prices and construction costs mean a buyer ‘can get (a home) built for $160,000, $150,000,’ he said. ‘There will be a whole bunch of people who owe $250,000 on a house worth $150,000. A whole bunch of them will take a walk.’”

“Realtor Jason Painter in Port Charlotte, also believes 2008 will ’see a lot of short sales and foreclosures.’ He predicts prices will tumble another 10 percent to 20 percent. ‘I don’t see a turnaround anytime soon,’ he said. ‘I don’t think we have seen the worse yet. If I had property right now, I’d sell.’”

“The U.S. housing meltdown and cooling of the red-hot housing markets in parts of Canada have many investors thinking now is the time to jump into real estate. It might be a little early to act.”

“Hendrickson Financial notes that ‘it is evident that home buyers in Edmonton and Calgary who bought in the spring of 2007, with less than five-per-cent down payments, already have less equity in their homes than the balance owing on their loans.’”

“An Edmonton realtor said that back in May ‘listings were gold,’ but now ‘buyers are gold.’”

“Alberta has been the centre of Canada’s booming economy. This province has seen a dramatic 50 per cent hike in housing prices in most urban centres in 2006. In 2007, the province saw the rise in housing costs trickle down into rural areas such as Pincher Creek.”

“The reason for the amount of construction is ‘50 per cent speculation’ says Trevor Birkmann, owner of Colossal Construction Ltd. ‘None are built on need.’”

“Don Lang, a broker for Pincher Creek’s Coldwell Banker generally agrees. ‘Prices have dropped recently by as much as $20,000 because there are more properties on the market. Less demand means less cost.’”

“Ah the revisionists. You can’t help loving a revisionist. He always emerges after the event to suggest that the history you have just witnessed didn’t happen at all.”

“In recent days, our newspapers have been full of articles telling us what transpired in the Irish property boom in 2007 (as if we didn’t know). Commentators who this time last year were confidently predicting that house prices would continue rising (albeit at a slower rate — the fictitious “soft landing”) now have changed their tune and are suggesting that ‘we all knew it had to stop some time.’”

“Well wait a second; if you all knew it had to stop and reverse some time, why didn’t you say so beforehand or even at the time, or even when the market was turning down in mid-2006? What, cat got your tongue?”

“The reason is simple. Most of these so-called commentators and economists are paid agents of the hype-machine which has dominated analysis in Ireland for the past five years.”

“Debate on whether or not house sale prices in the country are over-valued — particularly for the apartments in Nairobi’s upmarket estates and a number of new constructions in Langata and South ‘B’ & ‘C’ — has never left investors’ lips.”

“Finance minister Amos Kimunya joined the fray by calling on financial institutions to ‘go slow in their lending habits to avoid a bubble burst that could cause a crisis in the lending sector.’ Kimunya based his fears on ‘reports that houses…may be priced above what the market could sustain in the long run.’”

“He made the statement after what he termed as ‘reports that apartment sales in Nairobi’s upper market had stagnated due to an oversupply placed against limited demand and highly priced units.’”

“An argument that has always been sharply contested by a section of developers.’

“It was all so promising, back when we rang the opening bell for 2007. It was all good until the Wall St. greedheads and their wads of mutant debt were found out.”

“Here’s what some of the business world’s key players said along the way: ‘If you’re riding a unicycle and you lose a wheel, you’re in trouble.’ - John Kriz, head of Moody’s Investors Service’s real-estate finance arm, on subprime-mortgage lending.”

“The Bank of Fayetteville filed a foreclosure complaint Wednesday against Springdalebased developer Brandon Barber and one of his investment companies. Kathy Deck, at the University of Arkansas, said Wednesday that many developers are facing multiple foreclosures on several properties. ‘No one is quite sure how financially stable anyone is right now,’ Deck said.”

“‘I have to admit I’ve just been humbled by this market,’ Barber said. ‘It has highlighted a lot of mistakes I’ve made, but I’m not backing down. My partners and I will continue to fight. We just need some time for the market to rebound.’”

“Builders are pulling back further in the Austin area as the national housing market continues to languish. Starts for new homes declined and the number of closings dropped.”

“Home starts probably will bottom out in 2008, said Mark Sprague, Austin partner for Residential Strategies. ‘What’s happening is that the rest of the national market is pulling us down,’” Sprague said.”

“According to the S&P/Case-Shiller index of housing prices, home prices have fallen by about 6 percent in the United States on average over the last twelve months. By my rough calculations, that means that home owners have lost about $720 billion in wealth as a consequence.”

“If you are a homeowner, how bad do you feel about this? You should feel pretty bad, but I’m guessing you would feel a lot worse in the following scenario: home prices did not fall at all last year, but one day you took $18,000 out of the bank to pay cash for a new car, and someone then stole your wallet with the $18,000 in it.”

“At the end of the day, your wealth would be the same (down $18,000, either from depreciation of the value of your home or because the money was stolen), but one loss is psychologically far worse than the other.”

“An inventory of more than 7,000 unsold homes in the Treasure Valley will not disappear without aggressive price cuts, a Wells Fargo economist told Idaho lawmakers Thursday.”

“‘I think home prices have gotten ahead of reality, said economist Kelly Matthews. ‘And the reality is that we’re going to have to see a big adjustment in home prices.’”

“‘There are a lot of people who did not make smart loans,’ said Trey Langford, (who) tracks building activity in the Valley. Some homeowners are now ‘upside down.’”

“Marc Leibowitz, chief executive of the Ada County Association of Realtors, said there was little new information in Matthews’ presentation.”

“‘It (price cutting) is already happening,’ Leibowitz said. ‘What people have to realize is that in real estate, everything is negotiable. And that a 15 percent price reduction is not a 15 percent reduction in the value of the house. It’s a reduction in what they’re getting for the house.’”

“Maybe, just maybe, housing is stabilizing. That was the hope at year-end 2006, based on a plateau in existing home sales. There is hope once again that housing has bottomed — hope that’s as audacious as it is misplaced.”

“‘People do not like to borrow money to buy depreciating assets,’ says economist Ian Shepherdson. ‘Until potential buyers can plausibly believe prices will not fall further, home sales will continue to decline.’”

“Prices are the mechanism through which supply and demand find equilibrium. There are too many homes for sale relative to the demand for them. Prices will have to fall further, with potential borrowers running into tighter credit standards and rising costs associated with buying a home.”

“So where’s the incentive to buy a home if the real cost is high, inventory is plentiful, prices are falling and credit is harder to come by?”

“There isn’t one, at least not yet. Interest rates and prices are apt to fall further. The effect of new federal and state regulations for mortgage lenders, while ensuring that the most recent housing free-for-all doesn’t happen again, will be to depress lending in the near term.”

“The word ‘housing’ warranted 20 mentions in the minutes of the Federal Reserve’s Dec. 11 meeting released yesterday, and none of the references were positive. The Fed staff expects the drag from housing to weigh on economic growth throughout 2008 and 2009. Hopes for a bottom dashed again.”

A Whole New Era In California

The Press Enterprise reports from California. “After hitting bottom in 2007, home building in California and the Inland Empire will rebound modestly this year with smaller and less expensive homes affordable to first-time buyers, according to a forecast released Thursday by the housing industry. Alan Nevin, chief economist for the California Building Industry Association, predicted the mountain of foreclosures will shrink this year in Riverside and San Bernardino counties.”

“California has ‘weathered the subprime market storm of 2007′ and the correction is almost over, he predicted.”

“Sharply lower lot values combined with a trend toward building smaller homes by the third quarter will deliver new houses priced below $300,000, Nevin said. ‘Builders will be able to offer better values and people will recognize that and they will come out and buy. It will just be a whole new era,’ Nevin said.”

” Nevin’s forecast was challenged by Chapman University economist Esmael Adibi and economist Chris Thornberg, both of whom say the housing bubble is still deflating.”

“‘This is a feel good forecast, but unfortunately it is not going to happen. There is absolutely no rebound in 2008,’ Thornberg said.”

The North County Times. “The building association’s forecast estimates that permits issued for new home and condominium construction statewide will increase 10.5 percent to 128,400 in 2008.”

“The building association’s sunny outlook has not held up in past years.”

“Over the last two years, Nevin’s forecasts have overestimated the number of actual building permits by about 40,000. For example, Nevin predicted between 155,000 and 170,000 permits in 2007. The building association estimates permits for 2007 to hit about 116,250.”

“‘There is an amazing amount of money sitting out there waiting to buy lots that drop in value,’ said Nevin, who is also the director of economic research for San Diego-based MarketPointe Realty Advisors.”

“The economists expect falling land prices in Riverside County to encourage builders to construct smaller homes that will sell for as little as $100,000. Those homes will likely be built east of Temecula and Murrieta, Nevin said.”

“It may not need to wait much longer, according to The Hoffman Co. In the French Valley area east of Murrieta, where development boomed in 2004 and 2005, the average price of finished 7,200-square-foot lots fell to an estimated $115,000 last month from $240,000 in December 2005, according to a report the company published in mid-December.”

“Lot prices elsewhere in southwest Riverside County fell 39 to 45 percent in the same two-year period, Hoffman reported. Existing single-family homes sold for an average $375,000 in that area in November, down 22 percent from a year earlier, according to the North County Times’ analysis.”

The Santa Cruz Sentinel. “Here is an edited version of the association’s teleconference Thursday, Q ‘We’re seeing builders slash prices because of foreclosures flooding the resale market. How does that impact your forecast?’”

“A Nevin: ‘The subprime market won’t play out until the end of 2008 but foreclosures are less than 1 percent of market and those are homes of lesser quality.’”

“Q ‘Don’t you have a vested interest in saying things are looking up? A Nevin: ‘I didn’t take an optimistic position for 2007. For 2008, I’m predicting modest increases.’”

From ABC 7 News. “While some economists don’t dismiss the prediction, they note the industry did not give much weight to the current foreclosure crisis which has flooded the market with existing homes for sale.”

“‘If this report had taken into account some of the features of the sub-prime mortgage crisis and the resulting credit crunch that is likely to still persist in 2008, it probably wouldn’t have been as optimistic,’ said Prof. Jessica Howell, Ph.D. from Sacramento State Economic Department.”

The San Francisco Chronicle. “In the Bay Area, permits for 10,000 single-family units will be issued in 2008, up from about 9,000 last year, the group forecast. The increase should begin in the second half of the year, influenced by population growth, declining interest rates and a strengthening national economy, Nevin said.”

“Several observers strenuously disputed the conclusions.”

“‘We have enormous inventory that is sitting out there,’ said economist Christopher Thornberg. ‘Until that inventory is burned off, there’s not much reason to build in the state.’”

“The building group’s report echoed a similarly rosy forecast from the National Association of Realtors last month, which drew equally incredulous responses. The report predicted existing home sales will rise to 5.7 million this year, following a 12.5 percent decline to 5.67 million in 2007.”

“Thornberg said organizations that represent Realtors and builders generally can’t be relied upon for accurate predictions about their industry.”

“‘I understand that they’re hopeful, that their constituency is looking for some sort of bright light in the distance,’ Thornberg said. ‘The reality is that’s just not realistic.’”

The Sacramento Bee. “Not so long ago, Sacramento-area home prices were miracles to behold in the eyes of Bay Area and Los Angeles residents. Oh, the wonders here of a sprawling, three-bedroom home for the same price as a tiny, one-bedroom condo there.”

“The allure of lower-priced homes drew plenty of transplants to the Sacramento region earlier this decade. But as housing values began soaring, that affordability began disappearing.”

“Well, look again. Those days are coming back.”

“According to the most recent statistics, the median selling price of a Sacramento County home is now $388,000 below that of Santa Clara County. Just three years ago, that median gap was $225,000, according to a review of November sales data from DataQuick.”

“Likewise, Placer County’s median sales price in November was $178,000 less than in Alameda County. The gap three years ago: only $49,000.”

“Many real estate agents say they aren’t seeing any rush of would-be buyers from San Jose or Los Angeles. Henry Ung, an Elk Grove real estate agent who specializes in foreclosed homes, said, ‘There has been some, but not a lot of (Bay Area) people checking out prices here.’”

“Nevin, chief economist for the statewide builders’ trade group, says long-term mortgage rates will go as low as 5.5 percent this year. He also believes the government will ‘take all steps necessary’ to ease the subprime lending crisis.”

“Finally, he predicts a ‘major change in the home building mentality’ in Sacramento, the Central Valley and Southern California’s Inland Empire. Because of shrinking land values, Nevin says builders will offer ’substantially smaller homes and sell them for substantially lower prices.’ In the Sacramento region, that means more prices below $300,000, he says.”

“Effective Jan. 15, Fannie Mae wants bigger down payments on loans made in ‘declining markets’ like Sacramento. It means even if a national lender can get you a loan with no money down, Fannie Mae is now demanding a 5 percent down payment for loans in this market.”

“If your loan requires 10 percent down, Fannie Mae will wants 15 percent from the borrower. Similarly, government-sponsored loan buyer Freddie Mac, is also tightening rules on loans in ‘declining markets.’”

“The bottom line: Borrowers of loans up to $417,000 will need to bring more money to the table, which could further shrink the pool of qualified buyers.”

“But it’s beneficial for the long haul, says Brent Wilson, a mortgage strategist with Sacramento-based Comstock Mortgage. ‘I think it’s going to provide better long-term stability to our market.’”

“That’s a nice way of saying that borrowers under these rules are more likely to make their payments and keep their homes.”

The Modesto Bee. “The Northern San Joaquin Valley’s housing market will be one of the very last to turn around in California, a building industry economist predicted Thursday. Alan Nevin said prospects for builders in Stanislaus, San Joaquin and Merced counties are not so rosy.”

“Several of the region’s remaining builders agreed with Nevin. They are bracing for another difficult year.”

“‘2008 will not be very good for home builders,’ said Pam Franco, the new president of the Building Industry Association of Central California. She said there are so many resale homes on the market that builders have had to cut prices to compete, which has dramati-cally lowered profits.”

“Steve Mothersell, owner of SCM Homes in Modesto, said small starter houses he had been selling for $220,000 at Park Villas at Sherman Ranch in Newman have been reduced to $190,000. He has approval to build similar floor plans in Riverbank, with prices starting in the $170,000 to $190,000 range.”

“‘Prices are back to where they should be in the Central Valley,’ Mothersell said. Homes being built now ‘cater to the local buyer and the local demographics,’ unlike the much bigger, high-priced homes sold a few years ago.”

“Mothersell said buyers should take advantage of the big cost cuts now, rather than waiting for home buying to regain popularity: ‘These opportunities will dry up in short order when the herd starts to move.’”

“Local builders agree with Nevin about land prices dropping in the valley, which could lower the cost of future subdivision lots.”

“Builders who purchased raw land for development in 2005 were paying as much as $300,000 per acre in the Northern San Joaquin Valley, recalled Franco. She said the record-high land prices pushed up home costs, but land now is being offered for substantially less.”

“Franco’s Heirloom Collection semicustom houses on one-acre lots near Atwater had sold for as much as $850,000, but a new model will have a starting price of $449,500. She said that model will be ‘our loss leader, and its profit margin is substantially lower.’”

The Process Has Started To Unlock Dollars At Every Turn

Some housing bubble news from Wall Street and Washington. Dow Jones Newswires, “Coast to coast, Lennar Corp’s potential buyers see different scenery, but they might encounter the same kitchen faucets. The nation’s second-largest home builder is whittling down options, seeing standardization and simplification as tools in a cost-cutting drive aimed at saving millions of dollars and surviving the housing crash. Other home builders are taking similar steps.”

“With margins razor thin and builder stocks in tatters - one index has them down more than 55% in the last year - saving money has gained urgency.”

“‘When you can raise prices every Monday morning, like it was during the boom time, it’s hard to get the organization’s attention on something as mundane as lowering cost,’ said Pulte CEO Richard J. Dugas Jr. ‘The whole process has started to unlock dollars at every turn.’”

Gannett News Service. “If you’d asked housing economist David Seiders at this time last year to forecast the real estate industry’s future, he would have told you to expect ‘a recovery year’ in 2008. ‘That outlook has been cut dramatically from what I was saying a year ago,’ Seiders, chief economist for the National Association of Home Builders, concedes.”

“An even more pessimistic economist, David Rosenberg at Merrill Lynch, goes so far as to warn, ‘Real estate pricing in general can expect to be in the doldrums through 2012.’”

“The biggest problem is the glut of homes for sale - more than 10 months’ worth. And about 2 million of those homes (about 2.6 percent) are vacant, with banks or builders trying to get them off their hands.”

“Meanwhile, many would-be buyers are having trouble qualifying for a loan. Half of senior loan officers surveyed by the Federal Reserve in October said they had tightened their standards from July.”

“‘A lot of (buyers) haven’t come to the realization that the subprime market no longer exists,’ said Ritch Workman of Workman Mortgage in Melbourne, Fla. ‘Mortgage brokers are turning away more and more borrowers.’”

The Pioneer Press. “Homebuyers beware - the noose is tightening on zero-down-payment home loans in the Twin Cities. With portions of the area now flagged as a declining market, lenders are curbing 100 percent financing to adhere to lending rules set by mortgage-buying giants Freddie Mac and Fannie Mae.”

“Lenders admit they now are more reluctant to approve zero-down loans for fear that they will get stuck with them. Dan Arrigoni, president of U.S. Bank Home Mortgage, estimates that about 40 percent of borrowers who qualified for no-money-down loans a year ago would get them today.”

“‘Now most of Fannie and Freddie’s underwriting is automated,’ Arrigoni said. ‘If it pops out to be a reject or a caution, that’s where both agencies say ‘Well, use your judgment.’ But if we use our judgment and they don’t like it, we have to buy it back.’”

The Salt Lake Tribune. “Zions Bancorporation lifted its forecast for write-downs linked to real estate collateralized debt obligations by 16 percent to $109 million in the quarter in a regulatory filing late Dec. 31.”

“The company, which announced a previous set of write-downs on Dec. 19, also identified a further $40 million in charges on securities purchased from Lockhart Funding LLC. Zions, which operates in 10 Western U.S. states, bailed out Lockhart by buying $840 million in assets at a loss as the investment vehicle has difficulty raising short-term debt known as commercial paper.”

“‘They never thought this would be much of a problem until very recently,’ Manuel Ramirez, senior VP of equity research at Keefe, Bruyette & Woods, said in an interview. ‘They’ve got quite a bit of exposure to real estate markets in a pretty challenging part of the country: California, Arizona, Nevada.’”

The Toledo Blade. “Huntington Bancshares Inc. said yesterday that ties to a subprime mortgage investment company will slice $276 million from fourth quarter profit.”

“Franklin Credit was a customer for 17 years of Sky Financial Corp., which Huntington acquired in July for $3.1 billion.”

“About three-fourths of Franklin Credit’s business involves buying home loans typically made by lenders who misplaced key documents or applied rules too loosely. The balance of its business is tied to making subprime loans to borrowers with relatively low credit scores.”

The Miami Herald. “An internal audit last March warned the State Board of Administration, which invests local government money, that it should have a risk management committee to monitor its investments.”

“The audit also listed Lehman Brothers as one of five large firms that the agency relied too heavily on when buying securities. Seven months later, the Local government Investment Pool sustained a run as some of its investments turned sour. More than half of the ailing investments were sold to the state by Lehman Brothers.”

“Meanwhile, as a growing number of Florida municipalities expressed anxiety over when they will be able to withdraw more money from the fund without a penalty, state board officials said at a meeting Thursday in Tallahassee.”

“At the meeting, Lee County Schools Superintendent James Browder urged the agency to provide more liquidity quickly. ‘I have people in my school district who are starting to ask the question, ‘Jim, What did you do with our money?’”

“State auditors, who have been directed to investigate what went wrong, are looking to hire an outside auditing firm and legal counsel.”

The St Petersburg Times. “Even as the State Board of Administration on Thursday tried to reassure investors about the future of its Local Government Investment Pool, problems deeper in the past came to light.”

“Last year a handful of…brokers sold the state’s money managers investments in mortgage-backed securities that quickly ran into trouble. Thursday, investors found out the withdrawal limit is expected to increase to 21 percent by the end of this month and about 26 percent by the end of February, but they did not get a promise of the full refund they are demanding.”

“‘The state of Florida absolutely needs to step up; this is a disaster,’ said Robert Wishner, deputy mayor of Sunrise.”

The Boston Globe. “Securities investigators for Secretary of State William F. Galvin have opened a probe of Merrill Lynch & Co.’s dealings with Springfield after the city lost nearly $13 million in investments that Galvin said were too risky for municipalities.”

“The investments, backed by home loans, plummeted in value amid the ongoing subprime mortgage disaster. Worth nearly $14 million last year, Springfield’s investment today is worth just $1.2 million.”

“‘We’re interested in the documents that exist, the e-mails and communication records,’ Galvin said by phone yesterday. ‘We want to know who got paid. Then we can start to unravel the question: How did the City of Springfield find itself in this predicament?’”

“Springfield officials have blamed Merrill Lynch, saying the financial firm improperly invested city funds in risky instruments. The Springfield Finance Control Board issued a statement yesterday saying it…’believes that Merrill Lynch can and should be held fully accountable for any potential losses.’”

“‘From what I know today, Merrill Lynch is accountable and responsible for this and will be obligated to fully pay the citizens and taxpayers of Springfield all the money involved here,’ said Chris Gabrieli, who joined the Springfield Finance Control Board as chairman in June.”

“Galvin said his office is investigating a similar case in Maine, involving a Quincy-based Merrill Lynch broker. He said his office is helping determine whether the broker advised a public retirement entity to invest $20 million in a fund that was later frozen.”

“‘These type of investments have been problematic, not just for cities and towns but across the board,’ Galvin said. ‘They’re often marketed as ‘like bonds,’ which have a connotation of being very secure, quality investments.’”

The New York Sun. “The number of class action lawsuits filed against Wall Street firms surged in the last year, fueled by the meltdown in the subprime mortgage market, according to new research published yesterday.”

“There was a 43% jump in the number of securities fraud class action lawsuits last year to 166 suits — 100 of which were filed after the mortgage crisis hit, the study by Stanford Law School and Cornerstone Research found.”

“‘I think we’re going to see more litigation coming out of the subprime crisis,’ a partner at law firm Bernstein Litowitz Berger & Grossmann, Gerald Silk, said.” “The finance sector led the way for class action suits, with 47 Wall Street firms sued in 2007, more than four times the number sued in 2006.”

“New York City itself has gotten into the lawsuit game, with the city’s retirement and pension funds for city workers filing lawsuits against mortgage lender Countrywide Financial Corp., claiming the lender misrepresented the risk of its mortgage-backed securities.”

“‘I think you’re going to continue to see impaired assets being written off by companies, and investors claiming that those writedowns should have been taken earlier, and that the valuations were not accurate when disclosed,’ Mr. Silk said.”

“He is representing New York-based publisher Unisystems Inc., which is suing State Street Corp. for investing its retirement funds in the risky mortgage market.”

The New York Post. “A shake-up at giant money manager State Street over its contaminated junk mortgage paper could unleash a new flood of lawsuits against Wall Street firms for peddling risky, subprime mortgage assets.”

“State Street - the world’s biggest manager and overseer of institutional money pools and trusts of the wealthy, in all totaling $2 trillion - yesterday said it fired asset management chief William Hunt, and set aside $618 million for an expected legal battle ahead.”

“Securities lawyer Jake Zamansky said investors are suing firms for ‘lack of disclosure about the risk of the subprime assets, and possible fraudulent sales presentation, calling them conservative when they weren’t.’”

From Bloomberg. “U.S. regulators, concerned brokerages may have sold clients money-losing securities tied to subprime mortgages, are seeking information about how the investments were marketed, a person familiar with the situation said.”

“The Financial Industry Regulatory Authority, which polices about 5,100 brokerages, sent letters Dec. 14 to more than a dozen firms that sell collateralized mortgage obligations, a type of security linked to home-loan payments, said the person, who declined to be identified because the inquiry isn’t public.”

“Mounting losses from securities tied to home loans are prompting regulators to examine how Wall Street firms valued and promoted the products. CMOs cut up payments from pools of home loans to create bonds that offer a variety of characteristics, known as tranches, based on income and risk.”

“Finra’s Web site warns that the products should be reserved for ’sophisticated investors’ who are ‘prepared to do a lot of homework.’”

“Finra and other U.S. regulators have opened a growing number of inquiries as they seek to understand the extent of Wall Street’s culpability behind investor losses on mortgage-backed securities.”

“The Securities and Exchange Commission is focusing on issues including how banks valued mortgage-backed securities, how promptly they disclosed losses and whether executives at lenders dumped shares before loan defaults surged.”

From Newsweek. “One of the nice things about being a billionaire, or a private-equity magnate, or the CEO of a gigantic bank is that you don’t fret about paying retail. If you see an object you desire—a plane, a mansion, a car, a suit—you don’t wait for it to go on sale. You just buy it.”

“But efforts to catch such falling knives depend on perfect timing….Today, several savvy financial operators who tried to catch falling knives in the formerly hot housing and credit sectors are walking around with huge gashes in their hands.”

“On Aug. 22, Bank of America decided things couldn’t get worse for Countrywide Financial, the massive mortgage firm whose stock had been halved since the beginning of the year. Bank of America boldly announced a $2 billion investment. In the months since then, Countrywide, stung by a deteriorating housing market, has fallen another 50 percent.”

“Bank of America, which is already licking its wounds from an ill-timed plunge into investment banking, is already out several hundred million dollars on its investment in Countrywide.”

“In the fall, Bear Stearns, the mortgage-dependent Wall Street firm that soared to dizzying heights as the credit market boomed only to crash back to earth, attracted an international cast of falling-knife catchers.”

“In September, Joseph Lewis, one of Britain’s wealthiest men, spent $860 million on a 7 percent stake in Bear, paying an average of about $107 per share, according to the Wall Street Journal. In December, he boosted his stake twice. Today, with Bear’s stock trading at close to $85, Lewis has turned his massive fortune into something slightly smaller.”

“In October, Bear agreed to a complicated deal with CITIC Securities, in which the Chinese firm would invest $1 billion in Bear Stearns for a stake worth at least 6 percent. Since then, Bear’s stock has fallen about 20 percent.”

“On Dec. 10, Warburg Pincus—a very sharp private-equity firm—agreed to invest up to $1 billion in struggling bond insurer MBIA, which had lost 55 percent of its value in the previous two months. Within days, as MBIA dealt with questions about its exposure to collateralized debt obligations and other exotica, the company’s stock plummeted.”

“In less than two weeks, Warburg lost nearly 30 percent on its investment in the shares, or about $183 million.”

“Of course, it’s early days, and these investments could well turn out to be genius moves. The housing bubble popped, but between October 2006 and October 2007, according to the Case-Shiller index, housing prices fell only 6.1 percent. Housing prices may need to fall 30 percent or 40 percent before they bottom out, but it will take years—rather than months—for that process to play out.”

“And as the market continues to slump, companies whose business models rest on making mortgages—and on buying, selling, and insuring securities based on mortgages—may face a string of losses.”

The Trend Was Actually An Aberration

A report from the Virginia Pilot. “More than five times as many homes are for sale in Hampton Roads now as were on the market during the heady days of the real estate boom in 2004, and the excess inventory is showing no sign of shrinking anytime soon. ‘The calls - they’ve just stopped coming in,’ said Bob Bristol, a Chesapeake mortgage broker who described the market today as ‘the slowest I’ve ever seen’ in 15 years in the business.”

“In September 2005, Sean Kentch paid $538,000 for a five-bedroom, 3,800-square-foot brick home near the intersection of Mount Pleasant Road and Centerville Turnpike. Late last year, he learned he would soon be reassigned. This fall, he put the house up for sale, asking $579,000. He didn’t get a single offer.”

“Finally, Kentch decided to rent it instead. Within a week, he had a tenant, though the rental income will cover only about two-thirds of the $3,000-plus-a-month mortgage.”

“Between February and mid-October of this year, 13 of the 15 homes sold in Kentch’s subdivision went for less than the assessed value; all but two of the 15 homes were sold by builders, according to city real estate records.”

“Bill Dore, a Hampton Roads housing market analyst, said the run-up in home values between 2003 and 2006 led many to see what they wanted to see. ‘We got sloppy,’ he said. ‘We took those three years as a trend, instead of an aberration.’”

“The ‘trend,’ however, was actually a market blip driven by the notion that land for development was disappearing rapidly, along with available housing, Dore said.”

The Baltimore Sun from Maryland. “The mortgage crisis roiling communities across the country is being acutely felt in Prince George’s County, where thousands of residents, many lured in recent years by relatively affordable real estate prices, are in danger of losing their homes.”

“Stephen Fuller, an economist at George Mason University, attributes the crisis in Prince George’s to several factors, including the general affordability of the county’s housing stock.”

“‘You think of that as a strength, but it also attracted buyers who were marginally financially capable of supporting the mortgage,’ Fuller said.”

“Compounding the problem was a construction boom in the county where, unlike other areas in the Washington region, vast tracts of land had remained largely undeveloped, Fuller said. ‘They just couldn’t stop it,’ Fuller said of construction there.”

“Samuel Moore was a D.C. renter when he started looking for a home in 2006. A real estate agent suggested a four-bedroom house in the Prince George’s town of Clinton, and he paid $283,000 for the house that November.”

“Within weeks, he said, the ceiling in the dining room caved in, pipes burst and the toilet in the main bathroom crumbled. After spending his entire savings on repairs, Moore said, he could no longer afford the house. ‘It turned into a money pit,’ he said.”

“He put the home on the market early last year, and so far, four potential buyers have expressed interest to his real estate agent. But he said none qualified for a mortgage. Moore said he has not been able to find a renter and will not be able to make this month’s payment.”

“‘I thought I had enough foresight’ to avoid buying a house with so many problems, he said. ‘I wind up exhausting all of my savings.’”

The Philadelphia Inquirer from Pennsylvania. “Without a doubt, fewer people are purchasing houses now than were a year ago. Houses for sale are abundant, and prices tend to drop the longer a place goes unclaimed. Time on the market is increasing both in this region and nationwide.”

“‘The big problem in the current housing market is gridlock,’ said economist Joel Naroff. ‘Most move-up buyers look to the equity they have in their current house to buy a new one, so they don’t believe they can make an offer without selling that present house.’”

“That’s the predicament Robin and Joe Finkelstein find themselves in.”

“‘We’ve been talking about moving to the Philadelphia area [from the Washington suburbs] to be closer to Joe’s job in the Poconos,’ Robin Finkelstein said. ‘But we have the smallest townhouse in a community where a lot of bigger ones are for sale and have been on the market for a long time.’”

The Pocono Record from Pennsylvania. “Monroe County’s record-high 2007 home foreclosure rate may not be a surprise to informed observers, but it still can shock the senses.”

“There were 1,253 foreclosure filings with the county Prothonotary’s Office, according to final figures released by Prothonotary George Warden. The previous all-time high, set in 2003, was 941.”

“Warden’s office records foreclosure filings but doesn’t track the causes. ‘I think it’s the subprime market,’ Warden said. ‘The price of gas, perhaps. People aren’t able to commute and work.’”

“What Warden does know is the 2007 foreclosure filings are more than double the 540 recorded in 2005. There were 835 foreclosure filings in 2006.”

The Ithaca Journal from New York. “With relatively low prices for houses, a stable housing market and steady employment, Ithaca hasn’t experienced the real estate crash some places have.”

“‘People talk about the real estate bubble bursting, but in Tompkins County the bubble never really got that big to begin with,’ said Elia Kacapyr, economist and Ithaca College professor.”

“Brokers tell stories of some houses in the Fall Creek neighborhood and other neighborhoods near downtown Ithaca having as many as nine offers two years ago.”

“Homes in Ithaca were selling so fast and prices rising enough that buyers were moving to outlying towns, according to both broker Steve Saggese, and Everett Boutillet, a mortgage officer. Prices and taxes were so high, people were moving to towns like Groton, bringing prices up there as well, Saggese said.”

“Depending on whom you ask, after several years of bidding wars on desirable property and bids exceeding asking prices, Ithaca is changing to a buyer’s — or at least an even — market.”

“‘It is definitely becoming a buyer’s market here. There are more houses on the market, fewer multiple bids and especially in the higher end of the market, where it generally starts,’ said Beth Carlson Ganem, an associate broker who specializes in higher-priced homes.”

“Buying a house on Ithaca’s West Hill recently, Kenton Hensley and his family first had to face selling in an overstocked, depressed suburb west of Boston. ‘A month and a half after we managed to sell our house, there was an article about the slow pace in the Boston Globe, and they used our town as an example,’ Hensley said.”

“The town they left, Southborough, 25 miles from Boston, and others nearby had a lot of houses sitting on the market, he said.”

The Boston Herald from Massachusetts. “Some of Greater Boston’s most exclusive residential enclaves are seeing a startling spike in foreclosure activity.” “Wellesley, Weston, Sudbury and Newton in MetroWest, one of the nation’s wealthiest suburban clusters, all saw big increases last year in foreclosure filings, statistics from the Warren Group show.”

“Even the wealthiest communities are not immune to the trends that have fueled a nationwide foreclosure epidemic. ‘I don’t think this is just a low-income problem,’ said Robert Pulster, head of a Boston nonprofit that counsels foreclosure victims.”

“Wellesley foreclosure filings more than doubled last year through October - to 30 - from just 13 during the same period in 2006. Sudbury had one of the largest increases of any MetroWest town. Foreclosure filings soared 145 percent, from 11 in 2006 to 27 last year.”

“Meanwhile, more condo owners are also falling behind on their mortgages in downtown Boston, home to some of the priciest condo towers in the country, the Boston-based data firm reports.”

“In downtown Boston, which covers pricey neighborhoods like the South End, Back Bay and Beacon Hill, foreclosure filings rose 25 percent in 2007 to a total of 74.”

“Some of the foreclosure activity in these well-off towns and neighborhoods may stem from home owners who stretched to buy during the run-up in real estate prices back in 2004 and 2005, said Alan Pasnik, Warren Group’s real estate analyst.”

“That likely led those buyers to make the same mistakes as many others now facing the loss of their homes, such as taking out variable rate loans that later reset to much higher rates, even as home values have fallen, Pasnik said.”

“‘It’s a smaller percentage of the (overall) community, but it is the same ugly story, over and over again,’ he said.”

The Providence Journal from Rhode Island. “According to the city clerk’s office, the number of properties taken back by banks in Pawtucket has almost tripled, rising from 65 in 2006 to 172 last year.”

“Peg Ramos, the clerk responsible for recording real estate transactions, said foreclosures used to be so rare — there were just 3 in 2004 and 17 in 2005 — that she would have to look up how to enter them in city records.”

“Now they are so common the task has become second-nature. ‘I’m getting three or four a day,’ she said.”

“In an effort to trim the deficit, the city administration has imposed a freeze on expenditures. In addition to property taxes that haven’t been paid because of foreclosures, the city is projecting a $125,000 drop in the amount of money it collects in real estate transfer taxes and a $200,000 drop in real estate recording fees.”

“Tax revenues have plunged because banks that foreclose on delinquent borrowers don’t have to pay taxes on the foreclosed property until it is sold to another buyer, Finance Director Ronald L. Wunschel said in an interview.”

“To prevent the reserve fund shrinking further, city officials are being extra careful about spending. ‘Every expenditure that comes across, we look at it and we challenge it,’ Wunschel said.”

“It doesn’t matter if an item has been included in the budget. It is still being scrutinized, Wunschel said. Employees who have gotten budgetary approval for such things as a new computer or new set of tires on their city-owned vehicle are being asked whether they can put off the purchase until next year.”

“‘Do you really need four new tires on that vehicle?’ Wunschel said. ‘Can you get by with two?’”

Bits Bucket And Craigslist Finds For January 4, 2008

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