The Housing Bubble

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The San Francisco Chronicle reports form California. “California’s unemployment rate rocketed up by 0.6 percentage points in May - the largest one-month increase since the state began keeping records in 1976. Most of the job market’s distress has stemmed directly from the housing crash. Construction and finance, which includes mortgage, real estate and title companies, together lost 123,000 jobs over the past 12 months.”

“Berkeley resident Phil Catalfo has been looking for work as an editor for almost a year…but gotten few responses. When Catalfo was looking for work three years ago, he was swamped with freelance jobs. This time, assignments are trickling in slowly.”

“‘The air is definitely different,’ he said.”

The Bay Area Newsgroup. “The East Bay has lost nearly 12,000 jobs so far in 2008 - including thousands more last month. But during the past 12 months, the East Bay accounted for two out of every three jobs lost in the Golden State.”

“The collapse of the housing market has convinced Stephanie Hamett, an Oakley resident, to abandon her career in the mortgage industry. She worked in the mortgage sector for four years.”

“Hamett is skeptical that housing will rebound any time soon. ‘This is worse than we all thought it would be and it’s probably going to deteriorate even more,’ Hamett said of the housing market. ‘It’s a bigger mess than people imagine.’”

The Ventura County Star. “Ventura County’s job market continued to see signs of softening last month, with particularly weak showings in manufacturing and construction. Last month…the number of out-of-work people jumped 1,800, a result of recent graduations and more people entering the labor force.”

“‘That’s interesting, because normally, people don’t enter the labor force when jobs are going down,’ said Bill Watkins, executive director of the UC Santa Barbara Economic Forecast.”

“One possible explanation is that with inflation and gas prices rising, people are returning to work, Watkins said.”

“In Ventura County, construction was flat in comparison to April, but down year over year by 2,200 - the biggest annual loss among all sectors.”

“‘The bottom line is the industry is in the worst shape it’s been in for decades,’ said John Frith, VP of public affairs for the California Building Industry Association. ‘The market has completely evaporated for new housing in most parts of the state.’”

“Camarillo contractor Mark Varnum prefers the more competitive market. Customers have more selection and can make smarter choices, and it ‘weeds out the idiots in this business.’”

“‘When it’s booming, everyone’s a contractor,’ he said.”

The Press Enterprise. “Job loss continued to plague the Inland region in May, the fifth month in a row in which there were thousands fewer jobs than last year, and it was the worst monthly decline on record for the Inland region.”

“‘I’ve studied this economy since 1964 … never, in 44 years, have we had a year where we averaged a net loss,’ said Inland economist John Husing. ‘That is unprecedented. That has never happened before.’”

The San Gabriel Valley News. “Los Angeles County’s unemployment rate jumped nearly a point to 6.7 percent in May, its highest level in nearly 4 years, according to the state Employment Development Department.”

“The last time the region’s unemployment rate was so high was in January 2004, when it hit 6.9 percent. ‘It’s a discouraging report,’ said Jack Kyser, senior vice president and chief economist for the Los Angeles County Economic Development Corp. ‘It’s a little bit surprising how rapidly things went south.’”

The Union Tribune. “San Diego County’s unemployment rate jumped last month to its highest level in nearly five years. As has been the case for months, real estate and lending industries are leading the way in job losses.”

“‘We’re 1.4 percentage points higher than we were a year ago, and that’s a concern,’ said Alan Gin, an economist at the University of San Diego. ‘That shows how weak the job market is.’”

“May’s jobless numbers appear to derail hopes of a summer rebound in employment. May’s numbers reflect a loss of 3,200 jobs over the past year. That is the largest annual job loss the state Employment Development Department has reported for the county since the prolonged local recession in the 1990s, when the region shed thousands of aerospace jobs.”

“‘This is pretty stark, said Murtaza Baxamusa, director of research and policy at a private research group based in San Diego. It likely debunks the notion that the local economy is so diverse that it’s recession-proof, he said.”

The Brentwood Press. “The fastest-growing community in one of the fastest-growing regions in the country, Brentwood’s meteoric growth in recent years has been surpassed only by the speed with which the boom vanished, leaving in its wake unfinished subdivisions and neighborhoods peppered with foreclosure signs.”

“After posting steady gains during the 1990s, housing prices caught fire after the turn of the century, climbing from the mid-$300,000s for a median-priced dwelling in 2002 to almost $650,000 by mid-2006.”

“Creative financing and permissive lending practices helped fuel the climb - with disastrous consequences, said Brentwood broker Brian Sharp.”

“‘Getting someone who makes $45K a year into a $600K mortgage through neg-am, teaser-rate loans, using stated income on their application, is trying to use high-finance concepts on someone that just shouldn’t be in that vehicle when the market turns south and they don’t have the ability to make the fully amortized payments, or the deep pockets to wait out the market,’ he said.”

“‘When the market was going up 20 to 30 percent a year, (lenders) looked like heroes. When the appreciation leveled off, then tanked, then the ARMs (adjustable-rate mortgages) adjusted, they looked like criminals,’ he said.”

“According to MLS data provided by Sharp, by the beginning of this year, a median-priced house in Brentwood had lost more than 40 percent of its value, returning to the mid-$300,000 range of 2002.”

From KSBY 6. “A report from DataQuick Thursday said the median home value for Santa Barbara County has dropped 40 percent year to year. It went from $601,000 in May of 2007 to $360,000 for May of this year.”

“The drop is due mostly to foreclosures and depreciation around Santa Maria, which now represents a larger share of total sales.”

“‘You do have to accept the fact that you’re going to be getting a little less than you’d hoped for,’ said Martha Beckman, president of the Santa Maria Association of Realtors.”

The LA Downtown News. “Although some might raise their eyebrows as the national housing market crisis continues, a group of prominent area developers last week painted a rosy picture of the Downtown residential scene.”

“Still, some do believe the sky is falling, and for that panel moderator Tom Gilmore and others partly blamed the media. Gilmore took the opportunity to chastise the press for reporting on problems and delays with the Grand Avenue plan, which he called a misunderstood project.”

“‘What’s up with you guys?’ he asked some members of the press.”

“Bill Witte of Related of California, whose Grand Avenue project has been repeatedly delayed and is now not scheduled to arrive, at the earliest, until 2012, said Downtown needs to be viewed in the context of other areas, not just across the country, but even in Southern California. He read off a list of high-rise projects in areas such as Marina Del Rey, West L.A. and Orange County that have been halted.”

“‘I have a whole lot of friends on suicide watch in Orange County,’ he joked, saying the area is filled with ‘corpses of projects.’”

The Voice of San Diego. “In February, a homebuyer paid $591,000 for No. 602, a bank-owned unit in the Parkloft development near Petco Park. Two years ago, the buyer of the same unit paid $1.1 million. That meant at least a $509,000 loss for the lender.”

“But the 46 percent price plunge in two years represents more than the effect of a despondent housing market, prosecutors say. The unit was never worth $1.1 million and buyer Gloria Agundez never earned the $301,000 salary to make the mortgage payments on that sum, officials said.”

“And the employer listed on Agundez’s application for a mortgage, U.S. Mergers, never existed, officials said. Agundez said she never bought it, either. She told the FBI that her identity was stolen and her signature forged to purchase the property in the first place, according to court documents.”

“Agundez’s unit counts among 21 properties considered by investigators at the IRS and the FBI to be purchased fraudulently, part of an alleged mortgage fraud ring announced Thursday.”

“The court documents in this case offer insight into some of the machinations by which San Diego’s housing market reached a dizzying peak earlier this decade and has since spiraled into a freefall.”

“As mortgages for 18 of the 21 properties analyzed by the FBI have already ended in foreclosure, the properties involved have sold at bottom-scraping prices, often drastically undercutting the values for the whole neighborhood or condo building.”

“Though many in the real estate community have known such deals were happening for years, these are the first charges brought in cash back at closing transactions.”

“‘This is exactly what I’ve been screaming about for the last 18 months,’ said Todd Lackner, a Mission Valley real estate appraiser and mortgage fraud expert. ‘I’m elated to hear law enforcement’s going after these crooks. Certainly this isn’t the only one.’”

I suggested a topic on the new Justice department arrests. “How about a topic on the new law enforcement actions this week?”

A reply, “You wonder how far it will go. It appears that millions of people lied on mortgage applications, and millions of brokers abetted this behavior. You wonder if it is a “go for the big fish” policy, or if they will start hauling in little fish to get them to flip.”

One asked. “The articles I’ve seen seem to involve people doing something a little more brazen than just overstating their income on a mortgage application. My supposition would be that if a borrower who overstated his/her income is actually performing effectively on his/her mortgage, there won’t be much scrutiny.”

“In that way, maybe the whole business is designed to keep those who lied on their loan applications from walking away when they’re underwater!”

Another posted, “I would like to see this topic - the Operation Malicious Mortgage program - discussed on here, too, and I’d especially like to see posters naming names. Six from the same company here in San Diego got busted yesterday. They were involved in several inflate-the-price to-get-a-larger-loan-amount deals in which the various parties split up the extra cash.”

One sees another implication, “And part of this topic could be to explore how this new level of fraud exposure reflects on what some legislators/politicoes want to do with bailouts. More and more light shed on the fraud to the general populace will make those bailout/relief actions more and more suspect.”

The Detroit News. “U.S. Attorney Stephen Murphy said at a news conference that since March, his office has charged or convicted 28 people with a variety of fraud and money laundering charges in 15 separate cases related to alleged mortgage fraud with losses exceeding $50 million.”

“In Washington, the U.S. Justice Department and the FBI on Thursday announced ‘a national takedown of mortgage fraud schemes,’ saying 404 defendants around the country were charged in 144 cases since March 1. ”

“Murphy denounced the criminals but called on the mortgage industry to ‘clean up its act’ and require more proof that borrowers can pay off loans. ‘If there is money and an ability to get it, criminals will take advantage of it,’ Murphy said.”

“Victims include not only lenders and title insurance companies but homeowners such as Patti and Marc Cammarata.”

“They say in 2002 and 2003, more than a dozen homes in their affluent northern Shelby Township neighborhood were purchased for well over the asking price by people who often didn’t keep up their property and were rarely seen. Prices, which ranged from $500,000 to $600,000, spiked to $700,000 and up.”

“Most are now in foreclosure; the unfinished landscaping and curtainless windows remain. ‘There was a lack of neighborhood or community because you never knew who was living here,’ Patti Cammarata said.”

The Macomb Daily. “One case, which has already come close to a resolution, shows the seriousness of mortgage fraud penalties. Shannon Ferguson, 36, of Canton Township, pleaded guilty June 13 to one count of wire fraud for two fraudulent mortgage loans handled by Select Mortgage that were secured by a residence in St. Clair Shores. The loans totaled $732,000. Under the terms of her plea agreement, she faces up to 46 months in prison, a $1 million fine, and $732,000 in restitution.”

“Co-defendants Tariq Hamad and Kalil Khalil pleaded guilty to broader mortgage fraud schemes encompassing loans totaling $21 million. Hamad was sentenced in September 2007 to 110 months in prison and ordered to pay $11.5 million in restitution. Khalil was sentenced in February 2008 to 60 months and ordered to pay $11.1 million in restitution.’

The Dallas News. “Federal agents arrested eight North Texas men Wednesday in connection with an alleged mortgage fraud operation involving at least 11 homes in the Dallas-Fort Worth area. In a 51-count indictment, the eight men and three other defendants stand accused of profiting by obtaining mortgages based on inflated sales prices.”

“Prosecutors alleged that the defendants recruited straw buyers to purchase the homes, then let the loans go into foreclosure after making just a few payments.”

“In one case from 2003, according to the indictment, Eric Farrington of Irving, a real estate investor, motivational speaker and convicted felon, and two associates recruited a straw buyer to purchase a home near the corner of Preston Road and Royal Lane for $630,000.”

“It’s unclear what the home’s market value was at the time, but the Dallas Central Appraisal District had it on the books at less than $400,000.”

The Palm Beach Post. “A local title agent and a chiropractor are among hundreds of alleged mortgage scammers captured nationwide in a federal crackdown on loan fraud announced Thursday. Evelyn Rivera, owner of Asset Title LLC of Wellington, and Wellington resident William Louisma, used bogus loan applications in an attempt to buy 55 units in a Fort Lauderdale condo.”

“Rivera, Louisma and an unnamed mortgage broker and appraiser planned to borrow $11.9 million to buy the units at $216,000 apiece, then use phony appraisals and trumped-up loan applications to resell the units for $400,000 each, or a total of $22 million, according to federal court documents.”

“Those named in the cases include housing developers, mortgage lenders and brokers, lawyers, real estate agents and appraisers, said Sharon Ormsby, section chief in charge of financial crimes for the FBI.”

“‘In many instances the fraud cannot occur without the title agent going along and collecting a fee,’ said Alexander Acosta, U.S. attorney for the Southern District of Florida.”

The Salt Lake Tribune. “State Rep. Paul Ray, who has worked in recent years to pass legislation aimed at reducing mortgage fraud in Utah, applauded the agency’s decision to announce the hundreds of cases at once. ‘The only way to send a message to the public that there’s a chance you’re going to get caught is to throw 400 indictments out there at one time,’ Ray said.”

“Authorities say Utahn Jerry C. Huff of Hurricane, lied to convince a bank to provide him with a $250,000 second mortgage on his home in Moab, a loan on which he has failed to make payments.”

“According to the indictment, Huff lied about the condition and value of his home, overstated his income and submitted false documents, such as a fake appraisal, so that his loan would be approved. The indictment also says Huff submitted copies of personal tax forms as part of his loan application when in reality he hadn’t filed tax returns for those years.”

“Huff faces one count of wire fraud, which carries a maximum penalty of up to 20 years in federal prison; two counts of money laundering, with a potential maximum penalty of 10 years in prison for each count; and two counts of failure to file a tax return, which carries a maximum penalty of one year in prison for each count.”

“The most common type of mortgage fraud was inflating income or assets to qualify for a loan, followed by forging documents, inflating appraisals and misrepresenting a buyer’s intent to occupy a property as a primary residence. Loans based on primary residences are looked at more favorably by lenders.”

The Sacramento Bee. “The region’s latest arrest came Monday, when authorities charged Melissa Villegas, 29, of Natomas with lying to federal agents. Authorities alleged that Villegas lied during an investigation into transactions that included paying money to a buyer suspected of defrauding a mortgage company.”

“‘She is part of a larger investigation,’ said First Assistant U.S. Attorney Larry Brown of the Eastern District of California office in Sacramento. ‘We have numerous open pending investigations. In weeks and months to come that number will continue to rise.’”

“Other Northern Californians in Solano County, Stockton, San Ramon and Dublin have been charged, indicted and sentenced for mortgage fraud. Brown said the U.S. attorney’s office for the Eastern District of California, which oversees investigations in 34 inland counties from Bakersfield to the Oregon border, has seen a ’significant uptick in referrals of mortgage fraud over the past 12 to 18 months.’”

The Union Tribune. “In San Diego, prosecutors have charged six people associated with downtown mortgage broker and real estate firm Creative Financial Solutions. The FBI analyzed 21 loans that CFS made from November 2005 to August 2006 and found that 18 of them have resulted in foreclosure or are in the process of foreclosur”

“CFS allegedly used methods common in fraud schemes during the housing boom, when lax lending standards and ever-escalating prices made the climate particularly friendly for potential schemes.”

“In one case, a condo in Park Loft downtown was listed for sale in May 2006 for $845,000 to $925,000. Later, the price was raised, and it sold for $1.1 million. The buyer got a $1.1 million loan. CFS handled the loan and represented the buyer. The seller paid $174,000 to two CFS agents.”

“Loan documents submitted by CFS said the buyer made $301,000 a year working for a company that prosecutors said ‘does not exist as a functioning entity.’ The buyer says her identity was stolen.”

“The lender foreclosed on the property in March 2007. It was purchased from the bank in February. The price: $591,000.”

The Honolulu Advertiser. “Lax lending standards and the high cost of housing caused an increase in mortgage fraud in Hawai’i during the past few years, outpacing the majority of Mainland markets dealing with similar schemes, according to the FBI.”

“‘Greedy people looking to make an easy buck found Hawai’i’s hot housing market to be a lucrative place to operate their scams,’ said Janet L. Kamerman, special agent in charge of the FBI’s Honolulu division. ‘The mortgage fraud schemes we have thus far identified in Hawai’i are as diverse as the individuals and groups running them.’”

“The ‘fraudulent activities’ of more than a dozen local mortgage brokerages are under investigation by the FBI and officials estimate losses from the schemes stretch into the millions of dollars.”

“‘This is one of those silent crimes that is so devastating to our community and so damaging to those families who are thrown out in the street,’ said Ed Kubo, U.S. attorney for the district of Hawai’i. ‘These are tough times. In this economy when we are seeing people losing their homes and losing their jobs, these types of crooks need to be called on the carpet and accounted for.’”

“To people who have committed fraud or are contemplating doing so, FBI Director Robert S. Mueller III said, ‘We will find you, you will be investigated and you will be prosecuted.’”

“‘The FBI will continue to direct investigative and analytic resources towards mortgage fraud and corporate securities fraud that threaten our nation’s economy,’ Mueller said in a news release.”

“Banks reported nearly 53,000 cases of suspected mortgage fraud last year, up from more than 37,000 a year earlier and about 10 times the level of reports in 2001 and 2002, according to the Treasury Department’s Financial Crimes Enforcement Network.”

From Bloomberg. “The risks of putting sensitive information in e-mails were disregarded by two ex-Bear Stearns Cos. hedge fund managers indicted for fraud who allegedly exchanged incriminating messages, former prosecutors said.”

“Ralph Cioffi, 52, and Matthew Tannin, 46, were charged June 19 with misleading investors by saying two funds were thriving while knowing subprime-mortgage investments threatened their collapse. Investors in the funds lost $1.6 billion.”

“The men were each charged in federal court in Brooklyn, New York, with conspiracy, securities fraud and wire fraud. Cioffi was also charged with insider trading. They face as long as 20 years in prison if convicted on the most serious counts. Both men denied the charges and vowed to win at trial.”

“The indictments brought to light e-mail conversations that allegedly took place between the two men and others about the health of the funds, including a March 15, 2007, message from Cioffi to a team economist with the subject line ‘Fear.’”

“‘As we discussed it may not be a meltdown for the general economy but in our world it will be,’ the indictment quotes Cioffi as writing. ‘Wall Street will be hammered with lawsuits. Dealers will lose millions and the CDO business will not be the same for years.’”

“Cioffi acknowledged in a private e-mail that certain types of CDOs, which included subprime debt rated AAA or AA, were ‘not really AAA’ because they were subject to heightened risk of defaults, according to the indictment.”

“In March 2007, Cioffi urged a Bear Stearns broker to put more money in the funds, telling him it was an ‘awesome opportunity,’ according to the indictment. The broker agreed, said Tannin, who later that month bragged in an e-mail that he had successfully lured more money into the funds, prosecutors alleged.”

“‘Believe it or not — I’ve been able to convince people to add more money,’ Tannin said in an e-mail, according to the indictment.”

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