The Housing Bubble

It’s Friday desk clearing time for this blogger. “A lot has happened since 2004 — in the housing market and in the lives of everyone associated with Vantage Pointe, the largest residential project ever to be built in downtown San Diego. Jennifer Bishop made a 5 percent deposit on a unit in Vantage Pointe in one of the first phases, she said. But now, she doesn’t even want to live downtown anymore, and doesn’t think she’ll be able to afford her unit. Bishop said even if the building’s finished mid-year 2009, and even if it means leaving money on the table, she will probably walk away from her unit next year. ‘If they had done it in 2004, we would’ve wanted to go ahead and live there,’ she said. ‘But it’s just a different time now — a lot of time has gone by.’”

“In a sign that housing policies around the South Bay are ‘out of whack,’ market-rate homes are now selling for the same price — or less — in San Jose, Fremont and Milpitas as homes officially designated as ‘affordable.’ For developers, who are required to set aside a percentage of units for buyers making less than the median income, the situation has become frustrating.”

“‘Why would you pay $510,000 when you can buy market rate for $460,000 or $470,000?’ asked Cheryl O’Connor, chair of the Home Builders Association of Northern California.”

“A moritorium on foreclosures and more affordable housing throughout the city are needed to save East San Jose, according to residents. Foreclosures in East San Jose are up nearly 400 percent since last year, said resident Margie Marquez. ‘It feels like it’s dying,’ she said. ‘We need them to stop the foreclosures.’”

“She and other community activists who packed a community meeting at Trinity Cathedral said a temporary respite from foreclosures would preserve the quality of life in the area while the city pursues how to add more affordable units for those who have already lost their homes.”

“In the South Bay Wednesday night there was some straight talk on foreclosures. At a community meeting it wasn’t just about getting financial help, lawmakers were there promising change through their votes. Inside a downtown San Jose church, people in need asked for help. ‘If I don’t find any help, next is foreclosure or I’m out of the house,’ said Roberto Huerta, a homeowner.”

“San Jose councilman Sam Liccardo was asked if he’ll vote for more affordable housing. ‘Not only will I happily vote for it, I’ll jump up and down if this passes,’ said Liccardo.”

“The battle over the mass modifications of troubled mortgages has begun in earnest. On Dec. 1, William Frey, a private investor in mortgage-backed securities, filed a lawsuit alleging that the proposed modification of some 400,000 home loans originally underwritten by the defunct lender Countrywide Financial is illegal.”

“‘The public policy problem going forward is, if Congress can legislate or a judge can break the contract, then I as an investor will demand a much higher premium,’ says the mortgage-company risk officer. ‘I can’t model and price something that is ‘oh gee, we’re going to change the rules.’ It’s a big problem.’”

“I’ve lived in Washington nearly a decade now, and I still don’t get this place. Of course I’m talking about the Treasury proposal/possibility/plan to buy mortgage debt at a rate that would allow lenders to offer buyers a 4.5 percent interest rate on the 30-year fixed. Well, here’s my two cents: If you take the median priced home in the U.S. which is $183,3000, put 20 percent down (as most lenders now require) and take out a loan for 146,700, your monthly payment at 5.5 percent is $832. Your monthly payment at 4.5 percent is $743.”

“So the big Treasury bailout saves the median home buyer $89/month. (Of course, it’s a bigger savings if you buy a bigger home, but I’m just going by the median.) Is $89/month enough to save the housing market?”

“Eugenio Aleman, senior economist with Wells Fargo, contends that lowering interest rates is ‘a crazy idea’ and that continued government meddling with the housing market is making the necessary correction longer and more painful.”

“Aleman said since home prices generally rise when interest rates fall, the federal government’s lowering of interest rates seems to be aimed at halting the free fall in home values. But he argued that home prices must come down further to draw buyers into the market. Also he said the federal government’s series of actions to spur the housing market has caused would-be buyers to procrastinate because they are waiting for further assistance.”

“The poor employment outlook also is discouraging home sales, he said, noting, ‘How can you buy a home with a zero interest rate if you don’t have a job.?’”

“Luxury homebuilder Toll Brothers Inc. warned Thursday that revenue in fiscal 2009 will be significantly lower than in 2008. Early in the quarter, company executives were optimistic the housing market might be stabilizing, but that soon faded as the U.S. financial crisis worsened in September. Chief Executive Robert Toll praised a proposed initiative for the Treasury Department to lower the rate on 30-year mortgages to 4.5 percent.”

“‘A program like that would go a long way to soaking up excess (unsold home) inventories, assuming buyers had the equity to meet program parameters,’ Toll said. ‘Low interest rates clearly help price affordability.’”

“The only thing that’s working today, it seems, is something completely different, different from what other builders are doing, and in many cases, different from what your company has ever done before. That’s pretty much the only way to stand out from a sea of resales, including ‘used’ homes that when they are only a couple years old are ‘like new.’”

“Whether you can make any money with this strategy, or any strategy, is another matter, of course. ‘No one is making any money,’ one prominent Southern California builder told me the other day. ‘They may not even be building for wages.’”

“In this Phoenix suburb, two townhouses stand vacant, filled with trash and abutting an empty neighborhood swimming pool covered with graffiti. When the 236 plots at a development called Donatela went on sale two years ago, eager shoppers camped out overnight just to enter a lottery for a chance to buy one. Today, one in nine homes at Donatela is in foreclosure or close to default, according to city records.”

“The sign at another subdivision, Starlight Trail, reflected buyers’ ravenous demand for new homes in Avondale: During the construction boom, between 2004 and 2006, the sales pitch changed from advertising homes starting in the $150,000s to advertising homes from the $250,000s. Now the builder is advertising new homes in Starlight Trail starting in the $150,000s again — even though more than 22% of the existing houses there are in foreclosure or close to it.”

“Oak Park’s developer cleared 52 lots, paved roads, installed sewers and power lines, and built four luxury model homes. Workers were cutting trenches for the in-ground sprinkler systems when the bank repossessed the entire property, according to the city and a former employee of the developer. ‘They just went to lunch and never came back,’ said city code-enforcement officer Dave Wood.”

“Since the end of last year, about 2,800 Washington agents have abandoned the business, a decrease of about 9 percent, and hundreds more have put their licenses on hold, according to the state’s Department of Licensing. ‘I think everyone was expecting some sort of rebound in the third and fourth quarter,’ said Russell Hokanson, CEO of the Seattle-King County Association of Realtors. ‘But just when it seemed we were coming out, we had another meltdown in the stock market in September and October and that hit consumer confidence again.’”

“Real estate agent Len Brandt said surviving the current market is a struggle, and requires a second income. ‘My wife works full time — I don’t know how anybody is in real estate right now if it’s their absolute full-time job,’ he said.”

“With the number of home loans shrinking because of the subprime meltdown and resulting tight credit, logic says mortgage fraud would be declining. But a report this week by the Mortgage Asset Research Institute showed fraud rose 65 percent in the second quarter over the same period in 2007. ‘Desperation has an ugly face,’ said Abington appraiser Michael Frolove. ‘If you can’t pay the bills or meet expenses, the pressure to commit fraud is even greater.’”

“On the other hand, the institute ‘could be just discovering old fraud,’ said Philadelphia mortgage broker and Realtor Fred Glick. Still, Glick agrees with Frolove’s observation. ‘I am sure there are loan officers that need the money and will do anything,’ he said.”

“‘Expect fallout, expect foreclosures, expect horror stories,’ California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job. Bowing to aggressive lobbying - along with assurances from banks that the troubled mortgages were OK - regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.”

“‘These mortgages have been considered more safe and sound for portfolio lenders than many fixed-rate mortgages,’ David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.”

“One of the most contested rules said that before banks purchase mortgages from brokers, they should verify the process to ensure buyers could afford their homes. Some bankers now blame much of the housing crisis on brokers who wrote fraudulent, predatory loans.”

“But in 2006, banks said they shouldn’t have to double-check the brokers. ‘It is not our role to be the regulator for the third-party lenders,’ wrote Ruthann Melbourne, chief risk officer of IndyMac Bank.”

“Diane Casey-Landry of the American Bankers Association said the industry feared a two-tiered system in which banks had to follow rules that mortgage brokers did not. She said opposition was based on the banks’ best information. ‘You’re looking at a decline in real estate values that was never contemplated,’ she said.”

“Experts who spoke at a forecast meeting on Wednesday said the current recession will continue to have a negative impact on the housing market through 2010. The current housing climate is so bad that, by one analyst’s calculations, there is a 12-year inventory of homes worth more than $1.5 million in east Clackamas County. The equivalent figure for west Portland is about two years.”

“Jerry Johnson, a principal with Johnson Gardner, said a key indicator that the housing market was about to crash came when condominium prices began softening last year. ‘There’s always a canary in a coal mine in real estate markets,’ he said in reference to the condo market. ‘And the canary is dead.’”

“Ken Perry, president and CEO of Broker Knowledge Group, said about 7 percent of Oregon homeowners are ‘upside down.’ Perry said he was warning of the housing bubble and reckless lending practices in 2005, and he watched in amazement as lenders devised riskier deals for home buyers. ‘Did we really think they would pay us back?’ he said, referring to the borrowers.”

“Perry said the recession was unavoidable. ‘This correction is good,’ said Perry, referring to the recession and crackdown on subprime lending. ‘It would have been great five years ago. But the longer we waited to have the recession, the worse it would be.’”

A report from the Washington Independent. “To great fanfare, mortgage giants Fannie Mae and Freddie Mac announced last month they would temporarily halt foreclosures and evictions from Thanksgiving to Jan. 9. But it’s not working out that way for everyone. And certainly not for Julio Angulo of suburban Virginia, another victim of a foreclosure machine that seems to be almost unstoppable. The eviction was officially over, less than a half hour after it began. But Angulo still was allowed to wait a few more hours for his friend to help him move. He said his troubles began last spring, when he told his renters they had to leave because ‘they didn’t have their papers.’”

“At the same time, Angulo’s monthly mortgage payment on an adjustable-rate loan jumped from $1,400 a month to $2,600. He earns about $500 a week as a housepainter. ‘I didn’t know what happened,’ he said. ‘I got charged. I can’t pay that.’”

The Arlington Connection from Virginia. “A few years ago, it would have been unthinkable for any home in Arlington, regardless of size or location, to sell for less than $300,000. In October, 33 Arlington homes, most of them condominiums, sold for $300,000 or less. In the same month, at least 13 homes sold for more than $1,000,000. Which begs the question: Where is the ceiling in the Arlington real estate market and where is the floor?”

“‘The ceiling has not changed that much,’ said Nicholas Lagos, broker in Arlington. ‘We still have a tremendous disparity in pricing in Arlington.’”

“During the housing boom of the first part of this decade, Lagos said that condo constructions and conversions were occurring rapidly. ‘There were a lot of builders who jumped in and started building condos,’ he said. ‘When they were built, a lot of people built them on speculation. There were a lot of investors who went into them as opposed to owner occupants.’”

“There was an ‘overbuilding’ of condos during this period, Lagos said, and now prices in the Arlington condo market have plummeted.”

“‘Right now if you’re listing the home you have to make it show well,’ Lagos said. ‘Just slapping it together and putting a sign up is no longer working.’”

“He also said that Arlington has been fairly immune to the collapse of the Northern Virginia housing market. ‘We’re affected absolutely, but not like the outer areas,’ Lagos said. He did say that the housing market collapse has had an effect on the county’s real estate community. ‘Realty is now a career,’ Lagos said. ‘There’s not a lot of people dabbling in it [anymore].’”

The Falls Church News Press from Virginia. “While the Falls Church area has managed to escape the severity of the foreclosure crisis that plagues much of Northern Virginia today, the foreclosure market in the Greater Falls Church area still remains lucrative.”

“Stacy Hennessey of Long and Foster Realty and Shaun Murphy of Remax Allegiance shared their knowledge of the area market. ‘The owners overpaid in 2005, 2006 for these big homes, and now prices have dropped, so they were foreclosed,’ says Hennessey, who represents buyers looking for homes, including many foreclosures across Fairfax County, where she says the markets are ‘inundated’ with foreclosed homes. ‘I’ve seen houses in the $150,000 - 200,000 range or less. That’s a big drop from $500,000 and up.’”

“For Murphy, the market is even busier, as he doubles his role as a real estate agent for buyers and as a listing agent for IndyMac Bank. ‘There are a lot of foreclosed homes and a lot of buyers purchasing them,’ he says. ‘Two-thirds of the homes I’ve dealt with are bank-owned homes.’”

“Foreclosures remain one of the current economies greatest steals, and if economic conditions continue to deteriorate, Hennessey says, ‘there are going to be more great deals’ for home buyers.”

“Foreclosures may be a sign of hard times in the economy, but as Hennessey and Murphy can attest, it’s a ripe time to snatch a beautiful home at a bargain price. ‘Foreclosures are an awesome investment,’ says Hennessey. Both agents agree it is ‘the best time to buy.’”

“Hennessey adds that the buyers market also translates to a renters opportunity, as well. ‘Buy a home for a little, rent it out: that makes for a great investment,’ she says.”

The Virginian Pilot. “Real estate appraisers in Hampton Roads and across the nation say they have felt intense pressure from lenders, mortgage brokers and real estate agents to deliver inflated valuations - a serious ethical breach that may have played a role in puffing up the real estate bubble and promoting mortgage fraud.”

“The problem has been around for some time, says Woody Fincham, a Chesapeake-based appraiser. For several years in the mid-2000s, Fincham said, his company did steady business with a Virginia Beach mortgage brokerage but faced escalating pressure to deliver inflated appraisals.”

“‘They would get on the phone and scream at me to inflate values,’ he said. ‘They said, ‘If you keep coming in low, we’re not going to work with you anymore.’”

“Finally, the brokerage delivered on the threat, cutting off business with Fincham’s company. ‘They said, ‘You’re not hitting the numbers we need you to hit,’ Fincham said.”

“That brokerage is now out of business, dragged down by the collapse of the subprime mortgage market. One of its former loan officers, Aretha Smiley, has been named in two civil lawsuits alleging mortgage fraud.”

“It’s not as if there was no warning. Back in 2001 the Appraisal Institute, a worldwide association of real estate appraisers, told Congress that members were facing increasing pressure from lenders, brokers and realty agents to inflate property values. Such pressure can enable lenders to make loans larger than the actual value of the house, the institute warned. Moreover, those inflated transactions can later be cited as comparable sales in appraisals of nearby properties, creating a multiplier effect.”

“‘Such a cycle of ever escalating values adds unnecessary risk to our mortgage finance system’ and ‘can contribute to mortgage fraud,’ the institute warned.”

“Since 1999, more than 10,000 appraisers nationwide have signed an online petition urging the federal government to clamp down on lender pressure to inflate values. Such pressure is pervasive, the petition says, and includes blacklisting appraisers who refuse to go along. Some local appraisers were unwilling to discuss the issue on the record, saying they feared losing business.”

“One willing to talk was Suzanne Shannon, an appraiser in Hampton. ‘I’ve been told numerous times, right flat-out in plain English, ‘If you don’t do what I want you to do, you’ll never work for me again,’ Shannon said.”

“The deflation of the housing bubble has prompted some lenders to look more critically at appraisals, Shannon said. Occasionally over the past few months she has been asked to review high valuations turned in by other appraisers. In one instance, a waterfront property in Gloucester County had been appraised at $2.1 million; Shannon’s review put the value at only $1.2 million.”

“A 2007 national study found that 90 percent of appraisers reported being pressured to raise property valuations to enable deals to go through. The prime culprits, according to the survey, were mortgage brokers. Mortgage brokers, on the other hand, put the onus back on appraisers.”

“‘The appraisers have to step up here and take the high ground,’ said Marc Savitt, president of the National Association of Mortgage Brokers. ‘I understand a lot of them have been threatened with loss of business and so forth. I’m not saying it didn’t happen. If they get pressured, they need to report it to the appropriate regulator. That’s the first thing. The second thing is, if they do commit fraud, then they have to understand there’s consequences for that, and just because somebody tried to influence or pressure them, that’s not an excuse for committing fraud.’”

“The trouble is, when coercion occurs, appraisers have little recourse, said Glenn James, a Norfolk appraiser and a member of the Virginia Real Estate Appraiser Board. ‘Mortgage brokers are totally unregulated’ in Virginia, James said, so there’s no one to complain to.”

“Pressure on appraisers to pump up the numbers was particularly intense during the run-up in prices during the early and mid-2000s, said Bill Garber, director of government relations at the Appraisal Institute. ‘Good appraisers said no to it and went about their business and did their jobs professionally,’ Garber said. ‘But there are institutionalized conflicts of interest that exist - pressure points in the lending process - that can allow people with a vested interest in the transaction to control the appraisal process.’”

“Such coercive tactics are a violation of federal banking regulations. Earlier this year, the Federal Reserve Board adopted a rule barring mortgage brokers and lenders from coercing appraisers. The new rule is a positive step, Garber said, but the proof will be in the pudding.”

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