Anything That Could Go Wrong Did Go Wrong
The Gazette Times reports from Oregon. “After a months-long struggle to move through the city’s planning department and overcome objections by wetlands advocates, Ashwood Preserve is up for sale. The 9.52-acre parcel, which became a test case for a provision which allows a land owner to build on property even if it is mostly covered by natural features, has been stymied by a building industry that was quiet all year. It’s representative of the plight of Corvallis builders, who never really got off the ground in 2008.”
“Residential building ground almost to a halt in 2008. Just 44 permits for new residential building have been issued this year, half the number approved in 2007. At the end of last year, Legend Homes in Corvallis was upbeat about its prospects here. In June, the company filed for Chapter 11 bankruptcy protection when creditors came calling.”
“The Oregon company’s Corvallis projects — Stoneybrook and Willamette Landing, both offering new homes priced between $250,000 and $400,000 — had been largely completed before the troubles in the housing market. Another project brokered by Legend, Witham Oaks, remains in the same limbo that stalled Ashwood Preserve.”
“John Faulconer, a mid-valley builder for 10 years, hung up his tool belt this year and now sells existing real estate full time. ‘I just sold my own home for $550,000,’ he said. ‘A year and a half ago I could have gotten $750,000. It makes me sick.’”
The Oregonian. “State regulators are investigating a Bend firm that recently filed for bankruptcy after its owners used millions of customer dollars to fund their own business ventures, allegedly without permission. Summit 1031 Exchange’s owners said this week that they were short more than half of the $27.8 million in cash it owed to clients. The company said its problems are a result of loans it made during the real estate boom to Inland Capital Corp., a company owned by the same people who own and run Summit. Inland Capital Corp. then lent the money to other individuals and companies.”
“‘This is just horrible,’ said John Tennant, a Portland landowner whose family is owed $1 million. ‘We’ve hired an attorney, and we’ll be filing a lawsuit.’”
“Summit specialized in 1031 tax-deferred exchanges, a type of real estate investment that allows investors to defer paying federal taxes on gains from property sales. The largely unregulated exchanges are tax-deferred as long as sellers quickly reinvest their proceeds in similar properties.”
“Danae Miller of Bend said she turned to Summit looking to trade her 34-acre cattle farm near Bend for something larger. Summit now owes her $750,000. ‘I don’t know how in our lifetime we could ever recoup that money,’ she said.”
“News of what happened has surprised investors and business partners who said that Summit’s principals had strong reputations in the field and community. ‘They were very well regarded,’ said Dave Chambers, an accountant in Lake Oswego who ran Summit’s local office. ‘These guys in Bend got really good at this. These guys got too successful.’”
“Bend tied Atlantic City as the most overvalued market in the country in a report from research firm IHS Global Insight and National City Corp. Longview, Wash., had the fifth most overvalued market, Portland sixth, Eugene 10th, Salem 14th, Medford 21st. The firm bases the overvalued rankings on interest rates, household incomes, population densities and historic price trends.”
“The report provides further evidence that the housing crisis — after rolling through Sun Belt and Rust Belt states - — is clobbering Northwest markets the worst.”
“A South Waterfront condo once owned by a former U.S. Bank fraud investigator now doing time for embezzlement has resold for a discount of about 40 percent. David A. Shelofsky bought the 18th floor condo in June 2006 for $1.6 million. The condo went into foreclosure, and principal broker Philip Higgins listed it for $979,900 for the bank. He says it’s now under contract for a little less than the list price.”
“Shelofsky pleaded guilty in October 2006 to pocketing $1.5 million of the money he recovered from people accused of defrauding U.S. Bank. An accountant found that $583,000 of embezzled money went to properties Shelofsky purchased, including this condo. Shelofsky was sentenced to 37 months in federal prison last March.”
“Established Oregon economists scoffed a year ago when a younger colleague with a relatively new crystal ball declared: ‘A recession is likely imminent.’ As it turns out, University of Oregon economist Tim Duy, and his index of economic indicators, was closer to the target than even he imagined. Construction crashed, following the burst of the nation’s speculative housing bubble. Related sectors, such as wood products, manufacturing and the financial industry, also plunged. Foreclosures increased.”
“‘Anything that could go wrong did go wrong,’ Duy said this past week.”
“Eugenio Aleman, Wells Fargo & Co. senior economist, says federal monetary policy — injecting hundreds of billions of dollars into the economy through the financial sector — is not helping those who need it the most. ‘It will not help those who are struggling to make ends meet, or have lost their jobs or who may soon lose them,’ Aleman said, ‘because no financial institution is going to lend them money to buy a home, no matter what the interest rate is.’”
The Peninsula Daily News from Washington. “Jefferson County’s assessor expects to hear some noise when his office sends out property tax assessment revaluation notices next August for the city of Port Townsend, just as he did after assessments for Chimacum and Port Ludlow came out earlier this year. The Port Townsend notices, which will be for 2010 taxes, will show average increases of 20 percent to 25 percent, Jack Westerman III said.”
“‘They’re going to say ‘Jack, you are out of your mind,’ said Westerman, who at 30 years in elected office is the state’s longest-standing county assessor.”
“The countywide taxable value has more than doubled since 1997 to 4.7 billion in 2007, Westerman said, with about half of that being new construction. ‘Port Ludlow is an area that has more turnover with so many retirees,’ Westerman explained.”
“Then there was the spike in Port Ludlow residential construction during 2005-2006 that glutted the market. ‘My biggest problem right now for me is the areas in Port Ludlow,’ he said.”
“This year, Westerman’s office put together data for the Port Townsend revaluation cycle. The cycle is from January 2005 to January 2009. ‘If you bought at the peak of the market in late ‘06 your value hasn’t done much but go down 15 percent,’ he said.”
“That, however, followed two years that each had 20 percent market-value increases in Port Townsend, he said.”
“Westerman points out that although Port Townsend-area homes sales have dramatically slowed since 2006, prices have not necessarily declined at the same pace. In fact, he said, many are selling for more than their 2005 assessed value. For example, Westerman said, an uptown Port Townsend home with a county assessed value of $290,000 in 2005 recently sold for $615,000.”
“Westerman produced documentation that shows his office’s assessed values from July 11, 2008, to mid-September were under sale prices by as much as 35 percent at the low end, and by 99.2 percent at most for the Port Townsend School District revaluation area, which includes Cape George, Kala Point, Discovery Bay and the West End. ‘There are fewer transactions to make decisions on, which makes it a little more difficult for anyone involved . . . It’s a tough time to figure out your fair market value,’ Westerman said.”
The Seattle Times from Washington. “Summing up the 2008 housing market, Glenn Crellin, was succinct: ‘Challenging at best,’ said the director of the Washington Center for Real Estate Research at Washington State University. ‘We clearly have a situation where consumers have exited the market, rightly or wrongly, on the presumption that housing prices are going to fall precipitously and they’ll be able to get tremendous bargains if they wait.’”
“As 2007 ended, Mike Scott, of Dupre + Scott Apartment Advisors, said renters should see rents rise and stiffer competition for apartments. The reasons: Tight mortgage lending was keeping many renters from becoming homeowners. Plus, many would-be buyers were taking a wait-and-see attitude toward home prices.”
“Well, some of that happened. Central Puget Sound rents climbed 7 percent in the past year, Scott said. Going forward, it would seem like the same factors Scott cited for this year would be in play again for 2009. But the apartment situation has changed considerably. For 2009 and 2010, Scott expects that vacancies will grow, but rents won’t.”
“However, the economy is deteriorating so rapidly that it’s hard to say exactly what that means. In September, Scott forecast that vacancies would reach almost 6 percent by early 2010. Then this month, he revised that upward to 7.3 percent.”
“Job losses decrease apartment demand because renters double up — one reason vacancies are expected to climb. The other big one is an increase in apartment construction. Scott says 2,620 units opened this year in 20-unit or larger buildings in King, Pierce and Snohomish counties. That’s about 500 more than had been predicted.”
“Currently, 8,900 units are under construction. Additionally, some buildings planned as condominiums may become apartments instead, and some apartments formerly converted to condos are being reconverted into apartments.”
The Seattle PI from Washington. “No surprise: Many Seattle-area real estate experts say the market slowdown was the biggest local real estate story of 2008. But there’s a lot less agreement about what to expect from 2009.”
“The median house price actually topped out at $481,000 in King County in July 2007 and $501,000 in Seattle in August. Last month, the medians were $415,000 in Seattle and $395,000 countywide, down 17.2 percent and 17.9 percent, respectively, from their peaks.”
“Spencer Rascoff, chief financial officer at Zillow, the Seattle-based online real estate site, said that given that nearly 14 percent of area homes have mortgages for more than they’re worth, massive job losses would bring another wave of foreclosures, stalling any recovery.”
“Unemployment was higher in 2002, but the housing market was strong then because people felt comfortable buying, said Bruce Williams, CEO of HomeStreet Bank. ‘Until people have confidence the economy is not in free fall, home sales will be down,’ he said.”
“Sean Hyatt, managing director of the Bellevue office of national apartment developer Trammell Crow Residential, focused on the mayhem itself. ‘The fact that this downturn is so multifaceted, with bad news coming from every angle, which in turn is leading us into one of the deepest recessions on record, is the most significant story,’ he said. ‘The failure of WaMu, the disappearance of the condo market, the commercial markets grinding to a halt, how quickly Seattle proved it wasn’t immune, again, and caught up with the national recession, and all the other negative events are just symptoms.’”
“The real shock came in August 2007, when mortgage lenders significantly tightened their standards. Declines in prices and sales continued into this year. The area showed signs of possible stabilization this summer, with pending sales actually up from a year earlier in September. But nationwide economic turmoil upended that, and pending sales dropped in November by more than 30 percent from a year earlier.”
“September’s turmoil, of course, included federal regulators seizing Seattle-based Washington Mutual Inc. and selling its branches, deposits and loans to New York-based JPMorgan Chase — the largest bank failure in U.S. history.”
“That was the biggest real estate story of the year, according to Richard Hagar, a Mercer Island appraiser who teaches anti-fraud classes and has been warning that lenders, including Washington Mutual, failed to ensure they made good loans. ‘They are the poster child of what is happening at many banks,’ Hagar said. ‘And all of the problems at WaMu are still going on right now today.’”
The New York Times. “As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.”
“Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer.”
“Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved. ‘I’d lie if I said every piece of documentation was properly signed and dated,’ said Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.”
“While Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said. ‘In our world, it was tolerated,’ said Sherri Zaback, who worked for Parsons and recalls seeing drug paraphernalia on his desk. ‘Everybody said, ‘He gets the job done.’”
“‘”It was the Wild West,’ said Steven M. Knobel, a founder of an appraisal company that did business with WaMu until 2007. ‘If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.’”
“The ultimate supervisor at WaMu was Kerry K. Killinger, who joined the company in 1983 and became chief executive in 1990. An investment analyst by training, he was attuned to Wall Street’s hunger for growth. Between late 1996 and early 2002, he transformed WaMu into the nation’s sixth-largest bank through a series of acquisitions.”
“A key deal came in 1999, with the purchase of Long Beach Financial, a California lender specializing in subprime mortgages, loans extended to borrowers with troubled credit. WaMu underscored its eagerness to lend with an advertising campaign introduced during the 2003 Academy Awards: ‘The Power of Yes.’ No mere advertising pitch, this was also the mantra inside the bank, underwriters said.”
“‘WaMu came out with that slogan, and that was what we had to live by,’ Zaback said. ‘We joked about it a lot.’ A file would get marked problematic and then somehow get approved. ‘We’d say: ‘OK! The power of yes.’”
