Punch-Drunk On Real Estate In California
The Mercury News reports from California. “A new report pinpoints late 2006 as the time when the California mortgage market was most out of control — with some mortgage lenders acting so recklessly that two-thirds of the loans made during that time ended up in default. More than 9 percent of California mortgages originated from August to November 2006 have resulted in lenders filing default notices, according to DataQuick. By comparison, the default rate for all the loans made in 2005 is 4.9 percent, the company said, and for 2004, it was less than 1 percent.”
“DataQuick’s John Karevoll called mid- to late 2006 a ‘pocket of nastiness’ in the state’s lending industry, during which many lenders were making loans that had multiple risks — for example, no-money-down loans that also required no verification of the borrower’s income. As a result, too many borrowers could not afford their loans and have defaulted or been foreclosed upon. ‘This whole process, at least for a while there, just broke down,’ Karevoll said. ‘There was nobody out there minding the store.’”
“Said Dustin Hobbs of the California Mortgage Bankers Association, an industry trade group: ‘It’s no coincidence that these companies are out of business’ based on the lending standards exhibited by their default rates. But, he said, ‘There certainly is blame on both sides. Even borrowers who got loans they couldn’t afford, they have to take some responsibility as well. There’s more than enough blame to go around when default rates are that high.’”
“The median price of Silicon Valley homes has been cut nearly in half since peaking at $805,000 in summer 2007. But that doesn’t mean every home has lost that much value. In fact, a Mercury News analysis shows, home prices in some Santa Clara County neighborhoods least affected by the foreclosure crisis have fallen less than 20 percent. In neighborhoods where foreclosures are commonplace, prices have dropped 50 percent or more from their apex. And the foreclosure problem is not over.”
“The number of notices of default sent in Santa Clara County rose 95 percent in the first quarter of 2009 from the previous quarter, to 4,090 filings, following a period in which legislative changes and voluntary moratoriums had slowed the march to foreclosure. It’s unclear whether rising mortgage defaults will result in enough foreclosures in California’s more affluent areas to further depress prices in those places, said DataQuick’s Andrew LePage.”
“‘The numbers (of foreclosures) are still really small in the higher-cost coastal areas,’ including Santa Clara County, he said, compared with inland counties, ‘but it’s got to be watched, because at some point it could be a much more significant part of the inventory.’”
The Tribune. “More San Luis Obispo County homeowners are struggling to keep up with their mortgage payments. A total of 538 default notices were filed in the first three months of the year. That’s a nearly 40 percent increase from the first quarter of 2008 when 385 default notices were recorded, according to MDA DataQuick.”
“Foreclosure activity in San Luis Obispo County has been on the rise steadily in recent years, spiking last year with 784 trustee’s deeds recorded, versus 267 the previous year. Foreclosures accounted for 36 percent of resale activity in the county last quarter, up from 22 percent the same period a year ago.”
“Foreclosure resales accounted for more than 58 percent of all resale activity in California last quarter, a 33 percent jump from 2008.”
From KSBY. “Last year was a tough one for Santa Barbara County, now economists are weighing in on 2009. The UC Santa Barbara Economic Forecast Project…report shows that median home prices dropped 54 percent in 2008 but home sales increased by 20 percent. Retail sales fell by four percent, and commercial construction dropped by more than 12 percent.”
“‘If you can’t find people to rent your space, especially retail, why build it and why put the money out?’ said developer John Will. Will is already feeling the pinch with a project in Orcutt. ‘We’ve had three retailers pull out of it because they don’t want to take a chance in this economy either,’ Will said.
“Business is booming in a new shopping center in Santa Maria, but Will is quick to point out it is the product of better times. ‘Projects you see currently under construction right now were started in 2005 and 2006,’ said Will. ‘We only have one project we’re going to do after this one, then we’re going to sit tight for a couple years.’”
The San Francisco Business Journal. “In recent years, Pleasanton Rentals President Sherri Creighton and other small business owners have relied on the SBA’s 504 loan program to buy the commercial property in which their businesses operate. These business owners saw buying property as a means to capture the rent or lease payments the business was sending to a landlord and essentially make those payments to an entity controlled by the business owner. The plan was to build equity in the commercial property that might eventually provide retirement income for the owner.”
“But those carefully laid plans have gone awry. Now stretching to make the monthly mortgage has taken a personal toll on Creighton as well as a financial one. ‘Sleep has not been my friend lately,’ she said, likening her current troubles to those her father’s rental business in Texas suffered during the economic collapse of that state in the 1980s as oil prices plunged.”
“‘Everyday we get calls from troubled borrowers asking what we can do to help them,’ said Barbara Morrison, president of San Francisco-based TMC Development, which helps small businesses secure SBA financing to buy commercial real estate. ‘They’ve been hit by this perfect storm of an economic downturn.’”
“Like those servicing residential mortgages, Morrison says these commercial loans have been securitized and sold to investors, so there’s little they can do in the way of loan modifications. ‘Commercial mortgage foreclosures for owner-occupied buildings isn’t on anyone’s radar screen, but it’s more devastating for the community,’ Morrison said. ‘The community loses the business, employees lose their jobs and down the road become residential mortgage statistics.’”
The Press Democrat. “One gauge of the slumping economy is the growing number of courtesy calls self-storage site managers make to remind tenants to pay the rent. Leading the list are construction workers, sales representatives, restaurant owners and other self-employed workers struggling to keep their businesses alive. ‘They’re not ignoring their bills. They’re responsible. The bottom just fell out. It’s a sign of the times,’ said Brian Lane, site manager for Stor-N-Loc in Santa Rosa.”
“Helping fill the void are refugees from the sinking housing market — homeowners who lost houses to foreclosure. ‘There’s quite a few families. They just pile their stuff in here,’ said Les Kiracofe, site manager for Santa Rosa Avenue Self Storage.”
The North County Times. “Lenders appear to be inserting language into short sale contracts that allow them to sue for any ‘deficiency,’ or the amount lost by a bank by selling a home for less than the mortgage —- opening the door to collection agencies and court judgments that can run into the hundreds of thousands of dollars for some North County homeowners.”
“What’s more, the nation’s premier credit scoring firm says that short sales and foreclosures are equally damaging to credit scores. Yet short sales have surged in popularity, as homeowners struggling with falling values and rising unemployment seek a way out.”
“It’s not clear how many short sales in fact fail to protect former homeowners from subsequent collection efforts. But local real estate attorneys and other professionals say such vulnerability may be widespread. The North County Times obtained a short sale contract issued by Countrywide Financial Corp., which together with parent company Bank of America services roughly 20 percent of the mortgages in the nation.”
“The contract warned the homeowner, who owned a house in El Cajon, that Countrywide ‘may pursue a deficiency judgment for the difference in the payment received and the total balance due … ‘”
“Keeping up with mortgage payments —- and thus keeping the house —- is getting harder for thousands of families in San Diego and Riverside counties, where unemployment rates shot into record territory in March. Meanwhile, home values have plummeted more than 40 percent since 2006, leaving roughly one-third of San Diego County mortgage holders ‘under water,’ according to First American CoreLogic, a data firm.”
“The figure is higher in Southwest Riverside County; three of every four mortgage holders in Lake Elsinore is under water, for example.”
“It’s possible those lenders won’t sue the borrowers at first because ‘that’s why they’re in a short sale anyways, they don’t have the money,’ said Susan Anderson, manager of the Coldwell Banker real estate brokerage in Vista. So banks ‘are saying, ‘Down the line, if you have the money, we’ll go after it.’”
“Lenders might include a clause in a short sale contract that releases the lien but creates the possibility for a lawsuit to collect debts at a later date, said John Brady, a San Diego attorney. Effectively, lenders will try to transform a purchase-money loan into one in which the bank can sue to collect, Brady said.”
“‘They’re being sneaky,’ he said. ‘They’re trying to keep the door open to be able to collect on any deficiency.’”
The Union Tribune. “It’s Tim Kelley’s job to promote Imperial County as the future, as a hub for business, as the renewable-energy capital of the world. An optimist, Kelley said the area’s high unemployment rate has an upside. ‘I’m not saying it’s a good thing,’ he said. ‘But it does mean you have a work force.’”
“During a three-hour tour, Kelley noted promising commercial sites, three times pointing to curbs and gutters as selling points. He called everyone’s attention to a new Super Wal-Mart on one side of the street, while a former economic staple, Del Norte Chevrolet, sat shuttered on the other side. During a stop at a vacant 48-lot parcel, developer Dan Holbrook greeted one of the two-dozen passengers, asking, ‘Are we punch-drunk on real estate yet?’”
“Imperial County had 1,000 developable lots eight years ago when the country last rebounded from recession, Kelley said. Now it’s ready with 60,000. Kelley acknowledged his road ahead is rough. ‘You can’t really say, ‘When you’re in Imperial County, drop by my office,’ he said. ‘It’s not a destination site.’”
The Press Enterprise. “Fortune finally is smiling on renters who, for years, could not afford to buy a house as they watched home prices escalate ever further beyond their reach. In November 2006, the median price of homes in Riverside and San Bernardino counties peaked at $405,500. Since then it has plunged more than 57 percent to $173,000 in March, weighed down by foreclosures that represent more than two-thirds of sales, states research firm MD DataQuick.”
“‘Prices and mortgage interest rates now are so low that the monthly house payment is approaching the average rent in the Inland Empire,’ said Delores Conway, director of USC’s Casden Real Estate Economic Forecast.”
“That means many more renters can grab for the ring of home ownership as long as they can qualify under more-demanding lending standards. In a weakening economy, another key consideration is that they have jobs that they feel confident of keeping.”
“Last weekend, Simoun Davis and his fiancée, Felmarie Cipriano moved into the first house they could call their own. The single-story, four-bedroom house they bought for $115,000 on a cul de sac in Moreno Valley is just big enough for their two daughters and Cipriano’s mother to each have a bedroom. Their 3-year-old son will bunk with his parents.”
“‘We can’t imagine finally getting a house because three years ago we were just dreaming,’ said Cipriano. Her happiness was a little dampened, she said, by knowing that the previous owners had been foreclosed on. ‘I felt so sad for the people who lost their house and now we bought it,’ she said.”
“If it wasn’t for her boyfriend’s financial discipline, she said, they also might have bought a house that was too expensive for them in 2003. She said the only way they could afford a house then was if her brother joined them, but he declined.”
“When they started house hunting again in January…they decided to move inland where real estate prices are lower than on the coast. They face a long commute to their jobs, up to an hour-and-a-half each way, depending on traffic. Davis said although the couple was financially qualified to buy a $250,000 house, they decided to pay less to avoid financial stress and have time to relax and play with their children.”
“Their monthly house payment of $900, including taxes and insurance, is less than half their previous $2,200 monthly rent. And in a few years they hope to have built up equity and buy a better house, possibly back in Orange County. Cipriano said when they tell friends who have been through foreclosure that they are buying a house, ‘They say we are lucky.’”
The Inland Valley Daily Bulletin. “Economists and real-estate agents are counting on homeowner affordability to stabilize California’s housing market mess, but Bruce Norris couldn’t disagree more. Owner of The Norris Group, a Riverside-based real-estate investor and financial broker for other real-estate investors, Norris says it’s not what a home shopper ‘can afford to pay’ that’s key in turning this market around - it’s what they’re ‘willing to pay.’”
“He’s bucking the popular belief that a 5 percent or 10 percent price drop on Inland Empire home values will usher in the market’s bottom. Think 20 percent or maybe more, he said. ‘It’s because of the 1004 MC form,’ Norris said. ‘It’s very dangerous.’”
“This ‘market conditions addendum’ for appraisers to use - enforced April 1 by the mostly government-owned mortgage investors Fannie Mae and Freddie Mac and loan insurer Federal Housing Administration - might thrust the economy’s fragile mortgage system from its depressed state to something much worse, Norris argues.”
“The new addendum says a house must be appraised at the neighborhood’s median home value instead of market value, as long as the home is located in a downward market and as long as the mortgage is a Fannie Mae, Freddie Mac or an FHA-backed loan. Median home values in certain neighborhoods are taking a beating these days because their prices are skewed by dozens of foreclosures - which means nonforeclosed homes are slated to get hit by a double-whammy price-depreciation phenomenon.”
“Norris has already seen values stated on local home appraisals drop 20 percent in the past 3 1/2 weeks. ‘If this plays out, things will get much worse,’ Norris said. ‘We’re going to devalue the loan portfolios of almost every lender in the state of California. This could crash the system - it really could.’”
“Norris thinks a speedy free fall in home values wouldn’t draw buyers - it would erode the last bit of confidence remaining in the already-battered home shopper psychology. Money currently sitting on the sidelines could camp there for years because of fear. Not only that, but the foreclosure pipeline is so backed up that banks could collectively end up losing billions more if they sold their foreclosures at even worse penny-on-the-dollar prices based on median home appraisals rather than market-value appraisals.”
“With plenty of historical numbers on his side, Norris said he made presentations to homebuilders and real-estate professionals in early 2006 and predicted the housing market crash. Few believed him…The first sign to watch out for at a market’s peak is when affordability reaches historical lows. ‘It’s an indication you’ve reached the peak and about to head the other way,’ Norris said.”
“The other is migration. When California residents start jumping ship and moving to nearby states, just like they did in 2006, it’s a red flag, he said.”
The Democrat Herald. “When I worked as a real estate inspector in California in the early years of this decade, I was continually amazed at cost of houses, which never stopped rising. ‘Where are all the rich people who are buying these houses coming from?’ I asked a realtor as I completed an inspection of an older, not-particularly special, three-bedroom house she was selling for a cool million dollars. ‘These buyers must be taking on a $7,000-8,000 per month mortgage payment.’”
“She explained that most people buy a million dollar house by selling a $750,000 house, thus taking on a $250,000 mortgage (roughly a $2,500 monthly payment). They bought their $750,000 house when they sold their $600,000 house, taking on a $150,000 mortgage. And so the transactions went until the lowest-priced houses — which at that time in California cost around $200,000 — were purchased by first-time home buyers.”
“For people to ‘move up’ into ever more-expensive houses (touted as better investments because their price kept rising ) others had to keep coming in at the bottom of the market, buy the cheapest houses, then sell them and buy at the next level up. ‘But many people who don’t own a house can’t even afford a $200,000 house,’ I said.”
“‘Oh, they can with the right type of financing,’ the realtor answered, putting the million-dollar offer for the house I’d just inspected into her $500 leather portfolio. ‘No money down, adjustable rate mortgage . . . creative financing is easy for low-income people to get. Can you have that inspection report for me tomorrow?’”
“‘Sure,’ I said, feeling embarrassed about my foolish concerns for the housing market and people’s growing debt. Realtors and bankers obviously understood finances much better than I ever would.”
“Fast forward to the Obama economic team’s desperate attempts to return today’s economy to its mid-2007 condition, before the housing bubble broke. One of their principal concerns is to get credit flowing again so people can resume their pattern of consuming by borrowing — going ever further into debt.”
“Perhaps Obama’s economists think pushing consumer debt is the quickest way to restore the economy and avoid the pain of a complete collapse. Perhaps they are malevolent agents of Wall Street, helping the bankers use homeowner debt as speculative tender while the homeowners’ equity and net worth dissolves. More likely they’re misguided: they think that the economy as-it-was is the only way it can be.”
“Do we really want to go back to an economic system that can only grow by driving us ever-deeper into debt, setting up another — possibly worse — collapse? Or do we want to build a sustainable economy.”
“It’s said that if the people lead, their leaders will follow. In our current situation, the best way for people to lead is to refuse to go further into debt and to gradually increase the equity in their homes — and their outright ownership of cars and other goods. We can use a growing equity-to-debt ratio to stabilize our lives and, eventually, anchor the economy.”
