The Housing Bubble

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It’s Friday desk clearing time for this blogger. “Rex and Sarah Fritchey drove from Lehigh Acres to North Naples to take advantage of a free workshop. The Fritcheys, both 71, hope to modify their mortgage and save their home. The couple, who retired in 1986 from their landscaping business of 23 years, are struggling to afford their monthly payments. They were relying on income from other investment homes in Lehigh Acres to cover their bills, but that income has dropped drastically because rents have fallen so much with a real estate slump. One rental house that used to fetch them $1,200 a month now brings $850, Rex Fritchey said. ‘We refinanced the house and now we are upside down,’ Sarah Fritchey said. ‘It’s like you’re in a free fall. Someone has to stop and catch you.’”

“The vacant house next door has been gone more than a year, but Patricia Beck still has to deal with the consequences. The now-empty lot beside her home in Norfolk’s Lindenwood neighborhood has attracted drug users and vagrants, trash and trouble. Beck would like to buy the lot, but there’s a problem: No one will claim ownership. The company’s bankruptcy has dragged, leaving creditors unpaid and some investors with houses they don’t want.”

“‘We just want this done,’ said Karen Crowley, an attorney representing two brothers who at one point owned 48 properties in Hampton Roads through CM Development. Her clients have lost an amount approaching $1 million.”

“Two more lawsuits were filed electronically Wednesday in Pitkin County District Court from prospective buyers of Viceroy condo hotel units seeking to break their purchase contracts and get their deposits back. That brings the total number of such lawsuits filed since early October to 19 — representing roughly a quarter of the units that were put under contract mostly in early 2008 when the local real estate market was hot.”

“The picture has changed substantially for Base Village since then, when it was anticipated the entire 600-unit project would be done in 2011, and people were signing up daily to buy units — which would mean more people to pay into the infrastructure taxes and assessments levied on the project. The things making the base a tourist attraction and promised to hotel unit owners — an arrival center, plenty of retail and restaurants — were in the works then, but on hold now.”

“Asked if he was willing to negotiate should the developer approach him, the plaintiff answered, ‘I’m an avid believer in Snowmass as a great family and vacation spot, but the situation at the Viceroy that exists today is very different than what I bought into two years ago. I simply want out of the project. This is not merely a tactic to renegotiate a lower price.’”

“Fort Worth’s riverfront plan promises to create development on the Trinity that will double the size of downtown. Is that a good thing? And can Fort Worth pull it off? Former Republican County Chair Steve Hollaren, an accountant, points to high end condos near downtown that sit vacant and questions whether there’s a market for more on the water.”

“Steven: ‘The high-end condos have been overbuilt. You’re talking about putting properties in there that the average citizen is not going to be able to afford. A lot of developers that have high end projects - I’m talking about a half million to million dollar condos- in the city right now are having trouble moving them.’”

“House Financial Services Committee Chairman Rep. Barney Frank (D-MA) issued the following statement regarding recent press reports on FHA loan limits: ‘The reason Congress recently changed FHA (and GSE) practices to allow higher cost loans was to ensure that affordable mortgage credit was available to middle income families in areas with higher priced homes…Instead of representing a financial threat to FHA, allowing these higher priced loans allows for more geographical diversification for FHA. And, the just recently completed audit of FHA concluded that higher cost loans actually have a lower claims rate than lower cost loans.’”

“At a realtor tour meeting of the Silicon Valley Association of Realtors last week, California Association of Realtors Chief Economist Leslie Appleton-Young told realtors…(she) expects the jobs sector ‘will get worse before it starts to get better.’ She doesn’t see that happening unless new jobs are created.”

“On the plus side, sales are rebounding and it’s a bonanza right now for first-time homebuyers. However, Appleton-Young remains concerned about financing issues, including financial literacy. She wonders how the market will do ‘without (the) training wheels on the bike’ provided now by federal government programs such as the tax credit. She is also concerned about financial literacy, as 21 percent of this year’s homebuyers admitted in a survey they did not know or were not sure about the terms of their loan.”

“‘This is just unacceptable,’ she said.”

“Most years, the Charlotte Chamber’s economic forecast has offered a low-key, collegial atmosphere. Not so today, as Duke Energy CEO Jim Rogers offered a harsh assessment of the fledgling recovery and contradicted the rosier scenarios outlined by the president of the Richmond Federal Reserve and the top executives at Bank of America and Wells Fargo & Co.”

“Rogers described Wall Street and Washington as too narrow-minded to make the tough decisions required to cut deficits and lay the foundation for long-term growth. ‘What we have had an incredible duty to is put our head in the sand,’ Rogers said of the past few years in business and politics.”

“Despite being part of a panel that included major bankers, Rogers showed no heistancy to find fault. And Jeffery Lacker, the Richmond Fed president’s presence failed to dissuade him from making the assertion that the Fed and Washington politicians will only ‘print more money’ rather than enact more rigorous policies as circumstances demand. BofA’s Ken Lewis and Wells Fargo CEO John Stumpf and Lacker conceded some of Rogers’ points even as they defended their positions that the economy will make some strides in 2010. Failing that, they turned to gallows humor.”

“‘Remember The Gong Show?’ Lewis asked after Rogers closed his remarks. ‘If he starts that again next year, give him the hook.’”

“Sen. Bernie Sanders upped the ante on congressional Fed-bashing Wednesday, seeking to block Ben Bernanke’s nomination to a second term as chairman of the Federal Reserve Board mere hours before his confirmation hearing. ‘“The American people want a new direction on Wall Street and at the Fed,’ Sanders said. ‘They do not want as chairman someone who has been part of the problem and who has been responsible for many of the enormous difficulties that we are now experiencing. It’s time for a change at the Fed.’”

“The signatories make up a mind-bending group: on the right, conservative kingpin Grover Nordquist and Phyllis Schlafly; on the left, liberal economist Dean Baker. ‘This situation was totally preventable if [Bernanke’ just took the housing bubble seriously. I simply cannot understand how he thought the economy could withstand the collapse of an $8 trillion housing bubble without serious consequences,' Baker said in an e-mail, calling Bernanke second only to former Fed Chairman Alan Greenspan in terms of blame for the crisis. 'If a Fed chair doesn't get fired for bringing the economy to the edge of collapse and for leading it to double-digit unemployment, what do you have to do to get fired from this job?'"

"In recent months there have been a growing number of public notices of 'foreclosure sales' of homes in Buffalo published in the Buffalo Bulletin, but local bankers do not see the problem as being as serious as it was during the recession of the 1980s. Dean Bjerke, retired banker who was an officer with the Buffalo Federal Savings and Loan Association (now known as Bank of Buffalo), said the bank took ownership of more than 40 homes when the economy tanked in the early 1980s."

"'Sometimes we found the keys to a home in the night-deposit box along with a note that the owners just couldn’t make any more payments and were leaving town. We knew a ‘fire sale’ of these houses would have a devastating effect on the local real estate market, and bank directors and officers decided to simply rent most of them out until the market improved,' says Bjkerke."

"President of Buffalo Federal Savings and Loan at the time was Bill Perry, and Bjerke said Perry was adamant in his opposition to forcing an immediate sale of all of those homes. At the time they were getting pressure to market them immediately from bank regulators."

"The company held a meeting with local realtors, put all the properties in a hat and let them 'draw' for the rights (listings) to sell those homes as they could without placing prices under the current market values."

"This was done to avoid driving down property values in Buffalo and to reduce losses to Buffalo Federal Savings and Loan."

"There is nothing abnormal for corporate borrowers the world over to ask for rescheduling their debts, says a financial expert and economist from Saudi Arabia. Talking in the context of the state-owned Dubai World without naming it, Dr Mohamed Al Jebreen told The Peninsula late on Tuesday: 'Companies usually reschedule their debts.'"

"In remarks on the phone from Dubai where he was on a brief visit, Al Jebreeen said no lender ever gives corporate loans without adequate collateral. In the case of Dubai, the assets of the borrowing entity, which is presently in the throes of a controversy, should have pledged its assets (properties for whose development loans have been sought) as collateral with the lenders."

"'But the problem is that property prices are currently down almost 50 percent the world over, so they can’t be sold off to repay debts,' said Al Jebreen who holds a Ph D from a prestigious US university. 'I am sure that due to the slowdown in the real estate market globally the value of properties that are pledged as collateral with lenders are much less now than when the loans were taken.'"

"His argument implicit in the above statement is that Dubai’s debts can be rescheduled until the time the property market recovers so that it benefits both the borrowers and the lenders. Even in the US, especially Florida and California, property rates have declined by almost 50 percent in the aftermath of the world financial crisis. Some lending banks in the US are seizing properties which were pledged as collateral with them and selling these off at 50 percent lower rates to recover debts, he said."

"'So lenders in the case of Dubai can wait. The assets can be sold at a later date (when the market has improved). If these assets are sold right now, they (the lenders) aren’t really going to get anything, he said.'"

"Home, the aphorism tells us, is where the heart is. And when you own your home instead of merely renting it, your heart is supposed to swell with the pride of accomplishment. Purchasing a roof under which to rest your head is an essential part of the American Dream, we're told, a prerequisite to lasting happiness. But for others, the dream has turned into a nightmare. The housing boom, built largely on a shoddy foundation of unsustainable borrowing, has gone bust, leaving millions of Americans 'underwater'—meaning the money they owe on their mortgages exceeds the value of their homes."

"Statewide, foreclosures shot up 134 percent in October compared to the same period last year. And plenty of other Hawaii homeowners are clinging on by their fingernails. One of those people is former MauiTime graphic designer Kellee LaVars, who moved to the Mainland earlier this year. In 2003, she bought a condo in Kihei priced at $230,000. She says her lender sold her on a two-part, no-money-down adjustable rate loan and convinced her that 'the beauty of this loan was that as the property appreciated over the first two years we could [refinance] and roll both into a single loan with a fixed rate based on the equity we would accrue. He made it sound easy and logical.’”

“Shortly after she bought the condo, Kellee lost her job. She stayed on-island working as a freelancer, but then came word that the monthly payments on part of her loan were going to rise from $1,000 a month to almost double that. Kellee says it was ‘a huge shock,’ as she’d been assured her payments would never go that high. She went looking for refinance options, but found it nearly impossible to qualify since she was recently self-employed. A spiral of missed payments, paperwork and unfulfilled promises followed, and Kellee now jokes she’s ’so far underwater, the fish down here have no eyes.’”

“I ask her who she blames. She says she puts ‘a lot of it on the brokers who were willing to tell us anything to sell the loan,’ and characterizes them as ‘charlatans at best, liars at worst.’ At the same time, she accepts responsibility ‘for taking their word and not reading the loan [documents] thoroughly.’ Ultimately, she says, she was another victim of the failing economy: ‘It’s hard to pay a loan or get a new one when you’re underemployed or unemployed.’”

“Some will say it’s a matter of personal responsibility, that people who got in over their heads should have known better. There’s truth in that. But take a society that promotes home ownership as a noble goal laced with tax incentives, add aggressive lenders peddling too-good-to-be-true deals and mix in a dash of good, old American get-rich-quick fever and you’ve got a recipe for the crisis we’re currently facing.”

“In the end, making a major financial investment because it’s what you’re ’supposed’ to want or because some broker has put dollar signs in your eyes is irresponsible at best. Home may indeed be where the heart is. But sometimes it’s better to use your head.”

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