The Housing Bubble

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It’s Friday desk clearing time for this blogger. “By this point in his life, Stephen Mann should be getting ready to relax and enjoy his retirement. Instead, the retired Massachusetts sheriff’s deputy is living a nightmare. His home is in foreclosure because of four mortgage refinances he says were brokered numerous times by a Somersworth mortgage company to many different banks, and which, despite his numerous attempts, he has been unable to modify. On March 29, a Belknap County Sheriff’s deputy came to him with the 30-day eviction notice. Mann said he was baffled when the people at IndyMac told him his loan documents listed his additional income — he makes fishing lures and sells them — as $73,000. ‘I’ve never made $73,000 in my life and I want to know where they got that number,’ he said.”

“‘I know I was stupid, but what happened to Obama’s program?’ Mann asked. ‘That’s what I want to know.’”

“Cuthbert Snyder’s small home in South Ozone Park, Queens, just doesn’t make sense to him anymore. Snyder owes $309,000 on a house that’s now worth about $150,000. Last year, his bank agreed to a three-month trial of a modification to his mortgage that brought his $2,100 payments down to $1,065, but the lender refused to reduce his payments permanently.”

“Yet Snyder has continued to pay $1,065 a month, putting him at risk of losing the home to foreclosure. ‘It’s not fair to pay this for a one-and-a-half-bedroom home. It’s not worth it,’ Snyder said. ‘If they don’t modify, I will walk away.’”

“Walking away from her mortgage was the last thing on Manhattanite Jodi Romanello’s mind when she purchased a second home in Port St. Lucie, Fla., four years ago. Romanello believed the three-bedroom house would be good investment and eventually a retirement home for her and her husband. But soon after buying the house for $218,790, her real estate taxes surged, pushing her monthly housing payments to $1,800 from $1,400.”

“Romanello contacted her lender about refinancing, but was told she wasn’t eligible. Two years ago, she stopped making payments. She tried a short sale, in which she would sell the property for less than what was owed on the mortgage with the bank’s approval, but could not find a buyer. Then last year, Romanello’s husband passed away unexpectedly. In February, the bank repossessed the home, now worth less than half what she paid for it.”

“Looking back, Romanello said she had ‘a lingering bad feeling’ about walking away from her obligations. Still, she believes she did the right thing. ‘They should not have given me this mortgage at my income level,’ she said. ‘Why should I suffer the loss all by myself?’”

“In the fourth-floor courtroom of the U.S. Bankruptcy Court of the Southern District of California, which serves San Diego and Imperial counties, Chief Judge Peter W. Bowie’s docket is overflowing. Juan Flores is the owner and sole proprietor of a local business, Carpet Care 4 Less. Throughout 2007, he saw his income plummet along with the national economy. ‘My business dropped off by 50%,’ he says.”

“As his client roster evaporated, Flores started drawing on credit cards and took out a second mortgage to the tune of $57,000 in order to stay afloat. In 2009, out of options and under threat of losing his home of 10 years, Flores filed for Chapter 13 bankruptcy. But now he is behind on his payments again, and Wells Fargo Bank wants to restart foreclosure proceedings. San Diego resident Flores is still unwilling to give up, though a skeptical Judge Bowie says he is inclined to dismiss the case. ‘Have you run the numbers to see if he can meet the payments on just unemployment?’ Bowie asks Flores’ attorney.”

“The attorney informs the court that her client needs 12 months to catch up with his payments, saying the problem is a back-property-tax issue of $908 a month that will be resolved in nine months. From the bench Bowie says, ‘I can do nine months, not 12.’”

“Flores, who has run his carpet-cleaning business for 30 years, is relieved. ‘I just have to work like hell,’ he says.”

“When Charles Riley paid $330,000 for a two-story house on the outskirts of North Las Vegas, there was plenty of work for an experienced painter like him. He paid off his compressors, generators and other equipment, and took out a second mortgage. ‘We got into one of those ARM (adjustable rate) mortgages, and the second year we were in this house the (monthly) rate went up, and then it went up again, and it kept going up,’ Riley said. ‘We were freaking out. … It was crazy.’”

“‘Even if they take off the second mortgage, the loan we are paying off is $264,000, which is about $150,000 more than this house is worth,’ he said. ‘”I am like 60 percent of the people out there. Somebody has to do something to help these people out because they are struggling to keep their homes.’”

“Donna Reardon, a retired school teacher, and Jim Conroy long ago made plans to move from the East Coast to Las Vegas. Now, five years after they arrived, the couple last month received their first foreclosure notice after the bank refused to lower the mortgage or authorize a short sale of their one-time ‘dream home.’ ‘We are not going to live long enough to recoup our purchase price,’ Conroy, 56, said of the home bought in August 2004 for $211,070. ‘I blame the banks. If they weren’t making credit available for people who had no business buying a home, they (developers) wouldn’t have built all these homes.’”

“Terry Connolly said he followed ‘the rules’ in 2004 before he bought a brand new home. He calculated his income-to-loan ratio to make sure he could afford the mortgage. He researched the neighborhood, the developer and the outlook for local real estate, he said. Six years later, Connolly has stopped paying his mortgage and intends to walk away from the single-story house he purchased for $163,000; in part because it’s worth far less but also because the senior citizen fears for his wife’s safety and his own.”

“Like others who moved to the neighborhood when homes were first built, Connolly said out-of-town landlords a couple years ago, after Southern Nevada’s unemployment rate began to rise, started leasing homes to low-income tenants who receive government assistance with their rent. ‘When you do everything the proper way, and then you see it crumble around you because of what other people did — the banks, the speculators — then you start to lose any feeling that you have a moral obligation to pay the loan,’ Connolly said.”

“On a busy street in Boston’s Dorchester neighborhood, real estate agent Curtis Howe walks up to a brick townhouse that was rehabbed about 10 years ago. It’s in a part of town where properties got way overvalued during the housing bubble. Howe says the outstanding mortgage was about $540,000; the property eventually sold for $275,000 in a short sale. That is a huge drop in value, and the lenders who were on the hook for that loan lost a ton of money. ‘When a property goes into foreclosure and becomes vacant, it’s vandalized, you have plumbing issues if the property isn’t winterized, and there’s nobody to maintain the property,’ Howe says.”

“The federal government is launching a new program Monday to encourage more short sales. The Treasury Department will offer lenders and homeowners incentives totaling more than $3,000. Laurie Maggiano, a director of policy at the Treasury Department, says: ‘We’re not here to make moral judgments about borrowers; we are here to stabilize the mortgage market,’ Maggiano says.”

“Susie Gharib: Alan Greenspan said today of course we made mistakes. Tom, the former chairman of the Federal Reserve was testifying on Capitol Hill about the financial crisis. Darren Gersh, NBR Correspondent: ‘At one point, Greenspan suggested members of Congress were overlooking their own role in bringing on the financial crisis by pushing homeownership for almost everyone. Greenspan: ‘Having gone 18 1/2 years before the Congress, there is a lot of amnesia that is emerging currently.’”

“Gersh: ‘It was not the Fed that caused the problem Greenspan said. It was the government-sponsored mortgage giant’s Fannie Mae and Freddie Mac who bought up sub-prime loans and inflated the bubble…Greenspan went on, arguing that even if the Fed had tried to stop sub-prime lending, it couldn’t. The Fed had little authority over Wall Street investment banks like Bear Stearns and Lehman Brothers, who were packaging sub-prime loans and creating complicated securities. And he said, Congress would not have allowed the Fed to threaten the housing market.”

“Greenspan: ‘And if in that midst of period of expanding home ownership, no problems perceived in the sub-prime markets. Had we said we’re running into a bubble and we’ll have to start to retrench, Congress would say, we haven’t a clue what you are talking about.’”

“Fed Chairman Ben Bernanke offered a relatively downbeat view of the economy during a speech in Dallas, suggesting he was in no rush to tighten monetary policy. Bernanke said the U.S. economy still faces significant headwinds, including a housing sector that has yet to recover convincingly and an ailing employment market. ‘We are far from being out of the woods,’ Bernanke said. ‘Many Americans are still grappling with unemployment or foreclosure, or both.’”

“Thomas Hoenig, president of the Kansas City Fed, reiterated his concern that the Fed’s ultra-low interest rate policies could have unintended consequences. ‘I am confident that holding rates down at artificially low levels over extended periods encourages bubbles, because it encourages debt over equity and consumption over savings,’ Kansas City Federal Reserve Bank President Thomas Hoenig told a business group. ‘While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust,’ he said.”

“Asset price bubbles are difficult to identify, but they occur ‘fairly frequently’ and policymakers need to be more aggressive than in the past in confronting them, New York Federal Reserve Bank President William Dudley said on Wednesday. The challenge of identifying bubbles as they occur ‘cannot be an excuse for inaction,’ Dudley said during a speech to the Economic Club of New York. ‘Recent experience strongly suggests that asset bubbles exist and their collapse can be very damaging’ to financial markets and the broader economy.”

“However, the New York Fed’s Dudley was reluctant to endorse using monetary policy to keep inflating asset price bubbles in check on Wednesday. Instead, he urged instead relying more heavily on regulation and verbal warnings — ‘leaning against the wind of conventional wisdom by speaking out against the dangers associated with the incipient bubble.’”

“Dudley differed from Kansas City’s Hoenig, saying interest rates, currently at a record low near zero, need to remain ‘exceptionally low’ to support a still fragile economy and create more jobs. ‘We are not getting the job gains we would like to see,’ Dudley said. ‘What that tells us is monetary policy has to remain on an easy setting,’ he said.”

“The housing market in and around Falls Church is now in boom mode, a veteran Falls Church-based real estate agent and her now-active real estate business partner told the News-Press in an interview this week. With ‘pent-up demand’ leading to prospective home buyers bidding against one another to drive offers above asked-for prices, these realtors think the outlook is bright for a widespread rebound of residential real estate values in Falls Church.”

“Falls Church-based agent Leslie Hutchison, who has been in the business for 25 years, said the current eight percent first-time home buyer federal tax credit has a lot to do with the current buying frenzy, especially for homes priced under $600,000. That tax credit is due to expire by April 30, but she doesn’t think that will slow demand. ‘It’s all about a pent-up market,’ she said. ‘Homes are no longer being sold below their market value or asking price.’”

“In addition to the tax credit…mortgage interest rates remain under five percent and many mortgages are up to 90 percent of value, meaning they require only a ten percent down payment. In addition, mortgages qualified by the Federal Housing Administration (FHA) require only a 3.5 percent down payment, and those qualified by the Veterans Administration (VA) are zero percent down. On top of this is the lesser-known fact that the federal government also offers a 6.5 percent tax credit for home buyers who are trading in their existing home for a new one.”

“(Agent) Stacy Hennessey also noted that the prospect of higher interest rates down the road is also driving a boom in the market now, and added that the rental market in the area is completely sold out. She said that the expiration of the federal tax credits program should not slow the frenzied level of home buying activity that is now underway.”

“‘There’s a lot of arm wrestling now going on among prospective buyers bidding up the value of the homes they want,’ Hutchison said, adding that real estate speculators began picking up bargains on the market months ago.”

“Charlie Rose talks to James Chanos of Kynikos Associates about the coming property bubble in China. Q: What makes it a bubble? A: What we define as a bubble is any kind of debt-fueled asset inflation where the cash flow generated by the asset itself—a rental property, office building, condo—does not cover the debt incurred to buy the asset. So you depend on a greater fool, if you will, to come in and buy at a higher price. We’re seeing behavior [we saw] in 2005 in Miami or ‘06 or ‘07 in Dubai.”

“This is high-end condos in major urban areas and high-end office buildings. Just to give you an idea, right now construction costs in China are starting to hit $100 to $150 per square foot in some cities. That doesn’t sound like a lot by Western standards, but it means a condominium basically presented to you with no floors, no walls, no appliances costs the average Chinese two-income couple $100,000 to $150,000 U.S. That Chinese two-income couple in their 30s probably makes combined $7,000 or $8,000 a year. You do the math.”

“Even if they were making $10,000 to $15,000 a year, they couldn’t carry a $150,000 condo. This is very similar to someone making $40,000 in the U.S. at the height of our bubble buying a $600,000 or $800,000 house. We know how that ended.”

“Istanbul residents can’t pick up a newspaper or turn on the TV these days without encountering ads promising potential real-estate buyers a magnificent modern life in the heart of the city. ‘We promise you a new, modern world,’ developers vow, offering ‘a glorious future’ to people who invest in one of the new high-rise residential communities that seem to be continuously under construction.”

“Others, however, say the demand for such homes is not as great as developers would like consumers to believe. ‘Why do you think there are so many ads? Because no one wants to buy these houses,’ said architect Erengezgin said, who also criticized the poor quality of materials used in much new construction, leaving the buildings with little insulation against noise or heat and structurally vulnerable to earthquakes.”

“Nizamettin Aşa, vice chairman of the Istanbul Chamber of Real Estate Commission Agents, agreed with Erengezgin about the relationship between the frequency of advertisements and the lack of demand. ‘It is the same with shopping malls. Construction companies build them without considering the results,’ he told the Daily News. ‘But now there are so many empty spaces in those malls and so many empty houses in the city.’”

“One of the Baltimore area’s most historically significant residences is headed for a foreclosure auction today, more than two years after owner and prominent businessman Stephen A. Geppi put it up for sale for $7.7 million amid the slumping housing market. He and his wife paid $4.8 million in 2004 for the 9-acre estate. The Geppis moved to another house before putting the 13,000-square-foot mansion on the market in January 2008. The estate is currently listed for sale for $3.6 million.”

“Karen Hubble Bisbee, an associate broker whose agency had the Cliffholme listing until November, said the house should have been listed for less to reflect price drops in the market. ‘Here are countless sellers, who have very special houses and had paid a great deal of money,’ she said. ‘Nobody could believe the market would drop as precipitously as it did.’”

“‘The dismaying thing to me as an economist is that 97 percent of economists never saw this coming. No one saw the tidal wave,’ said Kevin O’Brien, economics professor at Bradley University. Part of the reason economists failed to see recession looming is because changes in regulations covering home mortgages and who qualified for them was not fully understood. ‘Mortgage-backed securities did not recognize the housing bubble,’ he said”.