The Housing Bubble

It’s Friday desk clearing time for this blogger. “A group of B.C. condo owners say they were unfairly pressured by a national developer into paying much more than their condos are worth, while the developer secretly gave their neighbours big discounts. Jagdish Lal and several other buyers had agreed to pay developer Amacon a premium for the condos in 2007, when the B.C. market was hot. The condos had not yet been built. ‘This is the first developer I know who has done this — and I’m disgusted by it,’ said Jagdish Lal, who paid full price for his two-bedroom condo last year.”

“The 240-unit Surrey complex, called The Morgan, dropped significantly in market value before the units were completed early in 2009. Several owners then found their banks were no longer willing to grant mortgages for the initial price. ‘I asked Amacon for a discount,’ said Lal. ‘I said ‘I am having trouble completing.’ They said ‘no — you will be sued.’”

“‘We never thought of holding out, because it’s never been an issue for us,’ said owner John Miller, who also paid full price. ‘You sign a piece of paper, you honour your contract.’ His wife Mary said doing the right thing cost them dearly. ‘Sucker you. Too bad for you — snooze you lose. That’s the way the developer played the game,’ she said.”

“The Obama administration will give $3,000 for moving expenses to homeowners who complete such a sale—known as a short sale—or agree to turn over the deed of the property to the lender. It’s designed for homeowners who are in financial trouble but don’t qualify for the administration’s $75 billion mortgage modification program.”

“A short sale appears to be the only way out for Brandee Chambers of Las Vegas. She got into trouble during the housing boom by taking out a risky loan against her home and using the money to buy two investment properties in Phoenix. She later lost those two properties to foreclosure, and now she is trying to sell the home she lives in for $209,000, but the mortgage balance is $350,000.”

“Chambers, who owns two hair salons, says she would rather stay in her home, where she lives with her 14-year old son. But she had no luck getting help with her loan. She said she’s resigned to scaling back her lifestyle and renting out an apartment. ‘I’ve had to accept a lot in the last year,’ she says.”

“As the Treasury Department released the updated March figures this week, a congressional oversight group panned the $50 billion plan, saying it’s not keeping up with the pace of the housing crisis and that so called ‘permanent’ modifications, which are really only good for five years, are just delaying the inevitable; more mortgage defaults. ‘The redefaults signal the worst form of failure of the program: billions of taxpayer dollars will have been spent to delay rather than prevent foreclosures,’ the Congressional Oversight Panel report stated.”

“One problem in Florida, which is noted in the congressional report, is the high number of homes where the borrower owes more on the loan than the home is worth. That’s the situation for Margate resident Wayne Henthorn, who bought his home in 2007 and is now about $120,000 underwater. Henthorn, requested a loan modification in July 2009 after the birth of his second child. Even with both he and his wife working they struggled to pay for day care and the mortgage.”

“The couple was awarded a trial modification that saves them $350 a month. Nearly a year later, they still don’t know if they’ll get a final approval. ‘Earlier this week, my wife called and they said we weren’t approved, then we got a letter Wednesday saying it had been sent to an underwriter and was in the final stages of approval,’ Henthorn said. ‘It’s so aggravating.’”

“Some homeowners are choosing to miss monthly payments rather than pour more money into homes that have lost 30 percent in value. ‘People who have prime jumbo loans, people with good jobs, with assets and nice cars are talking a hard look at this investment and making a decision, a conscious decision, to strategically default on their loans.’ explained Bankruptcy attorney Chip Parker in his Jacksonville, Florida office. ‘These are professionals making business decisions about their homes. Subprime is over — these are Alt-a and option arms loans….people with 700 and above credit scores. They are treating their homes like a business deal.’”

“85-year-old Joe Lerner had hoped that the home he built on Harborview with his wife June would be their nest egg. But a slowdown in his business and plummeting property values in the neighborhood are forcing the couple into an unthinkable decision. ‘We are faced with either selling the house at a very low price or going into foreclosure’, said Lerner. They have missed the last three mortgage payments. ‘Not only does it not make sense to pay it - it’s gotten to the point where we don’t have it. This was our nest egg that we invested here. This would be our retirement and as it has worked out the exact opposite has come about. We are in a pickle right now.’”

“‘We just adore it. It has just about anything anybody would ever want in it…but at the same time nobody can afford to buy it right now,’ says Joe’s wife June. ‘Today nothing is normal. Everything is upside down. We are just riding it out with along with a lot of other people and there are a lot of houses out in the harbor that are for sale that you would never expect.’”

“The economy improved, both in the nation and in the mid-Atlantic region, the Federal Reserve system’s latest Beige Book economic snapshot reported yesterday. The services and finance sectors saw mixed conditions, with a North Carolina property management executive reporting ‘the repo man is busy,’ the Richmond Fed said.”

“Demand for commercial and industrial loans was weak, bankers told the Fed. Housing sales improved, but prices were flat in Richmond and down in Fredericksburg, where a real estate agent reported that ‘banks seem to be willing to take anything within reason to reduce their holdings of foreclosed properties.’”

“Bank of America, the nation’s largest mortgage lender, ramped up its foreclosure activity in March, sending hundreds of letters warning delinquent borrowers in the region that it could sell their homes at auction in as little as three weeks, according to North County Times analysis of data from ForeclosureRadar. The bank said the increased activity was a natural consequence of borrowers running out of options.”

“‘My Bank of America asset manager told me we’d really start to get hit with inventory in mid-May to June,’ said Teri Garcia, a real estate agent based in Escondido who sells Bank of America foreclosures.”

“Garcia said the local supply of foreclosed homes has been low all through the winter. She was thrilled to hear that more homes might be coming onto the market this summer. ‘Let’s get them on the market, get them sold, and get through all this,’ she said.”

“Carlton Boujai, treasurer of the Maryland Association of Realtors, and a former president of the local Realtors organization, said federal tax credit program, offering $8,000 for first-time buyers and $6,500 for other eligible buyers, has not been as large a factor in the market as expected. ‘Only 29 percent (nationally) of buyers said they purchased a home because of the tax credit,’ he said.”

“Sasha Scaun, sales manager with Wormald Cos., said people are looking to capitalize on the tax credit, but many are under the false assumption that it will be extended. There is no plan to lobby or fight for the extension on Capitol Hill, ‘as they know it is futile,’ Scaun said. ‘There were thousands of fraudulent cases and the government is going to spend time investigating those cases before they revisit extending the credit.’”

“Scaun said the market needs to recover on its own and let things play out. ‘People are pricing their homes as aggressively as they can, but there is a limit to what they can reduce to,’ she said.”

“Bankruptcy filings in the Tampa/Fort Myers division jumped nearly 21 percent in the first quarter, a pace that would smash last year’s record. On the personal bankruptcy side, industry players say the single-biggest driver is the ailing housing market. Chapter 13 can help homeowners avoid being forced to pay off second mortgages or home equity loans. That, at least in part, could help explain the rise in popularity of Chapter 13 filings, especially given Florida’s current housing crises.”

“‘Some of those people have used their homes as a piggy bank for a number of years,’ said Smith, the bankruptcy trustee in Tampa who specializes in Chapter 13 filings. ‘Now they’re breaking the piggy bank and throwing it away.’”

“The bankrupt Lake Las Vegas development is seeking court permission to hire a high-powered Dallas law firm to file fraud lawsuits against former investors in Lake Las Vegas, including four Texas billionaires. Conditions at the community aren’t likely to improve soon, Lake Las Vegas says.”

“‘During 2009, 42 new homes have sold at prices that are up to 70 percent less than previous closing prices for the same type of home,’ attorneys for Lake Las Vegas said in an April 2 court filing. ‘Conversely, while foreclosures were at a record high within the community, record levels of resales also occurred. For calendar year 2009, 294 resales have been consummated at prices up to 80 percent below their original purchase prices (some of which were purchased less than two years ago).’”

“Just after lunch Friday, in a nearly empty courthouse foyer, a pillar of Chester Trabucco’s once-great estate crumbled. It’s neither the first nor the last to go. Records show creditors are closing in from all sides on Trabucco’s assets in Astoria. Trabucco said his fall from grace mirrors that of other commercial real estate developers: Ill-timed investments in riverfront condominiums sealed his fate. ‘It’s a far cry from ‘It’s a Wonderful Life’ where everybody chips in to help a guy out,’ Trabucco said. ‘You can’t really blame them.’”

“Four years ago, the Ocean Club, a 242-unit condo project that promised buyers Miami beach style in the shadow of Kelly’s Roast Beef. The market’s frothy peak brought in deposits on obscenely priced units, and the crash that followed shortly thereafter relegated the project to a scrap heap overflowing with speculative projects long on ambition and short on cash.”

“The project’s developer, Steven Fustolo, didn’t quit when the banks told him they’d suddenly decided to stop pushing luxury condos into an already overcrowded pipeline. The luxury bubble popped, croaked the Ocean Club, and left Fustolo with little more than some nice architectural drawings and a few acres of undeveloped land on the beach, according to the bankruptcy filing. It also stuck him with a $13.6 million pre-development loan he had no way of paying off, and $2.4 million in unpaid legal costs, architecture fees, and consulting bills. The project went from being appraised at $82 million, to $3 million, in less than two years, according to appraisals filed with bankruptcy court.”

“Real estate investors across the country are now walking away from failed bets they made during the boom. They’re tossing back the keys to properties now worth far less than the mortgages on them. Not Steve Fustolo. The Burlington accountant personally guaranteed much of the Ocean Club’s debt, according to filings in the Suffolk court case. It’s likely that a judge will soon order the Ocean Club site sold at auction, and it will sell for pennies, possibly leaving Fustolo on the hook for more than $20 million.”

“Number-crunching economic analyst Jonathan Schechter finds that real estate prices in Jackson Hole have bottomed out at prices below those of 2001. ‘… the crash has been so great that, corrected for information, it wiped out nine years’ worth of gains in mean prices,’ he writes in the Jackson Hole News & Guide.”

“The Bay Area Economic Club featured Jan Hopkins, president of the New York Economic Club, and former CNN anchor and correspondent gave an uplifting presentation. Reflecting on the financial crisis, Hopkins discussed how media frenzy and the surge in consumer spending were major causes of the problem. She also discussed what changes will need to be made to prevent it from happening again, regulation on Wall Street being one of them. ‘Wall Street is a small community where nearly everyone does what the guy next door is doing, except for some smart hedge fund managers who do the opposite and make a lot of money,’ said Hopkins.”

“Hopkins asserted that group-think is what led to the .com bust in the ’90s, the housing ‘bubble’ in the millennium, and what may become a bubble in the Asian market. It will continue to create bubbles that will eventually burst, if this behavior isn’t changed, she said. ‘Wall Street keeps score solely by adding up how much money is made,’ she said. ‘No one asks, what’s enough. There are other bubbles probably forming now, but we don’t really know where until the bubble bursts. If you see everybody rushing to get on a bandwagon it might be a good idea to go towards the exit. Being a contrarian often works well.’”

“You will be hearing a lot about the nation’s economy between now and November. Politicians hoping to keep their seats in the halls of power, or take one away from an incumbent, will tell you who’s to blame for this recession. Republicans will capitalize on the Obama administration’s struggling recovery effort and try to pin the tail on the donkeys, as in Democrats. Democrats are just as certain to point to eight years of benign neglect by the Bush administration.”

“Both sides are correct. It is the other guy’s fault — the fault of so many guys, in fact, that it’s difficult to know where to begin. There’s Alan Greenspan, former Federal Reserve chairman, who was a firm believer in Reagan’s deregulation approach. Greenspan was in Washington a few days ago, pleading his case, after accusations that he was asleep at the wheel as Fed chairman, missing obvious signs of the approaching collapse.”

“The aforementioned President Bush II contributed to the mess by promoting home ownership but with less mortgage industry regulation, laying the foundation for the housing bubble that ended with the pop heard around the world.”

“President Clinton signed laws that tore down the wall of regulatory separation between commercial and investment banking — laws that had been in force since the Great Depression — contributing directly to the growth of mortgage derivatives, which was the sharp point that burst the housing bubble.”

“Congressman Barney Frank joined the Bush team briefly in encouraging Americans to buy homes — no matter what the cost — through federal subsidies to Fannie Mae. Sen. Chris Dodd fought efforts in Congress to have better controls on mortgage titans Fannie Mae and Freddie Mac, adding to the problems those entities would later encounter.”

“We could mention the names and transgressions of dozens of CEOs who steered their companies into insolvency while pulling down tens of millions a year in salary and bonuses. But we’re drawing to the end of our space here, and we need to name the chief culprit in the great economic meltdown of the early 21st century.”

“It’s us. As in we, the people. Americans too willing to buy now and pay later, running up mountains of debt, without any reasonable means of paying the inevitable bills. People too eager to buy into the notion that, if we don’t have the money to pay for a new car or a flat-screen TV, we can just charge it.”

“In the end, it all comes back to personal responsibility on everyone’s part. Now, let’s figure out how to fix this mess.”