The Housing Bubble

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The Hartford Courant reports from Connecticut. “Investment giant Goldman Sachs & Co., facing federal charges of defrauding investors in selling them packages of risky mortgages, also could be investigated in Connecticut. ‘There may well be a factual and legal basis to consider state investigation … and my office has begun a preliminary review,’ said state Attorney General Richard Blumenthal. ‘The SEC’s allegations read like a ‘Sopranos’ episode,” Blumenthal said. “The SEC is accusing Goldman Sachs of constructing — at hedge fund manager John Paulson’s request — securities designed to fail so that Paulson’s hedge fund could make billions betting against them. It would be like Goldman selling consumers houses deliberately designed to collapse just so Paulson could collect the insurance.”

The Day in Connecticut. “Allegations Friday that Goldman Sachs defrauded investors of more than $1 billion didn’t exactly shock Chris Dodd, the Senate Banking Committee chairman struggling to win support for his overhaul of the nation’s financial system. ‘I’d like to tell you I was surprised,’ the Connecticut Democrat said. ‘But I’m not.’”

“In a civil suit filed in Manhattan, the Securities and Exchange Commission charged that Goldman, the Wall Street investment bank, created and sold a financial product that helped a hedge fund pocket huge profits from the collapse of the housing market. Goldman and one of its vice presidents stuffed the product - known as a collateralized debt obligation - with mortgage-backed securities that were riskier than they appeared and sold it to investors for a large commission, the SEC alleged.”

“‘As we are painfully aware, things were going on,’ Dodd said of the Wall Street implosion. ‘There were some making far too much money at the people’s expense - and without regard to its effect on the economy.’”

“Dodd couldn’t escape mention of the financial reform bill he’s crafted and which Senate Republicans have failed to embrace. ‘We must pass Wall Street reform to bring practices like these into the light of day and protect our economy from another devastating blow,’ Dodd said of the Goldman case in a statement.”

From Fortune. “Could the civil fraud case against Goldman Sachs be the break regulatory reformers have been looking for? The shift could pave the way for the enactment of reform legislation sponsored by Sen. Chris Dodd, who chairs the Senate Finance Committee. The latest version of the Dodd bill, introduced last month, hasn’t found a single Republican supporter.”

“‘This is going to have a major impact on the Dodd bill,’ said Simon Johnson, a finance professor at the Massachusetts Institute of Technology and co-author of 13 Bankers, a book calling for the biggest banks to be broken up.”

“The Dodd bill wouldn’t break up the biggest banks. But a measure offered Friday by Sen. Blanche Lincoln, D-Ark., would force them to spin off the businesses at the heart of the financial crisis and in this case — their highly profitable derivatives operations. ‘This is another example of how risky Wall Street behavior puts our nation’s financial system in peril and further illustrates the need for the strong reform that my legislation provides,’ she said.”

The New York Times. “The lawsuit could be a sign of a revitalized Securities and Exchange Commission, which has been criticized for early missteps in assessing the causes of the financial crisis. The agency appears to be tracing the mortgage pipeline all the way from the companies like Countrywide Financial that originated home loans to the raucous trading floors that dominate Wall Street’s profit machine.”

“In recent months, Goldman has been defiant in the face of criticism, repeatedly defending its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in. ‘We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,’ Goldman wrote.”

The Boston Globe in Massachusetts. “Butler Bank became the first financial institution in Massachusetts to fail in 16 years when state and federal regulators seized the small Lowell lender…and turned it over to the Federal Deposit Insurance Corp. The FDIC in turn arranged for all of Butler’s customer deposits and bank branches to be sold to People’s United Bank.”

“About 75 FDIC employees, wearing agency ID badges, were expected to work as late as midnight at Butler branches to handle the transfer to People’s United, sorting through documents and accounts, according to FDIC spokesman Eric Raines.”

“‘This is an anomaly,’ said Suzanne Moot, a Milton banking consultant who closely follows the Massachusetts banking industry. ‘This is a bank that specializes in a relatively risky form of lending — residential construction lending.’”

“Moot said it is possible one or two more struggling banks might fail in Massachusetts before the economy fully recovers, but doubted the problem would become more widespread.”

The Boston Business Journal in Massachusetts. “Butler Bank failed because of a raft of bad loans on residential construction projects in Massachusetts, New Hampshire and Maine. ‘One of the fastest growing banks in Massachusetts, Butler Bank has posted a staggering 30 percent annual growth,’ the bank said in its Dec. 8, 2006, press release.”

“Founded by the Pearson family in 1901, the bank built its reputation on being an aggressive construction lender. Its Web site once touted ‘98% of builders loans approved!’”

The Boston Herald in Massachusetts. “A Hub developer has sold the site of his planned luxury condominium project for $8.2 million. As the city’s real estate market tanked, Ted Raymond abandoned plans to turn the last empty lot in the Back Bay and an adjacent apartment building into a five-story luxury condo project. Each of the 4,000-square-foot units was expected to fetch up to $8 million.”

“‘The real estate market got a little soft on condos, so we felt it would be best to sell,’ said Raymond.”

The New York Post. “In just about every real estate cycle, you’ll find the wild-eyed dreamer — the person who makes the case that the moment is ripe to try something new. Something expensive. Something labor-intensive. Something that will change the face of the city as we know it. Of course, these dreamers only get a hearing during the boom years. Everything changes with a bust. But, yes, we admit that these visions can get pretty far afield before their patriarchs are led to a padded cell.”

“Our most recent real estate cycle was no different. ‘In this market, we’re suffering like everybody else,’ says condo developer Albert Marengo of Gary H. Silver Architects, which built the Observatory Place condo building and has two more East Harlem condo buildings set to open later this year. ‘Consumption of units has been very slow, and the ones that are selling are selling at such a reduced rate that there’s no way people can make any money on them.’”

“The Barclays Center is the crown jewel in the $4.9 billion Atlantic Yards project, which will include 6,430 new housing units (2,250 of which will be affordable). ‘Obviously, the timing of Atlantic Yards, that’s been deferred,’ says Brooklyn Borough President Marty Markowitz. ‘The original plans that we were so excited about back in 2004 — obviously the world’s changed.’”

The Downtown Express in New York. “Saying the Trump Soho New York condo-hotel has created 350 permanent jobs and will boost business for Downtown stores and restaurants, Donald Trump led a ribbon-cutting ceremony last Friday, officially opening the towering new building. As Trump was striding out of the room, I cornered him — well, actually, Trump looked like he was eager to talk to the media.”

“First question: Exactly how will the restrictive declaration covering condo owners’ use of their units be enforced? (Stays at the hotel are limited to no more than 29 days in a row within a 36-day period, and 120 days total per year.)”

“No problem, Trump said, confidently: It will all be done by ‘computer,’ and is a great system.”

“I then asked the millionaire mogul about the recently report by the Wall Street Journal that only a third of the building’s 391 units are in contract to be sold, and that it isn’t clear how many of them will actually close. That question he didn’t want to answer. ‘O.K., I’ll see you later,’ he said, then turned on his heel and walked out.”

“I bumped into Trump again in the lobby, and again asked about the reportedly slow sales, and this time Trump answered the question, sort of. ‘I think the building will do well,’ he said, adding, ‘We’re really involved in the management. We’re the managers — they’re the sellers,’ he said, referring to Bayrock and Sapir.”

“What of all the community opposition from Soho residents, who even filed a lawsuit against the project? ‘They’re all our friends now,’ Trump assured. ‘Everybody likes our building.’ As for the building’s gargantuan size, he stated, ‘We had a zoning that allowed us to build this tall, and we took advantage of that. I think it’s going to be a landmark in New York.’”

“In a telephone interview, Sean Sweeney, the Soho Alliance’s director, said he was looking at the Trump Soho at that very moment — but that only about one-third of its rooms’ lights were on. ‘Do you know what it’s like getting up in the morning and having to look at Donald Trump’s erection?’ he said. ‘I’d much rather cut it down to size.’”

The Times in New Jersey. “More than two years into the foreclosure crisis, the number of homes in Mercer County whose owners have fallen behind on their mortgages remains at historically high levels.’ This crisis is still going strong,’ said Markese Humphrey, director of housing and homeownership at Isles Inc., and a member of Trenton Mayor Douglas Palmer’s foreclosure mitigation task force. ‘You would think the rate would have slowed a year later, but no, it has not. It’s at a continuous rate, if not higher. There’s no drop anywhere. It’s very consistent in Hamilton, Ewing. We’ve got people as far up as Princeton, Hightstown, the whole of Mercer County.’”

“Trenton has the region’s highest foreclosure rate, particularly in its South Ward, where large numbers of older homeowners are losing their homes after becoming jobless, seeing their incomes drop or facing other personal crises, Humphrey said.”

“Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, attributed the persistently high foreclosure rate in part to adjustable rate mortgages that have recently reset, increasing their interest rates and requiring higher payments from cash-starved homeowners. In many cases, the owners are unable to refinance or take advantage of government-backed mortgage modification programs, she said.”

“‘Some are finding they can’t move into a lower rate mortgage because their property values have decreased,’ Salowe-Kaye said.”

The Asbury Park Press in New Jersey. “Idle New Jersey homebuilders don’t have to hurry back to the job any time soon, according to an industry expert. Instead, they should use this protracted bust which shows scant signs of a speedy recovery to rethink the housing needs of the future.”

“Analyst Jeffrey G. Otteau told a roomful of New Jersey builders Tuesday at Caesars Hotel and Casino that luxury McMansions on sprawling country lanes are dead. ‘The next crop of first-time buyers will be earning 17 percent less than their parents earned 30 years ago, so luxury housing is severely troubled,’ said Otteau.”

“While home prices will rise slowly, inventories will shrink over time and credit will loosen. Otteau predicted full recovery will be delayed until 2020. Baby boomers are not likely to bail the industry out because more are staying in their homes longer, then moving out of state to lighten their tax burden.”

From ABC News. “Never judge a house by its tax bill. That’s the lesson Don Newby, 65, is learning. The construction manager from Gibbsboro, N.J., is paying boom-era property taxes on a home that has lost 20 percent of its value in the past three years. He blames the Gibbsboro tax authorities, who haven’t reassessed property values in the town since 2003.”

“‘That’s absurd,’ says Newby, who pays $14,000 a year in taxes on a four-bedroom, bi-level modern house in the New Jersey township near Philadelphia. Newby, who was unemployed for a year after the economic collapse, says he believes the government is intentionally delaying new assessments to benefit from the lag as long as possible.”

“‘When you watch how property values have come down, it appears I could save almost $2,000 in taxes,’ he says.”

The Concord Monitor on New Hampshire. “New Hampshire’s real estate market showed signs of continued growth last month, as the number of home sales and median home prices both increased. But Realtors are hesitant to predict an immediate recovery, especially as a well-publicized government subsidy for new homebuyers is set to expire in two weeks.”

“‘It’s definitely picked up, and we have our fingers crossed,’ said Pamela Kenison, a Realtor in Concord. ‘We’re hoping that the end of the homebuyer tax credit doesn’t put the brakes on everything.’”

“Meanwhile, the number of foreclosure deeds in the state remains historically high. The most recent figures from the New Hampshire Housing Finance Authority show there were 326 foreclosure deeds in February - a new record for that month. Foreclosure deeds were also up 50 percent compared with the same month last year. Jane Law, communications director for the New Hampshire Housing Finance Authority, said the steady foreclosure rate continues to be the result of broader economic struggles, such as unemployment and wage cuts.”

“‘People have been saying the recession is over,’ Law said. ‘But that’s not showing on the ground yet for folks who don’t have jobs and are still trying to catch up. If you’re not working, the recession isn’t over yet.’”

The Union Leader in New Hampshire. “Home sale prices in New Hampshire have risen year over year for the first time since the housing boom went bust, and the president of the state Association of Realtors hopes that’s a sign that the ailing real estate market is beginning to recover. ‘I don’t want to call it a trend yet, but everything seems to be in place for that to be happening,’ said Monika McGillicuddy, a Realtor in Hampstead.”

“According to NHAR figures for the first two months of this year, the median sale price of a single-family home statewide was higher than last year at this time — the first time that’s happened since the peak of the housing boom in 2005. ‘To end the first two months of the quarter with the first price increase in something like 52 or 53 months, that’s significant,’ McGillicuddy said.”

“And it may be a good omen for homeowners who may want to sell but who have seen their home values drop steadily. According to NHAR figures, the median sale price for a single-family home has dropped 21 percent since 2005. That was when the median sale price of a home hit $270,000 for the year — a 112 percent increase from the $127,500 median price back in 1998.”

“Home values have been dropping steadily ever since. McGillicuddy views the drop in real-estate values as a market correction. When the median price hit $270,000, she said, ‘no doubt many buyers were priced out of the market. We knew there was going to be an adjustment,’ she said. ‘We were just going on a path that was totally unsustainable.’”