The Housing Bubble

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A report from the New York Post. “Thousands of Americans expecting to keep their homes after starting trial modifications on troubled mortgages could wind up in foreclosure anyway, thanks to a murky technicality known as the investor-based denial. Since launching its Home Affordable Modification Program (HAMP) last year, the government has buried in the fine print that not all 60-day delinquent loans are eligible — and one major exclusion is investor contracts that preclude modification.”

“In many cases, a shadowy investor or group of investors actually owns the debt. These investors can put the kibosh on converting a trial modification to a permanent deal, without the homeowner even knowing the investor’s identity or reason for rejecting the workout. Many homeowners undertake trial modifications — with a reduction in monthly loan payments — only to be told months later that they can’t convert to a permanent modification because the investor won’t allow it and they now owe thousands in back payments.”

“‘A lot of times there are no restrictions, and if there is one, it is usually limited [and] does not prevent the servicer from modifying under HAMP,’ says Margot Albert, staff attorney with Staten Island Legal Services. ‘[Servicers are] using any investor restriction as an excuse not to modify loans, even if there is another way under HAMP.’”

“Natalie Reyes fears she will lose her home after getting a confusing investor-based denial. Reyes bought a modest two-bedroom house in 2006, moving her twin daughters from a rough-and-tumble Brooklyn to Staten Island and a better shot in life. Reyes scaled her real estate dreams to fit her budget as a single mom and New York City employee. But when an FHA loan at 4.25 percent fell through just days before her closing, she believed a smooth-talking broker who promised easy refinancing on an adjustable-rate mortgage. Rather than lose her deposit and the house, she took an ARM at 7.625 percent.”

“By completing three trial payments and submitting the appropriate paperwork, Reyes expected her loan would then convert to a permanent modification, as outlined in HAMP guidelines. Instead, she got the shocking news that her modification was denied. Reyes continues to make the payments agreed to in her trial modification, and has turned to Staten Island Legal Services for help.”

“‘Hopefully Wells Fargo [and] whoever is making this decision gets to know that behind this loan number there are people, struggling people putting all their efforts and savings on the line,’ said Reyes. ‘If I lose my house I’m walking out with nothing, and hopefully they realize this.’”

The Long Island Herald. “Nassau County financial and real estate experts tackled the problem of foreclosures at a roundtable discussion. Foreclosures and distressed mortgages have been a huge issue in Nassau County for years, with homeowners falling victim every day. ‘Foreclosures in New York are the highest in the nation,’ said County Executive Ed Mangano, whose office spearheaded the event. ‘Our goal here in Nassau County is to keep people in their homes. We have aggressive programs to help people find housing, but there’s no better way to avoid emergency housing than to try to keep people in their present homes.’”

“Mangano concluded that the responsibility to help homeowners in Nassau County fell to the government, because the problem had grown too big for there to be one easy answer. ‘It’s government’s responsibility to help people find housing, because I think that government is somewhat responsible for what has occurred,’ he said. ‘It’s a result of very poor policies with respect to lending. The practical effect of this is that the housing market was artificially heightened.’”

The Buffalo News. “Andrew Cuomo promised to ‘transform the lives of millions of families across our country’ when as HUD secretary he announced his historic plan to increase home ownership. Eleven years later, many experts think that much-heralded transformation played a role in the devastating subprime mortgage meltdown and the worst economic downturn since the Great Depression.”

“‘They should have known the risks were large,’ said Edward J. Pinto, former chief credit officer at Fannie Mae. ‘Cuomo was pushing mortgage bankers to make loans and basically saying you have to offer a loan to everybody.’”

“‘He was a contributor in terms of him being a cheerleader, but I don’t think we can pin too much blame on him,’ Dean Baker, co-director of the Center for Economic and Policy Research, said of Cuomo’s role in the subprime crisis. Baker sees Cuomo as a contributor because he advocated a philosophy that almost everyone should be able to own a home. And yet, he thinks others, most notably mortgage lenders and brokers, were the real culprits.”

“Of all the initiatives endorsed by Cuomo, first as assistant HUD secretary and later as the agency’s top guy, none is as controversial as the affordable housing goals he imposed on Fannie and Freddie with the blessing of the White House and Congress. In reality, what those goals meant was to increase from 42 percent to 50 percent the percentage of affordable housing loans Fannie and Freddie were required to buy each year.”

“‘It will strengthen our economy,’ Cuomo said at the time, and ‘it will help ease the terrible shortage of affordable housing plaguing far too many communities, and it will help reduce the huge homeownership gap dividing whites from minorities and suburbs from cities.’”

“Cuomo declined to comment for this story, but his campaign spokesman suggested it was the Bush administration, not the Clinton administration, pushing Fannie and Freddie into the subprime market. ‘The GOP is trying to cover up the Bush administration’s complicity in allowing Wall Street and the banks to turn mortgage lending into the Wild West,’ spokesman Josh Vlasto said in a statement. ‘It is a well-established fact that those institutions were the main source of risky lending.’”

“Not everyone shares the view that Cuomo is completely guilt-free. ‘He definitely played a role,’ said Arnold Kling, a former economist at Freddie Mac who wrote about the subprime crisis on behalf of the Cato Institute, a conservative think tank. ‘Clearly, he decided to make a name for himself by trying to push the envelope.’”

“Why was it so bad, so unwise to expand homeownership opportunities for lower-income families? Kling says the government’s mandated new goals put pressure on Fannie and Freddie to adopt looser lending standards and, in the end, buy the type of risky loans it historically had avoided. ‘It promoted housing speculation, not homeownership,’ Kling said, ‘and the effect on neighborhoods has been devastating.’”

“Experts say the pressure to buy more-affordable housing loans resulted in new mortgage products, most notably low- or no-money down loans that brought more homebuyers into the market and ultimately created higher home prices. ‘He put the kindling on the fire,” said Russ Roberts, an economics professor at George Mason University. ‘What the requirements on Freddie and Fannie did was to push up the price of housing and that made it possible to lend money to people with no money down.’”

“Roberts thinks there’s plenty of blame to go around, but that Clinton and Cuomo deserve some of it. ‘It was a bipartisan mistake,’ he said. ‘And it was a mistake because it promised a free lunch that wasn’t free.’”

“The argument that Cuomo’s expanded housing goals led to the subprime crisis and the collapse of Fannie and Freddie is not universally accepted. In fact, there are experts who say the real culprits are Fannie and Freddie. They argue that the two companies got into trouble, not because of Cuomo’s new affordable housing goals, but because the two finance giants were trying to increase market share and profits.”

“‘I think Andrew Cuomo and his staff have gotten a bad rap,’ said Judy Kennedy, president of the National Association of Affordable Housing Lenders. ‘It makes me crazy that people blame the goals. It wasn’t the goals. It was plain old-fashioned greed.’”

New York Magazine. “In the wake of Scott Brown’s victory in the race for Ted Kennedy’s former Senate seat, the prospect of passing health-care reform—and the rest of Obama’s first-term agenda—suddenly seemed dim. So the president had decided to pursue the obvious, logical course: He had decided to change the subject. The topic to which Obama now shifted was financial reform, in particular to the matter of speculative, big-casino activity by the nation’s banks.”

“‘I’m proposing a simple and common-sense reform, which we’re calling the Volcker Rule—after this tall guy behind me,’ Obama declared. ‘Banks will no longer be allowed to own, invest, or sponsor hedge funds, private-equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so—responsibly—is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private-equities funds while running a bank backed by the American people.’”

“Wall Street’s reaction to the unveiling of the Volcker Rule came swiftly and was even harsher than Geithner had feared. The Dow promptly plunged 213 points, with bank stocks leading the way down. ‘It was like the White House said, ‘Okay, we lost Massachusetts, health care is screwed, so let’s go after Wall Street,’ says the CEO of one of the nation’s biggest banks. ‘And for a lot of Wall Street people, it was like, ‘Okay, first you slap us in the face, now you kick us in the balls. Enough is enough. I mean, we’re done.’”

“One night not long ago, over dinner with ten executives in the finance industry, I heard the president described as ‘hostile to business,’ ‘anti-wealth,’ and ‘anti-capitalism’; as a ‘redistributionist,’ a ‘vilifier,’ and a ‘thug.’ A few days later, I recounted this experience to the same Wall Street CEO who’d called the Volcker Rule a testicular blow, and mentioned I’d been told that one of the most prominent megabank chiefs, who once boasted to friends of voting for Obama, now refers to him privately as a ‘Chicago mob guy.’”

“Do all your brethren feel this way? I asked. ‘Oh, not everybody—just most of them,’ he replied. ‘Jamie [Dimon]? Lloyd [Blankfein]? They might not say Obama’s a socialist, but they come pretty close.’”

“Considering the lengths to which the administration had just gone to rescue Wall Street from collapse, all this behavior might strike a (rational) person as ungrateful and even churlish. One explanation for it revolves around the industry’s endemic twin defects: short-termitis and amnesia. Another, not inconsistent, theory is that the money changers aren’t merely forgetful but mildly deluded.”

“‘They’ve created a narrative where irrational actions by a few people plus the nature of government intervention forced them to do things inconsistent with their free-market philosophy and regular way of handling their business,’ offers a Democratic financier. ‘So, yes, they took the TARP money, but only because they had to. None of them are sitting there saying to themselves, ‘You know, I was responsible for this crisis. Therefore, I’m really grateful to the government that it stepped in.’ This is not the narrative they have in their heads.’”

“Considering how close the financial system came in 2008 to Armageddon, the consensus for imposing new rules and greater order was nearly universal (among the sane, at least). Yet that does little to lessen the sense of shock—of violation, really—that Wall Street feels. Whatever the effects of the bill, among them will be neither an end to the too-big-too-fail doctrine nor any curb on what the sharpest Wall Streeters see as the central threat to the system’s stability: excessive financial leverage.”

“Geithner, Summers, and Obama had little interest in tackling those matters, not because they are indentured servants to Wall Street but because at heart they are all technocrats who believe the system doesn’t need to be rebooted or downsized, merely better supervised.”

The New York Times. “The first signs of financial turmoil came at Riverton Houses in Harlem. Then came Stuyvesant Town and Peter Cooper Village on Manhattan’s East Side. Now a third complex built by Metropolitan Life in the 1940s for veterans and middle-class families has run into financial distress after being purchased by speculators during the recent real estate boom.”

“The owners of the sprawling Parkmerced apartment complex in San Francisco announced this week that they would default on their $550 million mortgage, which comes due in October. ‘The landscape has changed dramatically,’ P. J. Johnston, a spokesman for the owners, said in an interview. ‘The economy has taken a major hit. Many properties are facing default.’”

“‘It’s pretty interesting that they have all ended up in the same place,’ said Andrew Florio, an analyst at Real Capital Analytics, a research firm. ‘People assumed they could boost revenues by kicking people out and raising rents.’”

The New York Observer. “On the same day that one Times real estate reporter wrote that the office market appears to have bottomed out, another argued pretty much the exact opposite. Thanks to the phenomenon known as shadow space, which The Observer wrote about in 2008, the oft-cited Manhattan vacancy rate—a key measure of the health of the office market—may well be artifically low.”

“As The Times explains it: ‘According to the research firm CoStar Group, nearly 18 million square feet of unoccupied office space in Manhattan has not been factored into the market’s vacancy rate. This so-called shadow space consists of individual desks as well as entire floors that are empty after layoffs and consolidations. Because these vacant areas are not for rent, they are not recorded anywhere and so are hard to pinpoint.’”

The Times Union. “New Yorkers who own homes are proud of their properties. They consider home ownership a key piece of the American Dream. They believe real estate is a terrific investment. But there’s one component to home ownership that New Yorkers consider a major aggravation: Property taxes. Indeed, new poll results from Siena Research Institute found that 75 percent of respondents consider their property taxes too high.”

“Concern about high property taxes was most pronounced among respondents who live in the suburbs of New York City, but upstate New Yorkers were more likely than homeowners in New York to describe their property taxes as too high. ‘The suburbs were off the charts,’ said Don Levy, director of the Siena institute. ‘But upstate, there’s still a strong upswell of opposition to real estate taxes.’”

“The survey, sponsored by the New York State Association of Realtors, was Siena’s first poll devoted entirely to real estate and home ownership issues. Respondents seemed relatively unconcerned with the housing downturn of the last few years, with 62 percent saying they believe the value of their home has increased or at least stayed the same over the last year, while 34 percent believe their home value has decreased.”

“Meanwhile, 69 percent said the value of homes in their community will increase over the next five years. Just nine percent expect a decrease.”

The New York Daily News. “Donld Trump charges would-be moguls up to $35,000 to ‘learn from the master’ at his online Trump U. For the mogul, it’s a win-win proposition. For many who pay up - not so much. Those complaining include dozens of retirees, veterans, laid-off workers and seniors living on fixed incomes, records show. In letters, e-mails and interviews, they charge they were pressured to max out credit cards or draw down a 401(k) to enroll in courses they found useless - then were refused refunds.”

‘The claims, which don’t involve Trump personally, focus on two for-profit firms: Trump University, the nonaccredited, Web-based school he founded in 2005, and Trump Institute, a training center that paid him a licensing fee to hold real estate seminars under his name. Trump execs admit they weren’t happy with the quality of customer service provided at the Trump Institute and say they’ve been phasing out the licensing agreement.”

‘Frank Kruppenbacher, a Florida lawyer who represented Trump Institute, said it was the other way around - the Institute was cutting its ties to Trump. ‘We thought it best to no longer do business with Mr. Trump’s organization,’ he said, declining to elaborate.”

“‘The vast majority of people love us,’ Trump said. ‘Thousands and thousands of people have taken our courses, and very few have complained. … There are plenty of people who went to Harvard and did very poorly, and there are plenty of people who went to Trump University and did very well.’”

“Not all Trump U. customers are unhappy. ‘I’m about to flip a house I bought in foreclosure for a $50,000 profit, and a Trump mentorship made that 100% possible,’ said Marla Rains-Colic, a St. Louis sales rep who paid the school $25,000.”

“Tarla Makaeff, a California fashion designer, lost $80,000, including interest and expenses - and got mentors who disappeared or didn’t return calls, she says in court papers. ‘The primary lesson Trump U. teaches its students is how to spend more money buying more Trump seminars,’ said Amber Eck, a partner in the San Diego-based law firm Zeldes & Haeggquist.”

“For Patricia Murphy, a Bronx teacher, Trump Institute was a disaster. She says she blew $15,000 on ineffective seminars, software and mentoring. ‘I took out most of my life’s savings … maxed out my credit cards and badly damaged my credit rating,’ she said. ‘What do I have to show for it? Big bills, interest payments, finance charges - an awful lot of stress.’”