The Housing Bubble

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It’s Friday desk clearing time for this blogger. “Eric Adams remembers well the surge of foreclosures that occurred when Utah’s economy bottomed out in the 1980s. Banks were pushing foreclosed properties onto the market in hopes of recouping their losses, glutting an already depressed market. In some ways, Adams, a Realtor in Provo, said the current mortgage crisis is far worse. In 25 years of doing foreclosure sales, he’s never seen more foreclosed homes for sale. Adams said the banks have learned lessons from the 1980s in how to deal with them. Back then, Adams said the banks’ first instinct was to sell houses as quickly as possible and cut their losses.”

“‘They are trying to balance between being aggressive [in clearing their inventory] and fair,’ Adams said.”

“As Michelle Polak was looking for a house last year, she was disgusted by most foreclosed homes she visited. She remembers seeing ruined carpets, and noticing missing appliances and reeking smells. It looked as if homeowners were ‘letting their homes go to crap’ and had much more going wrong than just falling behind on bills, said Polak.”

“In the four west-side communities, about 1,350 properties have been reported as real- estate owned, meaning no buyer has come forward and the property may be sitting empty. In West Valley City’s 84120 ZIP code, which includes Polak’s neighborhood, there are 410 foreclosures — more than double the number there two years ago, said Layne Morris of the city’s community-preservation department.”

“And during the past few years, he added, there’s been an increase in calls from residents complaining about foreclosed homes that have not been maintained, some for as long as a year. There has also been a spike in police calls about people living in vacant homes or teens hanging out inside. Morris said there hasn’t been a drug bust in a foreclosed home, but he’s ’sure there’s a drug element there.’ A vacant house ‘just attracts all the wrong things,’ he said.”

“No one in the quiet old neighborhood on the city’s near west side knew the three Pizano brothers very well. When they moved away…the whole neighborhood has been stuck, for the four years since then, with the repercussions of the foreclosed home they left behind. At times, its yard has become an untended eyesore, with weeds five feet tall. Its dropping, bargain price has kept others from selling their homes for what seemed like a fair amount.”

“Ricardo Feliciano, the empty home’s other next-door neighbor, started worrying last year that he could lose his job in a plastics factory. He planted a ‘for sale’ sign out front. Feliciano hoped to get $176,000 — enough to pay off his own refinanced mortgage. But nobody was interested. ‘I realized nobody is going to buy my house for 176 when there’s that house next door selling for 119,’ Feliciano says. ‘You see some houses for sale for $30,000 or $40,000, after foreclosures. How can I compete with that?’”

“Foreclosures in Lee County hit a three-year low in May — but more than half were homesteaded residences. Some banks are more receptive than they were a year ago to non-foreclosure solutions for people in trouble with their mortgages, said Eddie Felton, executive director of the nonprofit Fort Myers-based Home Ownership Resource Center. Other banks are simply not foreclosing on some houses, Felton said. ‘I got a call recently from somebody who hasn’t made a payment in almost three years’ but still isn’t being foreclosed.”

“During the housing boom there was no hotter commodity. At the height of frenzied buying, people stood in long lines just for a chance to put a deposit down and secure a unit. Often the unit was immediately resold, or flipped, several times for a profit. The deflation of the market was felt most strongly in the condo market, which has been hit by waves of defaults. Investors walked away from units bought at inflated prices and stopped paying dues.”

“Stephen Demchak, treasurer of the Second Bayshore Condominium Association in Bradenton, said the new law will help associations the most by making banks pay up to one year’s worth of back dues when they foreclose. ‘We still need to come up with a method where the banks must complete their foreclosures in a much quicker time,’ Demchak said. ‘When you’re missing two years of association fees, that puts a real strain on the budget. If this goes on any longer we are going to have to go to a special assessment.’”

“Janice Swansen says she takes care of her condo. But when her neighbor walked away from his, the mess started seeping into her walls. ‘I started looking through and there was a mosaic of paisley on the kitchen walls. I looked a little bit more and oh my God its mold,’ she said.”

“Swansen said she knew it wouldn’t be too long before the growing mold appeared in her home too. So she called the homeowner, his mortgage company and her homeowners association. ‘Everyone who got back to me said, ‘This is your problem,’ she said.”

“Fort Myers Code Enforcement Officer Mike Titmuss said the housing bust has left many condos and town homes sitting empty - leaving neighbors to deal with the consequences. ‘Whatever common element that’s failing in that building, she may be responsible for it if she wants to get it fixed because nobody else is paying their fees,’ he said. ‘We’ve been dealing with some of these situations for a couple of years The majority, if they are going to lose it, they are going to walk away from the violation and not repair them.’”

“Local leaders, residents and housing activists launched a campaign Thursday to crack down on foreclosed homes that have been allowed to deteriorate and blight their communities. ‘We are here to let the community know that they have this important tool to use against the banks,’ City Councilman Richard Alarc told a news conference in front of a Pacoima home that was taken over by gang members after the bank foreclosed on the property earlier this year.”

“A spokeswoman for the California Bankers Association said the industry supported passage of a 2008 state law that allows local governments to impose fines up to $1,000 a day on legal owners who aren’t maintaining their property. But she noted that banks face some legal obstacles in maintaining foreclosed properties because they may not officially take ownership until many months after the homeowner has left the residence.”

“‘Where some of the disconnect is, from the industry perspective, until the foreclosure process is complete - and in California, that process could take well up to a year and possibly even more than that - the bank’s not the legal owner of that property,’ said Beth Mills of the Bankers Association. ‘Until that whole process is complete, the bank’s not the legal owner of the property, and it’s not their responsibility to maintain the property because frankly they’re not the legal owners of it yet.’”

“A bill that would help homeowners avoid foreclosure while seeking a loan modification is scheduled to be heard on the state Senate floor this week, but it faces an uncertain future with opponents arguing it adds hurdles to an already-complex process and duplicates existing guidelines. Former San Jose homeowner Gina Gates-Portales said the bill sounds good to her. Her former home in Evergreen was foreclosed on in November as she was preparing documents her lender had asked for in support of her loan modification application.”

“‘All along, I’m thinking, ‘Someone’s going to realize this is a big mistake,’ she said. ‘These servicers are not doing their jobs ethically, and their excuse that ‘Oh, we’re just overwhelmed’ is not an excuse.”

“Gates-Portales tried and failed to get her foreclosure rescinded and is now renting a condo, having moved in April out of her home of eight years.”

“Arizona’s housing market is deep into the process of flushing out its bad mortgage debt. But lenders and borrowers of troubled commercial real-estate loans continue to live a lie. Commercial real-estate brokers have coined a phrase, ‘extend and pretend,’ to describe lenders’ sluggish response to the billions of dollars in bad commercial mortgages on their books.”

“Commercial real-estate investor Biff Ruttenberg said pretending-and-extending hurts job-market recovery by prolonging economic uncertainty, which makes employers hold back on their expansion and hiring plans. ‘If you don’t think that hurts everybody, then you don’t live in the same world I do,’ he said.”

“Fortunately for building owners hoping to hang in there, the majority of banks and other lenders still shudder at the thought of taking charge of dozens, perhaps hundreds or even thousands of office towers, distribution warehouses, shopping centers and failed condominium projects. ‘The banks, right now, do not want the property back,’ said Michael Haenel, executive VP for real-estate firm Cassidy Turley BRE Commercial in Phoenix. ‘They do not want to sell it for 25 cents on the dollar.’”

“There’s an obvious problem with lenders’ current strategy, according to Pete Bolton, managing director of commercial real-estate firm Grubb & Ellis Co. in Phoenix: It doesn’t lead anywhere. ‘Their strategy requires a market turnaround,’ Bolton said. ‘That’s a long shot.’”

“Through April, the Pueblo Regional Building Department reported $2.4 million worth of commercial construction permits, down from $29.9 million last year and $169.5 million in 2008. Nick Pannunzio, CEO of Premier Homes, one of the top home builders in Pueblo and Colorado Springs, said he can empathize with commercial contractors’ worries. ‘I’ve been riding the roller coaster down with housing. They talk about the bottom and that the next year it can’t be worse and then it is. Unfortunately, commercial follows housing,’ Pannunzio said.”

“Two years ago no one wanted to buy Corey and Carrie McMillen’s three-bedroom townhouse in Oella. The couple tried again this winter and had more success: Within a month of listing their home, they found a buyer. ‘Our first open house landed us our buyers,’ Corey said.”

“The sale enabled them to purchase a four-bedroom house in Woodbine. And, it allowed them to join the ranks of recent home buyers benefiting from low interest rates, government incentives and reduced home prices that have fueled what some real estate agents say could be a turnaround in the area’s housing market.”

“While house sale data look favorable, not everyone is convinced the recession is over for real estate. Paul Revelle, owner of a land development company in Howard County, said builders have not been actively purchasing property for new houses in the county. ‘I think it means we might be bumping along the bottom here,’ he said. ‘Something good will have to happen to get us off the bottom.’”

“Right now Howard County is working with 2 1/2 years’ worth of inventory, with roughly 1,500 lots not being purchased by builders, he said. ‘We have a big inventory of lots that are not being bought,’ he said. ‘Now when they start to go, then I’ll believe that we’re out of the recession.’”

“In the first sign that home sales have suffered since the expiration of the $8,000 tax credit, pending sales were off in May for the first time in 10 months, according to the Massachusetts Association of Realtors. ‘It’s payback,’ said Gus Faucher of Economy.com.”

“The first-time homebuyer credit, as well as $1.4 trillion in debt purchases by the Federal Reserve, served their purpose: lowering mortgage rates and restoring life to the worst housing slump since the Depression. But applications to buy homes plummeted by nearly a third to 13-year lows after tax credits of up to $8,000 ended on April 30, proving that the incentive pulled sales forward, the Mortgage Bankers Association found.”

“Few expect the housing market to turn bubbly, with unemployment and underemployment still high and banks seen repossessing nearly one million homes this year. Households are also busy rebuilding balance sheets and are still as much as $9 trillion dollars down in net worth from the peak, noted Mike Fratantoni, VP of research and economics at the Mortgage Bankers Association. ‘It’s back to a fundamentals market where there are no gimmicks,’ said Fratantoni.”

“The CEO of Moody’s Corp. says his company’s inaccurate ratings of mortgage-related investments were ‘deeply disappointing’ but investors shouldn’t rely on ratings to buy or sell securities. Asked why Moody’s ratings failed leading up to the housing crisis, former managing director Eric Kolchinsky blamed a ‘factory mentality’ where resource-strapped employees were pressured to rate as many deals as possible to grow the company’s market share.”

“Bankers, in turn, knew they could get their investments rated quickly, even if they didn’t provide Moody’s with enough advance notice to properly evaluate the product, Kolchinsky said. ‘Bankers knew we couldn’t say no to a deal,’ he said. ‘They took advantage of that.’”

“Today’s Financial Crisis Inquiry Commission hearings targeted the ratings agencies who slapped AAA ratings on securities that were later found to be worthless. Committee Chairman and former California state treasurer Phil Angelides brought his ‘A’ game to the proceedings. Here are some of his best zingers. ‘Even the dumbest kid in the class gets 10 percent on their exams.’ —To Moody’s chief executive Raymond McDaniel, citing the company’s 90 percent downgrade of its housing-market-linked ratings.”

“‘Flipping a coin would have been five times better,’ than Moody’s ratings of mortgage-backed securities in the run-up to the financial crisis.”

“Moody’s stakeholder Warren Buffett: ‘Rising prices were a narcotic.’ Angelides: ‘You don’t want your police trading in crack.’”

“Kolchinsky described an environment in which bankers bullied analysts and withheld information from them. Exactly once, Kolchinsky testified, was he able to refuse to rate a security. In general, he said, ‘no’ wasn’t an answer, even if analysts were dubious about the quality of the information they had to form a rating, since saying no would mean giving up lucrative fees.”

“Another witness, former senior vice president Mark Froeba, said in a written statement that there was a ‘palpable erosion of institutional support’ for any action, like tougher rating standards, which might cause Moody’s to lose business to a competitor.”

“Buffett and Moody’s CEO Raymond McDaniel kept coming back to a different point: that the severity of the housing downturn caught practically everyone off guard. The real culprit in the breakdown of so many ratings, they held, wasn’t a lack of corporate integrity or analyst independence but the unforeseen national drop in home prices. ‘The entire American public was caught up in the belief that house prices could not fall dramatically,’ said Buffett. ‘That’s the nature of bubbles — they become mass delusions.’”

“But as the day of testimony illustrated, even mass delusions have their moments of clarity. One of those came from inside Moody’s, in late 2006, when Mark Zandi, the firm’s star economist, warned that some markets might be due for a housing crash.”

From Forbes. “When FCIC Chairman, Phil Angelides, asked Buffett whether McDaniel should still be at the helm of the company, Buffett evaded the question, stating, ‘In this particular case I would say they made a mistake that virtually everybody in the country made.’”

“Buffett who currently owns 30 million shares of Moody’s and has recently sold 18 million shares, worth about half a billion dollars, says he doesn’t put the entire blame of the financial crisis on the ratings agencies, saying to journalists before the hearing that the housing bubble was, ‘a 4-star bubble and the rating agencies missed it…Looking back they should have recognized it. But like I said, they didn’t recognize it and neither did I…there are many to blame, financial institutions, investors, the media.’”

The Housing Bubble Blog, May 2005. “(Buffett) and Munger issued stern new warnings about the residential real estate ‘bubble.’ ‘A lot of the psychological well-being of the American public comes from how well they’ve done with their house over the years. If indeed there’s been a bubble, and it’s pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices].’”

“We’re like an incredibly rich family that owns so much land they can’t travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can’t see. They trade away a little piece every day or take out a mortgage on a piece.”

“Buffett to Munger: ‘What do you think the end will be?’ Munger: ‘Bad.’”