The Housing Bubble

A report from Kenneth Harney. “When the Federal Reserve polled senior bank executives last month on whether they’ve been loosening credit criteria for home-mortgage applicants, most bankers said, ‘no way, not us.’ They’ve kept their rules tight to avoid the problems the lending industry experienced in the housing bust of the last decade. But there’s new statistical evidence that, at least in some areas, standards have been easing. A study conducted by credit-score developer FICO and released earlier this month found that credit scores for new mortgages have been dropping.”

“‘As we get further away from the Great Recession,’ FICO researchers said, ‘underwriting criteria seems to have eased and a broader section of consumers are obtaining mortgages as a result.’ The study did not specify which type of loans exhibited the most easing.”

“New loans with FICO scores below 700 — including some in the rock-bottom 400s and 500s — have increased from 21.9 percent of the market in 2009 to just under 30 percent (29.7 percent) last year, according to FICO researchers. (FICO scores range from 300, indicating severe credit history problems and high risk of default, to 850, where the probabilities of missed payments or default are extremely low.)”

“So where’s the easing been occurring? Conventional mortgage approval requirements haven’t budged much at the giant investors Fannie Mae and Freddie Mac. But Federal Housing Administration (FHA) insured loans appear to be a strikingly different story. During January through March of this year, the average credit score for new home purchase loans was 672, according to FHA data. By contrast, the average was 701 during the same period in 2011. Refinancings where borrowers replace their existing FHA loans with new ones carried average FICO scores of 709 in mid-2012; earlier this year that had plummeted to 661.”

“There’s also been a big increase in FHA loans with high debt-to-income ratios (DTIs) within the past several years. DTIs are a crucial measure of home buyers’ ability to repay their loans. Between January and March of 2018, one of every four FHA loans had a DTI ratio of more than 50 percent, according to the latest data available from FHA. As recently as 2013, just 12.7 percent of approved new FHA applications carried such a high debt load. Between January and March of this year, almost 30 percent of new FHA borrowers had DTIs between 43 percent and 50 percent.”

“Your FICO score may meet FHA’s easing standards, and your DTI may pass the test. But if you have to spend half or more of your income on your mortgage and other credit payments, you need to ask: Can we really handle this?”

The Star Tribune. “Part of the fun of going every year to the Minnesota State Fair is seeing what’s new — and this year that included Federal Reserve Bank of Minneapolis President Neel Kashkari talking about the Federal Reserve and economic issues. Patience also seems to be required for another Minneapolis Fed priority: a proposal to solve the problem of having banks too big to fail, meaning banks so big and important to the economy that the taxpayers have no choice but to bail them out if they got themselves into trouble.”

“Not that many people know as much about this topic as Kashkari, who 10 years ago this week was at the U.S. Department of the Treasury and on the front line of trying to contain the damage of the unfolding financial crisis.”

“Kashkari has said, and repeated this week at the fair, that the idea to pursue this is a research project came from colleagues at the Minneapolis Fed, who had been working on the problem of too big to fail for years. Their solution, dubbed the Minneapolis Plan, includes requiring the biggest banking companies to hold a lot more equity capital to absorb losses. Kashkari likened it to the way mortgage companies reduce their risk by requiring a 20-percent down payment to get a mortgage.”

“‘The banks are safer than they were 10 years ago,’ Kashkari said. ‘So I use that 20 percent as the number we want to get too, for their skin in the game. They are at about 10 percent today. Ten, 12 years ago there were at about half that. So they are safer. But by our analysis, they’re not nearly safe enough.’”

The Title Report. “Foreclosure starts increased in 44 percent of the nation’s metropolitan statistical areas (MSAs), according to ATTOM Data Solutions. ‘The increase in foreclosure starts is not just a one-month anomaly in many local markets given that July represented the third consecutive month with a year-over-year increase in 33 metro areas, including Los Angeles, Miami, Houston, Detroit, San Diego and Austin,’ ATTOM Senior Vice President Daren Blomquist said.”

“‘Gradually loosening lending standards over the past few years have introduced a modicum of risk back into the housing market, and that additional risk is resulting in rising foreclosure starts in a diverse set of markets across the country,’ Blomquist added. MSAs posting year-over-year increases in foreclosure starts in July included Los Angeles (up 20 percent); Houston (up 76 percent); Philadelphia (up 10 percent); Miami (up 29 percent); and San Francisco, (up 10 percent).”

The Tampa Bay Times in Florida. “While checking on August foreclosure auctions, Peter Filippello found a townhouse in Largo he liked. He did ‘a little digging’ and discovered that the company foreclosing and the company being foreclosed were headed by the same person — Clearwater lawyer Roy C. Skelton. ‘I smelled a rat so I got out,’ Filippello said. ‘The plaintiff was one and the same as the defendant. How can somebody sue themselves or put a judgment on themselves?’”

“Filippello wasn’t the first person to have issues with a foreclosure auction involving Skelton-connected companies. Last year, a judge threw out the $458,100 sale of a Redington Beach condo because of what he called an ‘unscrupulous’ scheme by Skelton to trick bidders. The Florida Bar confirmed it has a pending case against Skelton but would give no details. He said the Bar asked him to describe his actions in the Redington Beach auction.”

“In 2015, his Outbidya took title to the Redington Beach condo with a bid of $157,800 at an HOA auction. Shortly after Wells Fargo began foreclosing on the first mortgage, Skelton created Deutsche Residential Mortgage and issued a second mortgage to Outbidya. Last year, with the bank’s case moving slowly, Deutsche got a final judgement of foreclosure on its mortgage At auction, Orlando Realty Group bid $458,100. Only later did the company’s owner, John Houde, discover that the bank had a first mortgage and could foreclose.’

“That would have left Orlando Realty with no condo and out almost half a million dollars — money that would have gone to Skelton’s mortgage company. With all three auction sales falling through, Skelton’s companies still have the Largo townhome and the Redington Beach condo. Skelton, through his Deutsche Residential Mortgage, has appealed the judge’s order vacating the sale of the three-bedroom, two-bath gulf-front condo. He’s been renting it out for $2,5000 a month after trying to sell it for $623,000.”

“The first mortgage for the condo is now held by a Delaware firm, which recently got a final judgment. The foreclosure sale is set for Oct. 19. Skelton has never rented out the Largo townhome. ‘I’m just waiting,’ he said, ‘for the bank to foreclose.’”

The Mountain Journal in Montana. “My town, Bozeman, is the fastest-growing in Montana and one of the fastest growing ‘rural cities’ in the country. Since a huge percentage of people here are from somewhere else, most citizens are familiar with the perils of explosive, unplanned, unscrutinized growth without vision, and it’s a reason why many probably left that for the Gallatin Valley.”

“I guess we will never know the number or percentage of folks who have come here to participate in the growth of this immediate area from the ground up, so to speak. As I read in the morning paper the current average price of a home here is $420,000 as of July 2018, apparently there isn’t much ground to get in on the floor of.”

“Every year, Bozeman citizens and soon those in the Gallatin Valley shell out more in taxes to pay for expanding services, school and infrastructure needs. Together, we’ve generously complied but there is growing angst and tax burnout happening because while we’re paying more, it’s obvious that we’re subsidizing those who are directly profiting off the boom. ”

“The lie that growth pays for itself is promoted by those who benefit from it—developers, bankers, realtors, building suppliers, construction workers and their ancillary support vendors. It is an endless fiscally-defeating cycle based on the premise that cities can grow their way out of growth-related problems when what really was needed is fiscal discipline and the notion that if you want to play the game of boom, you need to pay your way and not foist your costs of doing business on someone else.”

“Those who have the means to focus a good percentage of their waking hours on decisions involving how much they will play, where they’ll get their massage, gourmet lunch sandwich and glass of $20 Pinot Noir are not bothered by the thought of those working two or more jobs to keep food on the table for their kids.”