The Housing Bubble

The North County Times reports from California. “From Valley Center to Del Mar, buyers can be picky. Most cities in North County carry hundreds of home listings for sale while barely a dozen sell each month. In Carlsbad’s 92008 ZIP code, it would take about 18 months to sell all the listed houses. Inventory numbers vary wildly across North County from a high of 26 months in Valley Center to a low of six months in Carmel Valley and Rancho Penasquitos, according to a three-month average of for-sale numbers provided by Sandicor this week.”

“Communities that have seen some of the steepest price depreciation and biggest drops in sales are in North County’s rural regions. Other than Valley Center’s leading inventory number, Ramona carries 16 months and Fallbrook has 20 months of inventory.”

“Meanwhile, only two homes have sold in Bonsall over the last three months.”

“The problem there is that owners are attached to custom-built homes and unwilling to reduce prices, said Fallbrook real estate agent Mark Fabela. ‘People are still unrealistic, and they’re still marketing their house at the high end,’ said Fabela, an agent with Coldwell Banker. ‘Until it comes down to reasonable pricing, we’re going to see that high inventory.’”

“‘Would you think (high inventory) would get people to drop the price? Yes, but I see more and more people just take (the home) off the market,’ said Anne-marie Boyer, a real estate agent based in Rancho Penasquitos. ‘They just sit on it and figure, ‘If I don’t get what I want, I’ll just keep it.’”

“Sue Landis, a real estate agent in Carlsbad, says she does not see the home price depreciation — the North County median has dropped 16 percent over the last year — ending until 2009.”

“‘Prices are not going to go up this year,’ Landis said. ‘This is not a market for unmotivated sellers. … If it’s overpriced, it’ll just sit there.’”

The Union Tribune. “In the height of the housing boom, an affiliate of San Diego developer Simplon Corp. spent about $25.5 million acquiring a full block near Petco Park, where it planned a 35-story condo tower called Cosmopolitan Square.”

“This month, the Simplon affiliate filed for Chapter 11 bankruptcy – in part because of difficulties securing financing in today’s tight credit markets.”

“Simplon executives say the bankruptcy of Simplon Ballpark LLC was necessary to buy time so the company could secure new financing, including construction loans, to push the project ahead.”

“But court documents filed by the company’s largest creditor contend that Simplon Ballpark has been granted short-term extensions since its existing debt came due in May and it still has been unable to obtain financing. It defaulted on the extension agreements and filed for bankruptcy on the eve of foreclosure, the creditor contends.”

“The creditor also said in court documents that Simplon owes nearly $40 million on the property to 14 additional lenders or investors. It faces an additional $1.5 million in liens for unpaid bills to engineering, architectural and consulting firms.”

“The property was recently appraised at $26.5 million, according to the creditor, which has asked the bankruptcy court to allow it to proceed with foreclosure.”

“Simplon isn’t alone in seeing its downtown projects stumble. Several have been shelved. Atmosphere, a roughly 80-unit loft project on Fifth between Beech and Ash streets, began construction but has since stalled, leaving unsightly steel bars around the site.”

“Cosmopolitan Square originally was approved for 334 condos with ground floor retail. ‘I believe this is one of the very best undeveloped sites downtown,’ said Gary London of a San Diego real estate consulting firm. ”It is not likely to be developed by anybody for at least five or six years.’”

The Merced Sun Star. “Shares of Capital Corp of the West, the Merced-based parent company of County Bank, were hammered Wednesday following news that the company expects to post its first-ever yearly loss.”

“‘(County Bank) is still adequately capitalized, everyone’s deposits are still insured by the FDIC, we still have plenty of money,’ said bank spokesman Thomas Smith. ‘We’re not going to have the Bear Stearns thing.’”

“The company blamed its anticipated loss on ‘the rapid decline in real estate values in California’s Central Valley in the fourth quarter of 2007.’”

“The drop in real estate values means the collateral backing County Bank loans is worth less than it was when the loans were made one or two years ago. The loss isn’t tied directly to the subprime mortgage meltdown, he added, because County Bank doesn’t make many home mortgages or invest in subprime loans.”

“However, the company does lend money to developers buying land, and that land is less valuable than it was a few years ago. ‘Even though the guy is still paying his loan, by federal law, we have to downgrade the loan because the quality of collateral has gone down,’ said Smith.”

“In February 2007, Capital Corp’s chief consulting economist Tapan Munroe predicted that the Central Valley wasn’t facing a housing bust. Instead, he termed the slowdown as a ’souffle with the air slowly leaking out.’”

“Munroe and co-consultant Lon Hatamiya projected then that Merced’s home prices would drop 8.9 percent. Instead, prices in Merced plummeted 16.8 percent between December 2006 and December 2007, according to DataQuick.”

“‘Economists have a 50 percent chance of being right and a 50 percent chance of being wrong,’ Smith observed. ‘If anyone was a good soothsayer and could figure this out, they’d be rich. Obviously a lot of the forecasting was inaccurate.’”

“On Wednesday, County Bank unveiled a new ad campaign featuring the line, ‘Times are tough.’ Smith said the campaign was prompted by overall fears about a national recession, not Capital Corp’s specific problems.”

The New York Times. “They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.”

“These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.”

“According to Loan Performance,, about 870,000 borrowers took jumbo ARMs — mortgages of $417,000 or more — from 2005 to 2007. In the fourth quarter of 2007, 8.10 percent were two or more payments late, it found, while 2.62 percent were in the foreclosure process and 1.35 percent had been foreclosed. All the numbers were up from the third quarter.”

“Jeffrey Conner, a San Francisco real estate lawyer, says he regularly hears from his clients ‘that lenders assured them they could always refinance.’”

“Richard Geller, founder of a for-profit venture that counsels troubled ARM borrowers, said he received calls from affluent consumers in almost every major metropolitan area.”

“Homeowners with at least 3 percent equity may qualify for refinancing through the Federal Housing Administration. ‘But if your payments are still going to be more than half your gross income, the lenders won’t do it because they figure you’re going to default later,’ Mr. Geller said. ‘It’s not rational to dedicate your life to making the next $5,000 monthly payment on an asset declining in value.’”

“In Oceanside, Calif., people paid $650,000 to $750,000 in 2003 and 2004 for row houses on Cleveland Street, said Chris McBrearty, certified mortgage planning specialist, in Carlsbad, Calif., who wrote many mortgages there.”

“When prices for the houses rose as high as $1.5 million in 2005, many of those people refinanced with ARMs to take out cash, he said.”

“But while the borrowers had the best intentions, life…changed their financial circumstances, Mr. McBrearty said. Now, with a most recent listing at $920,000, ‘nothing is selling on the street, and even for those with some equity, the products needed to refinance such large loans are not out there.’”

“One of those homeowners, a lawyer who spoke only on condition of anonymity for professional reasons, said he refinanced his mortgage with an ARM in January 2006 to take $510,000 out to invest in a hotel. ‘I planned to run the hotel with my lovely wife,’ he said.”

“Their strategy was to sell the house after a couple of years, but when they put it on the market in April 2007, there were no buyers. The lawyer, now divorced, calculated that the mortgage payments, now $6,200 a month, plus taxes consume 96 percent of his net income, which includes occasional rent from vacationers who use the house. He lives with relatives and sleeps on the floor.”

“‘I don’t regret what I did,’ he said. But a foreclosure would hurt his career and finances, he said. ‘And I was raised to pay back what I borrow.’”

“His strategy now is to sell when prices revive. But that could take time, because a bank just sold a neighbor’s foreclosed home for $850,000.”

The Associated Press. “A family of accused con artists is suspected of leading an operation that processed thousands of home loans in California during the past several years in the widespread refinancing scam.”

“The case has brought renewed calls for tighter regulation of the troubled mortgage industry that threatens to take the U.S. economy down with it.”

“Experts said the fraud occurred in a weak regulatory environment in a business that offered huge financial incentives to brokers willing to cheat.”

“‘There’s no regulatory oversight, it’s all complaint-based,’ said Dustin Hobbs, communication director for the California Mortgage Bankers Association. ‘Like these people found out, until you file a complaint, there’s no oversight of these brokers.’”

“Prosecutors said the operation had slipped past loan officers and regulators in a booming housing market fueled by greed. ‘I haven’t seen anything this extreme ever before,’ said Christina Tusan, the California deputy attorney general assigned to the civil case in which the web of companies is being sued for more than $20 million.”

“Late Tuesday, Eric Pony, 25, and his sister, Paulette Pony, 23, surrendered to face charges including conspiracy, grand theft, forgery and elder abuse. Five other suspects were also arrested.”

“The crackdown began with Eric Pony’s company, Lifetime Financial, and spread to others, authorities said. Lifetime Financial’s main mortgage provider was New Century Mortgage Corp., which has since folded.”

“Eric Bremner, a senior investigator in the real estate fraud unit of the San Bernardino County District Attorney’s Office, said loan documents often ran 300 pages. In many cases, problems were missed amid the rush to earn commissions for quickly approving deals. ‘Based on the volume of loans that New Century was doing at the time, it was either a combination of just missing these items or just looking the other way,’ he said.”

“After meeting with Eric Pony, Tracylyn Sharrit said she found her signature forged on loan documents and the monthly payments on her three-bedroom, 1,100-square-foot home in San Bernardino jumped from $1,070 to $1,868.”

“The money promised to her in an equity cash-out has been whittled away on lawyer fees, and her loan amount ballooned from $167,000 to more than $260,000.”

From Bloomberg. “California, the birthplace of the subprime mortgage industry, is paying the highest price of any state as the housing meltdown persists. Its gross domestic product will drop 1.5 percent in the first half of 2008, the most in the U.S., analysts at Global Insight Inc. estimate.”

“Almost half of the 25 biggest U.S. subprime lenders were based in the state, according to Inside Mortgage Finance, and almost a quarter of the country’s outstanding subprime loans were issued there, more than in any state, data from LoanPerformance show.”

“Prices that more than doubled in California from 2000 to 2005 fueled demand for nontraditional mortgages that allowed people to purchase homes, said Peter Navarro, a professor at the University of California, Irvine. Half of the 10 most expensive metropolitan areas for home prices are in California, according to data compiled by National Association of Realtors.”

“‘The high home prices here made it very difficult to get into houses unless you started doing really funky things,’ Navarro said.”

“The number of houses and condominiums sold in California plummeted 30 percent in January from a year earlier to 313,580, and the median price for an existing home dropped 22 percent to $430,370, according to the California Association of Realtors. The time it would take to deplete the supply of homes on the market at the current sales rate more than doubled to almost 17 months in January from a year earlier.”

“California had 481,392 foreclosure filings on properties last year, the most of any state, said Daren Blomquist, a spokesman for RealtyTrac.”

“The area has been one of the hardest hit by the housing- market slump in Northern California. Home prices in Solano County dropped 21 percent in February from a year earlier, according to DataQuick. Almost half of the estimated 334,500 home sales in 2008 will be trustee sales, according to the Norris Group.”

“Harry Subers, a 59-year-old unemployed engineer, said he and his wife ‘paid way too much’ for their house in Ben Lomond. They did it because they love living among the redwood trees of the Santa Cruz mountains, he said.”

“After their adjustable-mortgage rate rose last year, their payments climbed 20 percent to $1,900 a month, or more than two- thirds their monthly income of $3,000. The couple put the home up for sale because they could no longer afford it, Subers said.”

“Selling turned out to be tougher than they thought since three other nearby homes have languished on the market and one hasn’t sold for three years, he said. They paid $412,000 in 2004.”

“‘Everything would have been fine if the bubble didn’t pop,’ Subers said. ‘We’re resigned to the fact that we’re going to lose the house.’