The Housing Bubble

Some housing bubble news from Wall Street and Washington. Reuters, “The bond insurance arm of CIFG Holding Ltd, and two other units’ ratings were slashed to junk status by Moody’s Investors Service on Tuesday, due a ‘high likelihood’ the insurer will not meet its capital requirements. Two months ago the insurer had pristine ‘Aaa’ or ‘AAA’ ratings from the major rating firms.”

“The rating cuts ‘reflect the high likelihood that, absent material developments, the firm will fail minimum regulatory capital requirements,’ due to losses stemming from its debt and exposure to subprime mortgages, Moody’s said.”

“In March, Moody’s had estimated CIFG’s expected loss on asset-backed collateralized debt obligations at $433 million, and stress losses, consistent with a 21 percent cumulative loss on 2006 subprime mortgage first liens pools, at $1.3 billion.”

“‘The breach of such regulatory capital requirements would put the firm in a precarious position,’ Moody’s said in a statement, due to the company’s exposure to credit default swaps, Moody’s said.”

“Mitsubishi UFJ Financial Group, with a market value of about $113 billion, said losses related to subprime investments and other securitised products totalled 123 billion yen ($1.18 billion) in the year to March 31, and said it could lose $480 million this year.”

“‘Subprime had a very broad effect on us,’ MUFG CEO Nobuo Kuroyanagi told a news briefing.”

The Post Bulletin. “Something went wrong in the American Dreams of hundreds of thousands of homeowners during the past two years. They found they no longer could afford their mortgage payments. Many also found they could not sell their houses at prices high enough to pay off their mortgages.”

“The ’subprime’ mortgage crisis has spread far beyond some beleaguered neighborhoods and local courtrooms. How could one small corner of the housing market go so bad?”

“‘Subprime mortgage borrowing nearly tripled during the housing boom years of 2004 and 2005,’ Federal Reserve Board chairman Ben Bernanke said in mid-2007 speech.”

“Late last year, Federal Reserve Governor Randall S. Kroszner said in a speech that 7.7 million mortgages, or about 14 percent of the mortgage market, were subprime. About two-thirds of those had variable or adjustable rates.”

“Subprime loans grew to $650 billion by 2005 from about $150 billion in 2003, says Tom Musil, director of the Shenehon Center for Real Estate at the University of St. Thomas in Minneapolis.”

“Some borrowers own houses that are worth thousands of dollars less than what they actually owe in mortgages. Legally, they are on the hook for the payments.”

“The decline in value also creates other problems. For example, ‘The buyer can’t refinance $200,000 when the house is only worth $150,000,’ Musil explains.”

“In extreme cases, some owners, especially those who purchased homes for business instead of a residence simply are refusing to pay and daring lenders to foreclose.”

The Saginaw News. “Victorious Believers Ministries Housing Counseling Agency in Buena Vista Township…aids those looking to buy their first homes and teaches financial literacy, (and) is an affiliate of Mission of Peace, a Housing and Urban Development-approved national housing counseling intermediary.”

“The group’s goal is to help homeowners keep their houses. They work with owners, their lenders and insurance companies to devise a strategy.”

“‘There are too many people walking away from their homes,’ said Evelyn Moten, a Bridgeport Township resident who leads the volunteer agency. ‘It’s happening across all walks of life.’”

“State Rep. Andy Coulouris, chairman of the House Banking and Financial Services Committee, said legislators are addressing the problem of predatory lending.”

“‘One of the problems we see is attempting to regulate the mortgage market in Michigan. Until we have a national solution, we create the risk that the secondary mortgage market will stop,’ he said. ‘If Michigan becomes a hotbed for litigation, Wall Street will stop buying up homes.’”

The New York Daily News. “Devon Honeyghan spent $25,000 renovating the kitchen of his Bronx house in preparation for selling it and moving to Georgia.”

“But two ‘For Sale’ signs and an abandoned house standing all in a row across the street have him doubting he will make any of his money back.”

“Honeyghan, who bought his new house in Georgia at the market’s peak, is so desperate to sell his Bronx home that he offered to buy the abandoned house across the street, which has become an eyesore and is filled with stray cats. He could not because it is locked in a divorce case.”

“‘I just don’t see myself getting my money back,’ he said. ‘I was going to spend $10,000 on the bathroom, but it’s not worth it.’”

“Statistics released this month…show the value of nearly 400,000 homes in the Bronx has dropped $4.9 billion because of surrounding foreclosed homes.”

“‘You see the signs up - ‘For Sale, For Sale, For Sale’ - on every street,’ said Carmen Rosa, district manager of Community Board 12.”

“‘At our board meetings, residents are very concerned about the impact the foreclosures will have on the value of their homes,’ she said, ‘but they are also concerned if someone walks away from their home that people will break in and they will have to become watchdogs.’”

“As for Honeyghan, the real estate industry’s fall has hit him even harder, because his wife is an agent. She has given up her job selling homes to baby-sit.”

“‘She can’t make no money,’ he said. ‘And I can’t carry two mortgages myself. This just doesn’t do any justice for the rest of us.’”

From Forbes. “There was a time in America when losing your home to the mortgage lender was about the worst financial calamity that could befall a person. Not only were you homeless, your dignity was trampled by the repossession of your property.”

“That was Norman Rockwell. This is now.”

“To the distress of many banks and investors, American borrowers are increasingly viewing voluntary foreclosure as a practical financial decision, stripped of its taboo. Perhaps a bigger problem is that banks don’t want to talk about the problem and they don’t appear to know what to do about it.”

“As long as it persists, there will be downward pressure on home prices, especially in overbuilt markets where the supply of housing already outstrips demand.”

“In March, according to RealtyTrac, foreclosures rose 54.0% year-over-year, but bank repossessions surged at double that rate, 129.0%. What accounts for the difference? Rick Sharga, VP of marketing at RealtyTrac, said most March repossessions likely involved walkaways.”

“In mid-April, Chief Risk Officer Don Truslow of Wachovia acknowledged the troubling trend during a conference call. Even more disconcerting, Truslow added that the trend was ‘almost regardless’ of borrowers’ creditworthiness. Lender’s are beginning to report that loan-to-value ratios are better indicators of the likelihood of default than borrowers’ FICO scores.”

“Thomas Kerrigan, a real estate lawyer in New York, said that if a borrower has other assets besides the home, than there is a much greater likelihood that the lender will pursue the deficiency between the total mortgage and the depreciated home price.”

“However, if the lender believes there are no other assets, it will likely make a business decision that it isn’t worth trying to recoup the loss. ‘You can’t,’ Kerrigan noted, ‘get blood out of a stone.’”

“‘Destroyed credit is a still huge deterrent, but if someone is willing to throw their credit score away for seven years then walking away is an option,’ said Nancy Flint-Budde, a certified financial planner in Salem, New York.”

“Because many people ‘went in as investors,’ rather than homeowners, ‘they went in with a different mindset and might be willing to just walkway.’ Flint-Budde added, ‘This is why traditionally people had to put more money down when they borrowed money for a second home or investment property.’”

“Glen Costello, a structured finance officer at Fitch, said that walkaways are nothing new, but this cycle’s factors are. ‘One could understand that if someone had lost their job and all their savings, they were being forced to give up their home,’ said Costello.”

“Now, however, homeowners aren’t as much vulnerable to foreclosure as amenable. They just don’t want to pay high monthly costs for properties in which they do not have stakes.”

National Mortgage News. “A lot of ink has been spilled about lenders working diligently with homeowners who cannot make their payments but who want to keep the house. This tale is about ‘James,’ a loan broker who has a 2/28 mortgage with Countrywide.”

“His loan was a no-downpayment note with an original principal balance of $330,000. James and his wife are looking at new monthly payments of $3,599 compared to a start rate payment of $2,100. He, his wife and two kids live in Sun Valley, a suburb of Los Angeles. His house now has negative equity but they want to stay put.”

“Here’s the catch: his loan is not delinquent. It’s current. One of the chief reasons…his parents have been helping out with the payments. Nonetheless, he called Countrywide and asked to restructure the loan. Eventually, according to him, Countrywide agreed to renegotiate, promising to keep the mortgage at the original start rate.”

“Countrywide said it would send a letter confirming the details. When the letter never arrived, he called the servicer. He was told by a Countrywide rep that no such permission to keep the rate at 5.99% was granted. He said they described the permission as a ‘computer glitch.’”

“James is a self-employed loan broker, not a great business to be in right now. His wife just landed a new job with promise: on Monday she begins work at a collection agency. They hope to hang onto their house. But can they? Question: how many more James’ are out there, people who bought homes at the top of the market, like where they live but are sitting on negative equity and note adjustments?”

“In last week’s column…I asked for ‘post-mortgage career’ stories. Here’s one that caught my eye (edited a bit by me): ‘After 25 years in lending (mostly wholesale) I sent out no less than 50 resumes, responded to numerous job postings and found only scammers and insurance companies willing to talk to me. I never reaped the huge incomes that most of my peers did so I had nothing to fall back on…I have distanced myself from any association with lending because of the negative stigma attached to anybody in the lending business.’”

“‘Although the demise of lending is rooted with Wall Street, the lack of regulation played a big role resulting in the large number of ‘crooks’ and opportunists in the business. I have found that the insurance industry is a bureaucracy and heavily regulated and as such is considered at least an honorable career untainted by scandal.’ — Jack.”