The Housing Bubble

Some housing bubble news from Wall Street and Washington. Reuters, “Thornburg Mortgage Inc, a specialist in jumbo home loans that nearly went bankrupt in March, posted a $3.31 billion first-quarter loss on Thursday as the value of mortgages and other securities it owns plummeted. Results included a $1.54 billion write-down of the value of mortgage-backed securities and securitized loans Thornburg owns.”

“The company also realized a $651.6 million loss on the sale of some adjustable-rate mortgages, and had an unrealized $126.1 million loss on a separate adjustable-rate mortgage transaction.”

“Thornburg also took $949.1 million of charges related to the capital-raising, which heavily diluted existing shareholders.”

“The company said it made $548.7 million of loans in the first quarter. It said it has since made $239 million, but CEO Larry Goldstone said these were already in its pipeline, and that ‘we’re not really originating any of the new loans right this minute.’”

From MarketWatch. “‘The industry is suffering from a continued decline in housing prices, a mortgage securities market that cannot easily value mortgage-backed securities due to lack of trading activity, a banking sector that is lacking capital and deleveraging, and continued rating agency downgrades of mortgage-backed securities,’ Goldstone said.”

“As a result the credit storm and other factors, Thornburg saw a ’sudden downward spiral’ in prices on its triple-A-rated mortgage assets.”

“Thornburg shares have lost more than 90% of their value so far this year.”

The New York Times. “The struggling investment bank, Lehman Brothers, shook up its management on Thursday as it tries to win back the confidence of Wall Street. The bank said its chief operating officer and president, Joseph M. Gregory, and its chief financial officer, Erin Callan, had been removed from their posts.”

“‘Our credibility has eroded,’ the CEO, Richard S. Fuld Jr., wrote in an internal memorandum to employees about the change in executives.”

“Analyst Lauren Smith it would take time and another quarter of earnings for analysts and investors to become more comfortable that Lehman was actually marking its assets to reflect the downturn in the mortgage market and to see if business turns up.”

“While the firm took a smaller total, or gross, write-down in the second quarter - $4 billion, compared with $5.3 billion in the first quarter - its hedging, especially hedges on commercial mortgage related positions, failed. That meant Lehman wrote down $4.1 billion in the most recent period compared with $2.4 billion for the first quarter.”

“The developments mark a stark reversal of fortune for Lehman and for Mr. Fuld, its longtime chairman and chief executive. Mr. Fuld earned accolades - and more than $40 million in 2007 - for steering Lehman through tumultuous markets last year and, two months ago, he proclaimed that ‘the worst is over’ in the markets.”

“No one knows when the credit crisis will end. But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.”

“That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years.”

“A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years.”

“‘There are a lot more mortgage defaults to come,’ said Glenn Costello, a Fitch Ratings managing director. ‘We see an ongoing high level of default.’”

From Bloomberg. “The U.S. Federal Bureau of Investigation, confronting a surge in mortgage fraud, has ordered more than two dozen of its field offices to stop probing some financial crimes so agents can focus on the subprime crisis. Kenneth Kaiser, chief of the bureau’s criminal investigative division, issued the directive late last week.”

“The FBI traditionally has moved investigators to address urgent needs, he said. About 150 agents were working on more than 1,300 mortgage cases before the change. ‘If you’re seeing a significant crime problem, you have to move resources,’ Carter said yesterday. ‘We’ve got a big problem with mortgage fraud.’”

The Daily Business Review. “Florida ranks first in the country for mortgage fraud and second in foreclosures. Combine that with understaffed and overworked law enforcement agencies, a real estate industry where money doesn’t change hands unless a deal closes and crafty crooks who know the system, and there’s no sign the fraud epidemic will abate soon.”

“It’s no surprise many people involved in all aspects of the real estate industry have stories of bogus sales perpetrated by fraudsters and enabled by lax lenders or appraisers. And the same insiders increasingly question what law enforcement is doing about it.”

“Former banker Suzanne Weiss, coordinator of the Broward County Foreclosure Task Force, said the Mortgage Bankers Association’s recent allocation of about $750,000 to fight fraud nationwide will come up short. ‘That’s nothing; that’s a bunch of file folders,’ she said.”

“A South Florida prosecutor who spoke on condition of anonymity said there is an overwhelming volume of fraud. ‘I think there is tons of small-bore fraud going on, and I’m shocked at how easy it is to get done,’ he said. ‘You’d have to have thousands and thousands of [investigators and prosecutors] to stop it.’”

“During the height of the real estate boom, ‘it behooved everybody to cooperate [in fraudulent deals] because everyone made money,’ he said. ‘And the fact that real estate prices kept going up washed away the sin. Fraud was easy to hide because the next sale would have an even higher sales price.’”

“Now that the boom is over, the prosecutor said it’s likely there’s fraud in many of the South Florida foreclosures now in the pipeline. But the ‘dirty little secret’ about fraud investigations is that many investigators don’t know how to examine loan files, the prosecutor said.”

“The Securities and Exchange Commission voted Wednesday to propose tightening rules for credit-rating firms, calling for restrictions to attack conflicts of interest and expanded disclosure, including on ratings of structured finance products.”

“SEC Chairman Christopher Cox said the proposals were spurred by the subprime-mortgage crisis and a lack of understanding about the risks posed by mortgage-backed securities. He said the fact that ratings firms sometimes advised issuers of such securities on how to structure them was ‘a triple-A conflict of interest’ that added to the problem.”

“SEC investigators have found ‘ample evidence’ of rating firms consulting on securities they later rated, Cox told reporters.”

From Marketplace. “Kai Ryssdal: ‘Now that the subprime horse is gone, the Securities and Exchange Commission set about closing the barn door today. It took aim at the credit rating business with a series of proposed reforms that are supposed to prevent one of the things that got us into the credit crunch from ever happening again.’”

“‘Moody’s, Fitch and Standards & Poor’s handed out top ratings to bonds that were backed by subprime mortgages only to see those bonds collapse as mortgage defaults soared.’”

“Amy Scott: ‘Well, many of the reforms they proposed involved conflicts of interest and transparency. If the rules are approved, ratings agencies wouldn’t be allowed to help structure the bond deals that they rate…And analysts won’t be allowed to accept gifts from issuers worth more than $25 — there was kind of a cute discussion about whether coffee and danishes are allowed.’”

“Ryssdal: ‘Gotta love that after billions lost in the subprime squeeze, it comes down to coffee and donuts, right?’ Scott: ‘That’s right.’”

The International Herald Tribune. “The housing market is lousy, but television shows about housing are booming. The audiences for HGTV and TLC, the two U.S. networks with the most so-called property programming, have grown steadily over the past three years. The reason appears to be their shift in focus away from buying real estate as speculative sport to more educational and emotional shows.”

“Shows that were hallmarks of the bubble - like ‘Flip That House,’ on TLC, and “Flip This House,’ on A&E - are still around, but have been retooled with less-than-happy endings.”

“‘People loved comedies during the Depression, too,’ said R.J. Cutler, executive producer of ‘Flip That House.’”

“Even though housing might be a depressing subject to talk about, watching a show about it remains entertaining. Brant Pinvidic, who until recently oversaw TLC’s programming, recently finished building a new house near Los Angeles, but now he cannot sell his old house. So when Pinvidic describes the questions that TLC’s shows try to answer - ‘What would I do to sell my house? What could I do to pump up the value? How could I sell it quickly?’ - he finds that he wants the answers himself.”

“‘A few years ago, viewers were wondering ‘what’s my house worth’ with an exclamation point,’ he said. ‘Now they’re saying it with a question mark.’”

The Independent. “Lots of suggestions to add to our list of ‘bright spots of a recession’ which we went with last week.”

“To paraphrase the feedback, ‘No More @#/*-ing Property programmes on TV’ and ‘No more expensive government quangoes established to make sure we brush our teeth before bed’ are silver linings to cheer people up.”

“Readers born before 1975 will remember the ‘overseas jobs fairs’ phenomenon of pre-boom times. This was when foreign employers would come to Ireland and hundreds of dole bunnies would queue up hoping to get a ’start’ on building sites in Hamburg or the Isle of Dogs.”

“Well, we’ll never see that again will we ? ‘Fraid so. On Friday and Saturday, FAS are holding a ‘Construction Jobs in Europe’ fair at its offices in D’Olier Street.”

“The major difference this time around is that the State training and employment authority is presumably aiming to re-export some of the tens of thousands of overseas construction workers that landed here from Eastern Europe but now find their boots and hard hats gathering dust.”

“Earlier this month, David Hughes of Ernst & Young was appointed provisional liquidator of Denis Finn Limited, a construction firm specialising in high-end housing in the coastal areas of North County Dublin.”

“While, this occurrence has received little or no media coverage, the difficulties of Denis Finn Ltd are not just another case of a small builder being forced to the wall because of the residential slowdown.’

“The company has a strong reputation in the Howth and Sutton areas for building and selling top-of-the-range homes to affluent customers. A glance at the company’s website gives just some indication of the highly expensive inventory it is carrying and a frightening snapshot of how a successful upmarket developer can suddenly hit the skids.”

“Amongst many others, it has three 4,000 sq ft homes overlooking Howth Harbour for prices of between €2.9 - €3.2m.”

“It has two designer gaffs on Station road in Sutton for €1.3m apiece. It has two more similar new homes on Thormanby Road in Howth quoting €1.7m and it has a significant bank of €1m prized coastal sites.”

“Despite reducing prices by upwards of 20pc since last autumn, it seems that the hitherto bulletproof market for trophy coastal homes has fallen in a heap.”

From WSMV Nashville. “Property value for thousands of homeowners in middle Tennessee is sinking even lower than they may realize. One builder going bankrupt was a large part of the problem. Almost 200 Corinthian homes are either going into foreclosure or may end up there soon.”

“While the Orsburns moved to Riverwalk in Bellevue for friendly surroundings, Carla Orsburn said every time she looks around, she sees neglect. She is looking at the 24 unfinished homes and lots in Riverwalk that are going into foreclosure.”

“‘There’s nobody that takes care of that property,’ she said.”

“Due to the bankruptcy, dozens more homes from Brentwood to LaVergne are on the way to foreclosure. ‘We’ll be foreclosing on two complete subdivisions Friday the 13th,’ said Tom Lawless, who is representing one of the banks foreclosing on Corinthian properties.”

“Surrounding home values drop probably ‘25 to 30 percent,’ said Lawless.”

“Monticello said the real pain will come to people living nearby. ‘Banks aren’t going to go out there and pay top dollar for properties they’re foreclosing on,’ he said.”

“Mark Dersham of Keller Williams said the upside is that homebuyers can save tens of thousands on nice homes that may just need finishing. ‘Anywhere from 25 to 33 percent,’ he said.”

“Another possible negative for homeowners living near foreclosed properties is the possibility of rising homeowners’ association fees. When banks take possession of a home, they’re not responsible for paying those fees, so that cost may be passed on to homeowners.”

“One plus side to Corinthian’s foreclosures is that the banks will pay property taxes. Taxes for Corinthian properties went unpaid in 2006 and 2007.”

“‘It is frustrating,’ Orsburn said. But Orsburn is on the wrong side of the silver lining with her home losing value. She said summer plans to move are indefinitely shifted.”

“‘We didn’t have to move. We’re OK with staying where we are. We’ve been very lucky,’ she said.”