The Housing Bubble

Some housing bubble news from Wall Street and Washington. Bloomberg. “Confidence among U.S. homebuilders dropped to a record low in July. The National Association of Homebuilders/Wells Fargo sentiment index decreased to 16 from 18 in June, the Washington- based group said today. Readings under 50 mean most respondents view conditions as poor.”

“The NAHB index of buyer traffic fell to 12 in July from 16. All of the gauge’s three components were the lowest ever and pessimism grew in three of four regions.”

“‘Given the systematic deterioration of job markets, rising energy costs and sinking home values aggravated by the rising tide of foreclosures, many prospective buyers have simply returned to the sidelines until conditions improve,’ David Seiders, chief economist at the builders’ group, said in a statement.”

From Portfolio.com. “Through a program that provided loans on favorable terms to V.I.P. borrowers, the nation’s largest mortgage lender curried favor with politicians, government officials, and business partners who were in a position to influence policy, profits, or public opinion.”

“A loan officer…who served as gatekeeper for the V.I.P. program from 2000 to 2004, wrote hundreds of millions of dollars’ worth of loans-as much as $400 million in 2003 alone-for customers whom his superiors had singled out for special treatment. After he filled out the applications, they were processed by a V.I.P.-loan underwriting unit, which had its own branch number in Countrywide’s recordkeeping system.”

“To gain access and ‘keep their edge,’ says retired managing director Sidney Lenz, who oversaw government relations for Countrywide, the company’s lobbyists identified potential customers on Capitol Hill and in federal agencies and directed them to the V.I.P. program.”

“The company’s lobbyists were ‘incredibly receptive’ to loan requests from officials, she says, and it paid off.”

“‘Countrywide had an incredibly good relationship with Congress. It was not unusual for us to get a call saying, ‘A bill’s being introduced. It’s a little technical, and there are parts we don’t understand. Can you help educate us on this?’”

From Politico.com. “If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions. But the political tentacles of the mortgage giants extend far beyond their checkbooks.”

“They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.”

“Critics have long argued that both Fannie and Freddie operated with too small a capital cushion to adequately offset financial risk. But the mortgage giants have consistently beaten back congressional efforts to increase oversight, even after a major accounting scandal in 2003 resulted in a $400 million fine for Fannie.”

“In July 2003, Davis wrote to the American Banker, taking issue with an opinion piece by Leslie Paige of Citizens Against Government Waste, arguing that Fannie and Freddie should operate with greater transparency.”

“‘Several of Ms. Paige’s assertions bear correction,’ Davis wrote, defending Fannie and Freddie on behalf of the group. ‘The GSEs are subject to an innovative and stringent risk-based capital stress test - the toughest in the financial services industry.’”

“McCain has called the government’s weekend intervention in the struggling companies ‘correct,’ saying he hoped that the action would ‘preserve the ability of Americans to obtain loans in order to buy a home and be able to afford mortgage payments they’re having to make.’”

From CNN Money. “Treasury Secretary Henry Paulson was hammered by lawmakers on Tuesday over the Bush administration’s plan to prop up mortgage finance giants Fannie Mae and Freddie Mac. Paulson argued that the best way to assure the markets was to give the broadest possible guarantees of access to government capital by those firms.”

“‘If you’ve got a squirt gun in your pocket, you probably will have to take it out,’ Paulson said. ‘If you have a bazooka in your pocket and people know it, you probably won’t have to take it out.’”

“The rescue plan won some support. But the amount of opposition and skepticism from other members of the committee, both Democrat and Republican, suggested that hopes voiced by Paulson and Dodd for action on the proposal within the next week may be a long shot.”

“Other senators questioned whether the rescue plan would reward management and shareholders who should have seen problems coming due to the downturn in housing. And some even questioned if trying to rescue the firms at this point is really the best course.”

“‘The question we are really going to be dealing with is this a model that works any more?’ asked Sen. Chuck Hagel.”

The Associated Press. “Federal Reserve Chairman Ben Bernanke told Congress Wednesday that troubled mortgage giants Fannie Mae and Freddie Mac are in ‘no danger of failing.’ Bernanke said the ‘best solution’ is to keep Fannie and Freddie ‘in their current form’ as opposed to having the government take them over.”

“It is also vital for Congress to boost regulatory oversight on the two companies. Such powers are contained in a sweeping housing-rescue package. Congressional leaders plan to add to the bill the provisions Paulson is seeking to aid Fannie and Freddie.”

“Spencer Bachus of Alabama, the panel’s most senior Republican, said of the housing boom-to-bust situation: ‘Fortunes were made on the way up and pain will be felt on the way down.’”

The National Journal. “At least one member was unconvinced. ‘When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants,’ said Sen. Jim Bunning.”

The Birmingham News. “Sen. Richard Shelby said Tuesday the current housing crisis is an opportune time to ‘rein in’ the two government-sponsored enterprises - a goal of his for many years - but he stopped short of formally endorsing the plan announced over the weekend by Treasury Secretary Henry Paulson Jr.”

“‘We realize that they’re important to our housing. They’re important to our economy,’ Shelby said during one of two hearings on the subject Tuesday. ‘But they have to be capitalized well. They’ve got to be managed well. And they’ve got to be regulated.’”

“Shelby also mocked those who opposed stronger regulation of Fannie and Freddie in legislation he pushed years ago because they feared it would endanger the companies.”

“‘Goodness,’ he said. ‘I hope it is now clear that quite the opposite is true.’”

The Daily Bulletin. “The U.S. Department of Housing and Urban Development and the U.S. Senate are attempting to ban seller-funded downpayment-assistance programs, claiming they are a driving force behind the foreclosure crisis.”

“The housing relief bill passed by the Senate prohibits the use of seller-funded downpayments - and effectively bans the nonprofits supplying the service - on FHA-insured loans. The White House is threatening a veto should the bill clear the House of Representatives as it is currently written.”

“The House’s version of the bill, which was passed in May, would tighten standards but ultimately maintain the legality of such programs.”

“Last fall, HUD proposed eliminating the programs but was blocked in court. HUD reported nonprofit downpayment-assistance is used in 14.8 percent of all FHA loans that default within 90 days, as opposed to 7.57 percent of buyers who use gifts from family.”

“According to Sen. Kit Bond, the nationwide surge of foreclosures proves what can happen when borrowers overextend themselves. ‘Putting a family in a home they cannot afford is setting them up for failure,’ said Bond. ‘They should wait until they’ve saved … for at least a modest downpayment.’”

“And, opponents of the programs add, sellers, including home builders, merely inflate their prices to pay for the downpayment assistance.”

“Scott Syphax, CEO of Nehemiah Corp. of America, said his company helped 14,000 Californians buy a home the past year. ‘We have a number of supporters in Congress,’ said Syphax.”

The New York Times. “Bank stocks spun wildly on Tuesday in another bruising day for financial companies. The marketplace is passing harsh judgment on an industry that was a darling of Wall Street when home prices and mortgage lending boomed in recent years.”

“The missteps the banks made in good times are glaring. ‘The whole allure of regional banks has gone out of fashion,’ said David Hendler, a research analyst at Credit Sights in New York. ‘They used to have the best perfume in the business. Now, they have an odor.’”

“Even the whiff of bad news can send a stock falling. Zions Bancorporation, a Utah-based lender which barreled into construction lending in once-hot markets like Nevada and California, planned to use its in-house brokerage arm to raise $150 million in a series of deals. But when it raised only about $47 million in its first attempt, investors concluded the bank was struggling to raise cash.”

“‘The stock has literally cratered,’ said Richard X. Bove, a prominent banking analyst. ‘It has just fallen apart.’”

The St Louis Post Dispatch. “Local bankers say they are in good shape, but their customers are nervous as the bad news about lenders nationally continues to pile up. ‘People who never asked about FDIC insurance are asking about it now,’ said Steve Marsh, president of Enterprise Bank & Trust in Clayton. ‘They also ask about exposure to subprime loans.’”

“In testimony Tuesday before Congress, Federal Reserve Chairman Ben Bernanke tried to put IndyMac’s troubles in perspective.”

“‘Its failure … was inevitable,’ he said because the bank was weighed down by low-quality mortgages. ‘All banks are being challenged by credit conditions now,’ he said, adding that the Fed is keeping close tabs on the nation’s banking sector.”

“‘The real issue is, there are bankers who simply lost track of their role as the financial custodian of their depositors’ assets,’ said David Naunheim, president of commercial lending for UMB Bank in St. Louis. ‘They just haven’t stuck to their knitting.’”

“Rick Bagy, president of First National Bank of St. Louis, said local banks haven’t been hurt as much as other markets because real estate values haven’t declined as drastically as they have elsewhere. Most local banks avoided subprime loans, those made to borrowers with shaky credit.”

“‘We all tend to overreact to information,’ he said. ‘Our opinion at First National Bank is that we have reached the bottom of the housing market in St. Louis. It may be flat. We are about - and I can’t define ‘about’ - to improve.’”

The Miami Herald. “Miami-Dade County Mayor Carlos Alvarez on Tuesday announced the arrests of 30 people on charges related to mortgage fraud. The arrests, carried out over the last six months, bring the number of arrests to 56 since the mortgage-fraud task force was formed in September.”

“Real-estate professionals, including agents, mortgage brokers and appraisers were among those arrested as well as people who had sold their identities so homes could be bought in so-called straw-buyer schemes.”

“‘What is really disturbing is you can see the fraud occurring at all levels,’ Alvarez said, noting that lenders were also guilty to the extent they made loans without confirming borrowers’ identities or the information in mortgage applications.”

“Earlier this year, state legislators passed a law toughening penalties for mortgage-fraud convictions and requiring law enforcement to notify local property appraisers of properties possibly targeted by scammers.”

“Appraisers would then have to consider whether property values for neighboring homeowners should be revalued for tax purposes. The law took effect July 1.”

“Florida ranks first in the nation for mortgage fraud and second in the number of foreclosures. ‘The real estate crisis has to do not only with the economy but [with] the amount of fraud that has taken place in our community,’ Alvarez said.”