The Housing Bubble

It’s Friday desk clearing time for this blogger. “The price of a detached house in this upscale community fell 22 percent in October from a year earlier, helping to drag the average residential price in Canada down by 9.9 percent, the biggest decline in 26 years. West Vancouver builder Sean Hanley thought Canada’s real estate market would be immune to the housing recession. Hanley has cut his asking price to C$3.99 million ($3.26 million) and is now offering a C$100,000 bonus, on top of regular fees, to the agent who delivers a buyer. He’s starting to think it may be easier to rent the place. ‘The only other option is to reduce my asking price by C$600,000 to C$700,000 to where I’d be virtually giving the place away,’ Hanley said. ‘I’m not about to do that.”’

“Hard-working Tennesseans were lied to and tricked into signing home loans they couldn’t afford. James Slate of Greenbrier is just one homeowner who said mortgage companies ripped him off. ‘I had been taken advantage of. I know it. There’s no doubt about it,’ Slate said.”

“Jimmy and Joyce Slate of Greenbrier said they’ll never pay off their home loan. They claim their mortgage company added a $25,000 penalty to their loan then demanded payment. Slate recalled one conversation with the lender. ‘He said, ‘Well it’s got to be paid. And I said, ‘Well, what if I can’t pay it?’ He said, ‘We’ll take your damn house,’ Slate said.”

“‘Lo and behold I found they stole my house. They lied to me there’s now other way to say it. They just lied,’ said Alyce Simmons of Nashville. As housing prices soared, she decided to refinance to get money for repairs. But she was stunned to discover her monthly mortgage payment was $500 higher than she was promised.”

“Why didn’t Simmons see the actual monthly payment when she closed the loan? She said the notary who came to her house to get her to sign the papers had her sign blank pages and didn’t give her a copy of what she signed. Simmons demonstrated how the notary quickly rushed her through the stack of papers. ‘He would come through and say, ‘Sign here, initial here, sign here,’Simmons said. ‘They were going to take my house. We were going to be homeless.’”

“A review of Jing Hua Wu’s investments by the Mercury News — he owns 17 properties in three states — indicates that in the months before the killings, the housing bubble burst and many of Wu’s once-promising real estate investments tanked. While he looked prosperous on paper, with properties in California, Arkansas and Washington, several are worth less than he paid for them. And records also indicate that he also is tapping heavily into the equity in his Mountain View home.”

“Wu owes more than the current value of two houses he bought before the crash in an affluent gated retirement community in Hot Springs, Ark., according to Realtor Keitha Turner. Both houses in Hot Springs Village are now worth less than when he bought them in 2000 and 2005. ‘If you could even find a buyer, with so many houses in the Village for sale,’ Turner said, ‘his would probably go for $10,000 to $20,000 less than he paid.”’

“Wu invested in two houses in comfortable suburban neighborhoods of Vancouver, Wash. in 2005 and 2007 — near the top of the then-booming market, said Vancouver Realtor Lisa Costa. At the time, property in the city was appreciating rapidly, with equity in some locations ranging from 10 to 25 percent. But when the bubble burst, Wu was caught holding the properties. ”

“‘I’m sure when he bought it, he thought he was going to make money,’ Costa said, ‘but the market shifted virtually overnight.’”

“Government officials and housing organizations in Georgia will have $153 million to spend under the Neighborhood Stabilization Program. Even supporters concede the money will have little impact against a vast metro Atlanta real estate market in decline. DeKalb County CEO Vernon Jones, whose county gets the largest allotment, readily admits it could go horribly wrong. ‘The restrictions that come along with it … you can tell it wasn’t well thought out,’ Jones said. ‘It’s not going to have the impact it should. It came from a bunch of bureaucrats trying to score political points.’”

“When Jones heard the federal government would make cash available to fight the foreclosure crisis, he said he rushed to Washington to attend a briefing. He left disappointed when he saw there was a huge disconnect between the program’s intent and how he thought it would work on the street. ‘They just left the stakeholders out of the room,’ he said. ‘They didn’t talk to anybody. They were just flying by the seat of their pants.’”

“Atlanta Councilman Howard Shook said what little he’s learned makes him wonder whether it won’t be a spectacular failure. ‘For a government that struggles to provide meat-and-potato services,’ Shook said, ‘I’ve got a hard time seeing this as anything other than a disaster for the ages.’”

“A new wave of foreclosures may be on the horizon as unfavorable adjustable rate mortgages taken out in 2005 and 2006 start hitting home, according to those who work with people who have become overextended financially. ‘It is getting worse,’ said Celeste Collins, executive director of OnTrack Financial Education and Counseling in Asheville, which works with residents in 18 mountain counties. ‘With our mortgage default counseling, if you compare all of 2007 with where we are right now — January through October — we have seen 53 percent more people than in all of 2007.’”

“Chants of ‘Wake up, Secretary Paulson’ filled Pennsylvania Avenue Tuesday morning as a crowd of 200 — including three New Bedford residents — prayed outside the Department of the Treasury. Daniel Lesser, organizer for United Interfaith Action, said foreclosures are ‘racking New Bedford.’”

“‘We see the abandoned houses everywhere,’ he said.”

“Eight townhouses built in part with a city of Medford grant meant to promote home ownership among low-income residents will be turned into rentals after the nonprofit organization that built the houses at 11th and Grape streets was unable to find qualified buyers. Construction began in late 2006 and didn’t finish until spring 2008, said John Wheeler, Rogue Valley Community Development Corporation’ co-director.”

“President Floyd Bawlowski said RVCDC screened more than 100 applicants. The handful that qualified ended up balking on the purchase after finding more attractive accommodations when the housing market began to slip, or in some cases, they made vehicle purchases that disqualified them for the credit, Wheeler said.”

“‘We were marketing before construction in hopes of having buyers lined up before the houses were built,’ Wheeler recounted. ‘We got the loan together. We couldn’t find homeowners before construction, but the director at the time was confident they would come along, so the project began. Then, the market took a nosedive, and those buyers never materialized even though we continued to recruit home buyers.’”

“When Focus Property Group gathered eight homebuilders and purchased 1,710 acres of government land at the base of Kyle Canyon in 2005, it promised to extend Las Vegas still farther into the desert. This project, approved by Las Vegas for as many as 16,000 homes, was called Kyle Canyon Gateway. But that was then. Without a single home being built, the property has been foreclosed on by its lender, Wachovia Bank, said John Ritter, CEO of Focus Property Group.”

“‘Ritter said he has no problems speaking candidly about the marketplace, unlike those who find positive spins. ‘To a certain extent, that is how we got into this mess,’ Ritter said. ‘We all just encouraged each other to go farther out on a limb and take more leverage. I think there is a light at the end of the tunnel, and I am hoping it is not a locomotive coming. But ultimately in Vegas the good news is there is very limited supply, and when things turn round here, values are going to increase relatively quickly. I think the market has the capacity to become very strong again.’”

“He warned: ‘When we come out of this thing, we need to be more conservative. We need to use less leverage if any leverage at all. It is going to be long time before banks jump back in the lending game for land and land developers, and even to a large extent the builders.’”

“Did you see Merrill Lynch Economist David Rosenberg’s comments yesterday that the country should consider putting a moratorium on new home building? Apparently he made the remarks half jokingly, arguing that we need to curtail supply to put a floor under the market and stop prices from falling. Maybe we should stop producing cars and computers, too. That would certainly help prevent prices of those items from declining.”

“Let’s face it–we live in a consumption economy and homes, new or existing, are a big part of that equation. What about the home building industry’s comtribution to the national economy? The other problem with this argument is that supply conditions vary throughout the country and even within metro areas. People may not want to live in the places where there’s an excess supply. Are we going to force people to move to Phoenix, Florida, the Inland Empire, and Las Vegas?”

“Colorado Attorney General John Suthers today said he has reached settlements with three mortgage companies as part of a crackdown on false advertising that he launched about two years ago. Each of the three companies ran ads advertising low teaser rates and/or low minimum monthly payments associated with option ARM loans.”

“The Attorney General has also reached a settlement with Sacramento, California-based mortgage broker Tri-Point Realty, which he said sent letters to Colorado homeowners that appeared to be from a homeowner’s bank. The letters urged the homeowner to refinance to take advantage of his home’s increased value. Tri-Point, however, had no affiliation with the lender and did not conduct any research to determine if the home had actually increased in value.”

“Department of Housing and Urban Development Secretary Steve Preston recently announced what he said was a ‘mammoth leap forward for the consumer.’ So what does this mammoth leap entail? It’s an overhaul of the good-faith estimate used during the mortgage lending process. ‘Consumers need and deserve to know what they’re getting themselves into before they sign on the dotted line,’ Preston said during a teleconference.”

“To this so-called big announcement, I say big whoop-de-do. So now we get ‘reform,’ after people have bought homes they couldn’t afford with exotic loans that should never have been sold to them. Now we have so-called major reform, when lending standards are so high and credit so tight it’s hard to close on a loan anyway.”

“For me, mammoth reform would include legislation that imposed new bone-chilling cash penalties and prison sentences for anyone who deceives consumers during the mortgage process. Mammoth would be creating a commando-type enforcement division at HUD. Mortgage professionals should be as afraid of HUD as many people are of the IRS. Mammoth would be creating a new worksheet as part of the application process that would look at all monthly expenses of a potential borrower. Preapproved applicants would have to list regular monthly living expenses to see if the loan would take up more than 38 percent of the family’s monthly net income.”

“The new standardized good-faith estimate is just a start to the overhaul needed in how loans are sold.”

“The Newton Grove 100 Committee held its annual banquet recently. The highlight of the night was a speech by Jeff Etheridge of BB&T bank. He has spent the last 37 years in the banking industry. He discussed several other types of loans made by banking institutions that increase in risk as you go. The one that brought the loan industry to its knees earlier this year is a ‘pick and pay’ loan where you pick a payment. This was started by a company called Golden West Corp. ‘Lets take that same $500,000 house with the same $5000 a month payment. But, you are only paying $1000 per month. That means you are going in the hole $4000 a month. At the end of a year your $500,000 obligation is $548,000, two years it is $596,000 and at the end of three years, it is $644,000 because you didn’t pay what it was worth.’”

“‘What was happening is that investment firms were buying these packages but nobody was looking at what they were buying. They would buy at 10 a.m., sell it at 10:05 a.m. with a small margin and buy some more. This wasn’t just nationally; it was global. It was going on all around the world. The problem is nobody was looking at where these loans were or where are the houses, what is the ability to pay? Everything hinged on how much return (margin) the seller wanted. The higher the margin, the higher the risk.’”

“All these were intended to make it easier to own a house. ‘Everybody knew that housing prices were going to go up, your salary would go up and you could make the payments. But, it was an absolute farce.’”

“A former Federal Reserve governor speaking to a group of certified public accountants Thursday was critical of the actions taken by former Fed Chairman Alan Greenspan. Wayne Angell, a Kansas native who served on the Federal Reserve Board from 1986 to 1994, said Greenspan played a role in creating the housing bubble through monetary policy. He said the Fed’s move to bring the Federal Funds Rate to 1 percent in 2003 and keep it there until mid-2004 precipitated the housing bubble because there was no house price deflation.”

“‘One of the first conversations I had with Alan Greenspan was the Hippocratic Oath and the mantra to do no harm,’ said Angell, who is also a former chief economist at Bear Stearns. ‘But harm he did.’”