The Housing Bubble

The Enquirer reports from Ohio. “Linda and Peter Gatchell’s dream was simple. After years of saving, the Deerfield Township couple was ready to move from their suburban cul-de-sac to a five-acre spread in Morrow. So in June they placed their three-bedroom home in the Mason school district on the market for $175,000. Then they waited. And waited. And waited. ‘I thought it would be really easy to sell my house because of the price and the location. Boy was I wrong,’ Linda Gatchel said. ‘I had this big old plan, and now it’s crumbling before me.’”

“Caught between a deepening recession and poor housing market, the Gatchells are among a growing number of home sellers who - locally and nationally - are turning to a new strategy: permanent housing swaps. So far, Linda Gatchell has had one response from her Craigslist posting.”

“‘Unfortunately, our house wasn’t what the person was looking for,’ she said.”

The Detroit Free Press from Michigan. “At the end of the third quarter, 14.4% of Michigan banks were rated problematic, troubled or worse by BauerFinancial, up from 13% at the end of June and significantly above the national average of 6.2%. Michigan’s rising jobless rate and the crises in the auto and housing industries are expected to add to the financial pressures facing the state’s banks. Main Street was the first bank to fail in Michigan since 2002.”

“‘We will see further bank failures,’ said Terry McEvoy, an analyst who follows several Michigan banks.”

The Journal Sentinel from Wisconsin. “Marshall & Ilsley Corp. on Thursday declared a three-month foreclosure moratorium on mortgages it holds for owner-occupied homes. Milwaukee’s M&I, which is the biggest bank based in Wisconsin, said the moratorium is intended to allow the bank and struggling homeowners to work out loan modifications that could keep people from losing their homes.”

“‘There are certain situations that are beyond repair, but we’ll never know that until we actually counsel with them,’ said Richard Becker, an M&I senior vice president.”

“Russell Kashian, a University of Wisconsin-Whitewater economics professor who is tracking foreclosures in the state, said mounting job losses in the recession will make it tougher to modify loans enough to make them affordable. ‘There’s nothing you can do if people aren’t paying because of being unemployed,’ Kashian said. ‘You can’t lower the payment low enough.’”

“Wisconsin unemployment hit its highest November rate in 21 years, according to data released Thursday, and state employers continue shedding jobs in greater numbers. Separate payroll estimates show a loss of 32,400 Wisconsin jobs in the last 12 months.”

“November was the ninth month in a row of year-to-year declines and the biggest 12-month drop since mid-2002.”

The Post Tribune on Indiana. “Indiana has one of the highest foreclosure rates in the United States, according to the latest quarterly report issued by the Mortgage Bankers Association. The state was fifth in the percent of foreclosure inventory at the end of the third quarter in September, the association’s National Delinquency Survey revealed.”

“At 3.59 percent of all loans in foreclosure, Indiana was topped only by Arizona at 3.86, California at 3.90, Ohio at 3.93 and Nevada at 5.58 percent.”

“The reasons, however, are different for Indiana than for the four states ranked higher. Sam Khater, senior economist with First American CoreLogic, said Indiana has had foreclosure issues for some time. ‘But the United States is quickly catching up,’ he said.”

“Khater said a drop in home prices coupled with job loss hit Indiana hard. ‘Indiana lost 1.1 percent of its employment base in the last year’ Khater said. ‘That’s not a good combination.’”

The News Democrat from Illinois. “In November, 100,000 U.S. consumers filed for personal bankruptcy. More than 32 percent of them filed under Chapter 13, which allows debtors to restructure and repay creditors over 36 to 60 months. That’s more than 39 percent higher than the number reported in November 2007. This is happening after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, a law enacted in October 2005 to make it more difficult for consumers to file for Chapter 7 bankruptcy, under which most debts are forgiven.”

“Bankruptcy attorney Bill Mueller has seen a shift in clientele. Once upon a time, bankruptcy was primarily a choice for the poor. Today, he said he has filed for clients from every economic status level. ‘I’ve filed for members of the military, ranking officers, clergy, lawyers, doctors and people who make a large income who are still above what they can handle,’ he said. ‘We have some with six-figure incomes.’”

“Although the new law intended to tighten Chapter 7 regulations, Collinsville bankruptcy attorney Karl Wulff said he is seeing a rise in Chapter 7 filings versus Chapter 13 filings. He said that before the collapse of the real estate market and credit crisis, about half of the cases had filed under Chapter 7. ‘Now, with equity no longer in their houses to save, what they are doing is throwing in the towel and filing Chapter 7 and surrendering the house,’ he said.”

“Mueller also said that the mortgage crisis…has pushed consumer confidence to a new low and has consumers taking drastic measures, like abandoning their homes. ‘I have never seen this number of people coming in and saying, ‘I’m giving up my house,’ doing Chapter 7 and just walking away,’ Mueller said. ‘In years past, they would have tried to something like Chapter 13 to restructure their mortgage.’”

“Attorney John Johnston in Belleville, said he has had many clients file under Chapter 13. Johnston said this option can help individuals catch up on a delinquent mortgage, but it probably won’t help afford the monthly payment. ‘We’re filing a whole lot of those right now,’ Johnston said. ‘The one thing about Chapter 13 that it can’t do right now is it can’t change payments. If you really can’t afford your mortgage payment, Chapter 13 isn’t going to solve the problem.’”

The Kansas City Star. “A federal jury in Topeka has convicted Kansas City area homebuilder F. Jeffrey Miller and two others of multiple felonies and acquitted a fourth defendant. Miller, 47 of Stanley, was convicted on four felony counts: conspiracy, unlawful monetary transactions and two counts of criminal contempt.”

“Miller and others still face charges under a larger indictment brought in May 2006. That case alleged a $25 million bank fraud that prosecutors said amounted to a ‘fraudulent real estate machine.’”

“As a builder, Miller was among the most active in the Kansas City area during the late 1990s. He pulled nearly 800 permits to build single-family homes between 1994 and 2002. The jury still must weigh the government’s case to require the defendants to forfeit certain assets. The indictment listed all assets of Miller Enterprises and other businesses and two boats — one named Bling-Bling and the other Pipe Dream — as subject to forfeiture.”

The Pioneer Press from Minnesota. “Foreclosures in the Twin Cities and across Minnesota keep piling up in record numbers, but the rate of increase this year has leveled off a bit, according to a report. The finding supports the idea that Minnesota already has experienced what Prentiss Cox, a University of Minnesota law professor who studies the housing market, argues is the first wave of the foreclosure crisis. That wave, he said, has been tied to the ‘inevitable’ failure of homeowners to make payments on subprime mortgages.”

“Such foreclosures crested in Minnesota this summer, Cox believes, and likely will continue to decline, since subprime lending largely came to a halt in mid-2007. But there’s still a second wave of foreclosures on the horizon, Cox said — homeowners failing to stay current on payments for so-called ‘Alt-A’ adjustable-rate mortgages.”

“Those loans were made primarily from late 2003 to 2006, and typically start resetting after five years, Cox said. Whether those homeowners will be able to stay out of foreclosure will have a lot to do with the general health of the economy, he said.”

“‘The second wave could be substantially less — we could see a moderation and a downturn in foreclosures,’ Cox said. ‘Or, it could make the first wave look bad but not remotely as bad as the second wave.’”

The Duluth News Tribune from Minnesota. “Now that the economic downturn is officially a recession, can we go back to the subprime mortgage crisis that started it all and ask the obvious question: Shouldn’t all those high-risk loans gone bad have been covered by private mortgage insurance? Yes, if all the high-risk borrowers and their lenders had been playing by the rules. But they weren’t.”

“‘Exactly. They weren’t insured,’ Jeff Lubar of the Mortgage Insurance Companies of America said from Washington on Friday in response to my is-it-me-or-is-the-rest-of-the-world-crazy question.”

“As most first-time homebuyers know, PMI is a policy lenders will make you buy if you don’t put down enough money — usually 20 percent — on your home. The purpose is to insure the loan in case you default.”

“My wife and I had to pay it on our previous home in Massachusetts and assumed we’d have to do the same when buying a house here. But to our surprise, our mortgage broker said no, we didn’t. The trick (he didn’t exactly call it that) was that the 10 percent we planned to put down would instantly establish 10 percent equity in the home. That meant we could qualify for a home equity loan for an equal amount, bringing us up to 20 percent and Voila! No PMI required.”

“The mortgage company providing the primary loan on the house was offering us a second loan that we would hand right back to them to prove, with their money, that we weren’t a credit risk. ‘OK,’ I said, and we shrugged it off, thinking they were doing it because we had very good credit and because we planned to sell the Massachusetts house anyway. We did, and did well on the sale, and immediately paid off the second mortgage that we called ‘the stupid loan.’”

“But in fact, the deal had nothing to do with our ability to pay. Thousands (millions?) of subprime borrowers were doing the same thing, including those who checked the ‘no-income-verification’ box on their loan applications. Some even bought houses with zero down and still got home equity loans to avoid PMI.”

“So should I have been flabbergasted when the housing crisis hit and our mortgage company wound up in the center of it? ‘They made more money on it,’ Lubar said of the lenders who concocted the scheme. ‘The underlying premise of all of this was that the market would continue to expand and prices would keep rising.’ As we all know now, instead the bubble burst.”

“Some of the prey is as much to blame as the predators. In researching this column, I came across a financial writer’s advice to a California couple with a $415,000 first mortgage (at 5.75 percent) and a $163,000 second mortgage (at 9 percent) taken out to avoid PMI. Big shocker: They can’t pay.”