The Housing Bubble

It’s Friday desk clearing time for this blogger. “Seven people were arrested Thursday and charged with operating a $142 million mortgage and security fraud that pushed 201 Riverside County homes into foreclosure and harmed hundreds of investors in California and Arizona, driving many to financial ruin. In their wake were dozens of homeowners and investors hopeful for prosperous lives but instead, in some cases, impoverished by their losses. Deborah Weber has gone through foreclosure and bankruptcy and was forced to move with her husband from what she called their ‘dream house’ in Rialto to a mobile home in Riverside.”

“She said she has little hope that the money she and her fellow investors lost will be recovered from the defendants and returned to them. ‘I really don’t foresee any money,’ she said. ‘The most we will get is the satisfaction of them going to jail.’”

“The scheme was orchestrated, District Attorney Rod Pacheco said, by James Benjamin Duncan, of La Cresta, who billed himself ‘James the Cash King’ in Internet videos. Also in connection with the case, plea agreements on federal charges were filed in U.S. District Court in Los Angeles, said U.S. Attorney George S. Cardona. Cardona said Duncan was able to take advantage of people because home values were exploding and people thought they would continue to climb.”

“In a telephone interview Thursday, one of the alleged California victims expressed delight that charges were finally filed. ‘Yes, yes,’ said Anna Richter, who moved to Houston after being coaxed into buying three Murrieta homes and later losing them. ‘That’s where they should have been for the last three years. I can’t even describe how happy I am to finally see some movement.’”

“The slump in the US housing market may not be over, but for buyers like Daniel and Robin Akerman, for sale signs equal dollar signs. For US$150,000 - the Akermans are buying a three bedroom house in Pensacola, Florida which sold for US$225,000 at the peak of the market. ‘We’re getting a lot of house. We looked at a lot of houses before this one, and they were good prices but not as much house. Definitely excellent house for the price that we’re paying,’ says Daniel Akerman.”

“Short sales like this are increasingly popular in Pensacola, Florida. Short sales aren’t an option for everyone though. Mitchell Perry, a member of the US Navy stationed in Pensacola, bought his home at the peak of the market for $115,000. The house is now worth US$90,000 and Perry is being transferred to a new base. Compounding matters, Perry refinanced his house, without realising that his mortgage would rise to US$125,000.”

“‘There’s no selling right now, it’s either going to be rent or it’s going to be vacant and I’m going to be paying on it,’ says Mitchell Perry, US Navy hospital corpsman.”

“In 2005, the bankruptcy law was changed to make it harder to file bankruptcy. After it took effect, filings dramatically dropped. But this year, filings are climbing and are expected to total 1.5 million, the level they were at before the tighter law took effect. These days, it’s ordinary middle-class Americans, not a marginalized underclass or high-stakes gamblers, who are most apt to experience financial failure.”

“During the boom years, many middle-class Americans lived beyond their means. Middle-class families were encouraged to spend. But that often turned into a disaster when their bills increased and wages dwindled. ‘My wife and I were great at lubricating the economy,’ says Rock Macke, who lives with his wife and two children in Rancho Santa Margarita, Calif. ‘We loved to spend money, as is the middle-class thing to do.’”

“They filed for Chapter 7 bankruptcy in March. Since then, they’ve gotten rid of their expensive cars and downgraded. Macke takes care of the yard instead of paying for a gardener. ‘I got wrapped up in materialism. But in a painful way, this reminded me of important things, like a healthy family, that you lose perspective on when you’re trying to chase the American dream,’ he says.”

“As unemployed homeowners struggled to pay their mortgages, the percentage of New Jersey loans in foreclosure or at least a month behind on payments hit 14.5 percent in the third quarter, the Mortgage Bankers Association said Thursday. The rise in unemployment is the main driver behind the rise in foreclosures, according to Jay Brinkmann, the mortgage bankers’ chief economist.”

“Phyllis Salowe-Kaye, head of New Jersey Citizen Action, said that while the economy is partly to blame for the rise in mortgage delinquencies, lenders also bear some responsibility because of the exotic loans they made during the housing boom. She pointed to one type of loan popular in those days, the option ARM — an adjustable-rate mortgage where the homeowner had the option to pay less than the amount needed to fully amortize the mortgage. In those cases, the unpaid balance was added to the loan amount. But eventually, the payments rise.”

“‘We’re seeing people with exploding mortgages that have just started to explode,’ Salowe-Kaye said.”

“She watched her rewarding job in the mortgage industry disappear and her financial security dissolve in a $3 million bankruptcy. Then she embraced a total career change — only to have her first steps toward the health care industry interrupted by a frightening turn as a patient. Somehow, 47-year-old Diane Simon smiles brightly beneath a still-short shock of regrown hair, at ease in her new life entwined with two major crises of the times.”

“‘I’m more comfortable in health care than the finance industry,’ she says of her fledgling career. ‘For one thing, you don’t have to rely on the goobers on Wall Street.’”

“‘I saw an explosion of business,’ she said. ‘What I didn’t see, at that point, was the issue of value. We were seeing how values were increasing, but we weren’t seeing the trouble ahead.’”

“By 2007, houses in which she had invested — two in California, two in Hawaii — had begun the slide toward foreclosure. The rental market dried up and, with no tenants to cover her costs, she saw four mortgages and other debt snowball into a $3 million bankruptcy. And then, in late November 2008, she felt a lump in her breast. Within three weeks she had her diagnosis: Stage 3 breast cancer that had metastasized to the lymph nodes.”

“And that’s when she remarked to her husband: ‘Apparently the mortgage industry gives you cancer.’”

“The coroner’s report left no doubt as to the cause of death: toxic loans. That was the conclusion of a financial autopsy that federal officials performed on Haven Trust Bank, a small bank in Duluth, Ga., that collapsed last December.”

“At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. ‘We all could have done a better job,’ said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.”

“Many bank examiners acknowledge they were lulled into believing the good times for banks would last. They also concede that they were sometimes reluctant to act when troubles surfaced, for fear of unsettling the housing market and the economy. Then as now, banking lobbyists vigorously opposed attempts to rein in the banks, like the 2006 guidelines that discouraged banks from holding big commercial real estate positions.”

“‘Hindsight is a wonderful thing,’ said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. ‘At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.’”

“Experts outlined how the government saved the U.S. economy from collapsing and predicted its path of recovery at the University of Redlands’ Inland Empire Economic Update Wednesday. UR president Stuart Dorsey, former chief economist for the Senate Finance Committee and a self-described ‘recovering economist,’ addressed ‘FAQs’ about the recession and recovery. The debate over whether government intervention helps the economy has been raging a long time, he said.”

“‘We’re still debating whether fiscal policy had anything to do with getting us out of the Great Depression,’ he said.”

“What the government’s recent actions have done is boost consumer confidence, he said. But for the economy to recover and stabilize long term, people need to drop the mentality that spending money is the answer. ‘Perhaps it’s not a bad thing for consumption to lag behind and saving (to increase),’ he said.”

“Los Angeles-based Beacon Economics founder Christopher Thornberg’s presentation was abbreviated because of bad phone connection. He said the good news is the recession is over - the bad news is the problems are not being fixed. ‘We’re in a very weird place where government policy is the primary driver of economic activity,’ he said.”

“California is worse off than the nation as a whole, he said. But the residential market - including in the Inland Empire - is improving. He cautioned against getting caught up in enthusiasm over the market’s revival. There will be more foreclosures in the region in the coming year and unemployment is still high, he said. ‘The housing market is being rallied by mortgage rates - that can’t go on forever,’ he said.”

“Thornberg predicted slow growth in 2010 and a mild recession in 2011. ‘We have to let the economy heal,’ he said. ‘The process is painful but it has to occur.’”

“‘Clearly, things are worse than most of us would have anticipated,’ said Stephen Cauley, director of research at the UCLA Ziman Center for Real Estate. ‘And lower income homeowners are not the only ones hurting. The value of upper-income homes have gone down about as much, and in some cases it can make a lot of sense for people to walk away from the mortgage. If a homeowner owes $80,000 on a house that’s worth only $60,000, it might make sense to give it back to the bank.’”

“‘On the flipside, if you’re thinking about giving the home back to the lender, you also have to consider where you’re going to live,’ he said.”

“The number of delinquent prime loans in Minnesota climbed 5.17 percent in the third quarter compared with the second quarter and the percentage of prime loans in foreclosure grew 2.41 percent. ‘They’re terrible numbers and they just keep getting worse,’ said Scott Anderson, a senior economist for Wells Fargo.”

“‘We’re talking about people who really, truly want to pay their bills on time and are having trouble,’ said Tim Swierczek, president of the Minnesota Mortgage Association. Swierzcek’s also heard of a small number of cases where homeowners who can afford to pay their loans are choosing not to because they paid far more for the home than it’s worth in today’s market.”

“The common practice during the housing boom of stretching to afford a home is another contributor to these higher numbers, experts say. ‘People stretched to buy housing and took on more debt than they should have,’ Anderson said.”

“Sacramento-area home prices are still falling compared to a year ago, but for the first time in almost 2 1/2 years, their decline can be measured in single digits. In some parts of the state, including the Bay Area, prices are even starting to creep up again. Michael Lyon, head of Sacramento’s Lyon Real Estate, said, ‘If anything, we’ll see appreciation in the first quarter, especially in the lower end.’”

“Home affordability has hit another all-time high in Stanislaus County, putting homeownership in reach for more first-time buyers. Sales prices, meanwhile, held steady in October, with the county’s median-priced home selling for $140,000. But foreclosures continue creeping up. Modesto kindergarten teacher Andrew Sirogiannis carefully tracks all those housing statistics as he hunts for his first home.”

“‘I’ve been waiting for what I think is the bottom of the market before I buy,’ said Sirogiannis, 31. ‘I’m looking for a good, safe neighborhood and a good price (under $300,000). If I buy something, it probably will be between Thanksgiving and New Year’s when the market slows down and not so many people are bidding for houses.’”

“Sirogiannis has been financially ready to buy a home for about five years, but he thought purchasing would be foolish ‘during the real estate boom because houses were overpriced.’”

“Using her good credit rating and her income from managing a Ceres insurance office, Twenty-year-old Diana Aguilar purchased a $115,000 house in Livingston. ‘It was super simple. I was actually amazed,’ Aguilar said. The foreclosed four-bedroom house previously had sold for more than twice what she paid, so she is confident she got a good deal.”

“Aguilar’s home payment now is less than $900 a month, compared with the $800 monthly rent she had been paying. She got a Federal Housing Administration-backed mortgage that only required a few thousand dollars for a down payment. She also qualified for the $8,000 federal tax credit. Although finding the right house can be difficult, Aguilar offered this advice to other first-time buyers: ‘Don’t give up. Just keep looking. You can do it. Everybody can these days.’”

“For the first time in nearly two years, the median price of Santa Clara County houses is higher than a year ago. The median price of houses in the county that changed hands last month increased to $550,000, up 6.7 percent from October 2008. The last time the median price increased from its year-ago level was in December 2007, when the price of $739,000 was 4.6 percent more than in December 2006.”

“‘With the homebuyer tax credit, and with the lower prices compared to ‘06 and ‘07, and with lending institutions keeping homes off the foreclosure inventory … we’ve stabilized,’ said Stephen Levy of the Center for Continuing Study of the California Economy, in Palo Alto. ‘But that’s a lot of conditions. It doesn’t mean we’re not in danger of another round of foreclosures.’”

“Homebuyer Eddie Espitia, 31, was spurred to action by the federal government’s tax credit of up to $8,000 for first-time buyers. Espitia started looking about six months ago, eventually touring more than two dozen homes from Brentwood to Gilroy to Hollister. He and his mother are combining forces on the purchase, and they searched for a quiet neighborhood and a house priced from about $300,000 to $325,000.”

“After losing out on two houses, one in Brentwood and one in Hollister, he finally had an offer accepted on a four-bedroom house in Hollister. It’s a short sale, meaning the owner is selling for less than he or she owes on the mortgage, but is able to avoid foreclosure. The trek toward home- ownership has been more competitive than he had thought based on media reports, said Espitia, who manages two Starbucks stores in San Jose and Morgan Hill.”

“‘It reads as if it’s plentiful out there and quite simple, but it’s not,’ he said. ‘The amount of inventory in our price range seemed to diminish over time, and the houses were being picked off by people who were quicker and more savvy than we were.’”

“Since 1997, Chicago has added almost 150,000 condos to its housing stock. The people who bought those units maybe didn’t fully realize it at the time, but they’re taking part in a big experiment in communal living. Everyone has to pool their money to fix the roof or keep the elevator working. And if your neighbors stop ponying up, you’re on the hook. Now the foreclosure crisis is pushing many condo buildings to the verge of collapse.”

“When Dee Hutchinson bought her condo, let’s just say this was not part of the plan. This 27-unit condo building in Chicago’s Washington Park neighborhood is almost completely empty. Most of the units are foreclosed or abandoned, some inhabited by squatters. For months, only Hutchinson and a few other owners have been paying assessments. They’ve had no heat or hot water since April when the gas was shut off.”

“Hutchinson loves her unit and wants to protect her credit, but even she had started packing to leave for good. She says she was tired of crashing at her brother’s place. HUTCHINSON: ‘And I was just paying mortgage and struggling paying this mortgage and not living here and I was just going to walk away and foreclose like everybody else.’”

“Angela Maurello of the non-profit Community Investment Corporation has been working on this for years. Her program acts as a receiver on behalf of the city for distressed condo buildings. I asked her how many she thinks there are in Chicago. MAURELLO: ‘Oh there’s hundreds because we already have 200 of the ones we have, so I’d say there’s got to be 400, 500 of these buildings in the city. This is a serious problem.’”

“And that means lots more condo owners like Hutchinson trying to shoulder the expense of a whole building without help from their neighbors. Turning this building around won’t be easy. Investors are now buying units there for as low as $14,000. Hutchinson says some of the new people have as little commitment to the building as the previous owners.”

“HUTCHINSON: ‘It’s been a struggle, because we have no control of the people moving out and going foreclose, but then we have these knuckleheads coming in buying these units short sale – that’s fine, but you still have to pay assessments. So we have new people coming in now that we’re fighting with.’”

“Hutchinson sinks back into her couch, exasperated. She says she misses the days when she was a renter. And she says if she ever buys another home, it won’t be a condo.”