The Housing Bubble

A report from the Connecticut Post. “In Connecticut there are thousands of foreclosures, according to the state Judicial website. Despite a foreclosure crisis hammering the nation for three years, distressed homeowners who want to keep their homes are facing a disjointed and uncoordinated process that has left many sitting in homes for months without knowing their fate. Photos of Judy and Jim Pepe in high school hang on the wall. They also have their wedding photo on the wall. They’ve been able to hang those pictures there since 1978 when they bought the home — their first and only.”

“But now, in their twilight years, the pair are worried that the pictures will have to come down and they will have to move because of a bad decision a few years ago and some bad luck. The Pepes refinanced into an interest-only loan a few years ago. They said they didn’t realize what they were getting into, but the salesman who gave them the Countrywide loan made it sound like a smart move. Now, they think they owe about $169,000 on the house.”

“They fell behind when Jim had some medical problems. They were able to get Bank of America to give them a temporary modification that put their payments at $975 a month, but then Judy fell ill and was hospitalized and they missed the first two months of payments. Since she’s been out, they haven’t missed since. Still, Bank of America, which took over Countrywide, sent them a letter saying the modification would not be made permanent.”

“‘We don’t want to be out on the street,’ Judy says. ‘We’re just in limbo. We don’t know where we stand,’ Jim says.”

“William Raveis, CEO of Raveis Real Estate, Mortgage and Insurance, has more than 35 years in the business and is plainly disturbed with ‘the ineptitude of the banks.’ Raveis said in the 1990s, when the nation faced a similar situation, the government and banks handled it better. The bad assets were taken away from the banks by the Resolution Trust Corporation, a government entity that could make decisions much more quickly on what properties would be foreclosed upon and which could be saved. This time around, the banks got money and kept the assets.”

“‘They got billions and trillions of money from (taxpayers) and they have no incentive to do deals,’ Raveis said. ‘If you were getting money and had bad assets, you don’t have to get rid of it so fast.’”

“Bridgeport Mayor Bill Finch said it’s unconscionable what’s happened. ‘I can’t believe some people didn’t go to jail,’ Finch said of the financiers who gave out loans without verifying incomes or sometimes falsifying documents during the housing boom. ‘Instead, we bailed them out.’”

The Boston Herald in Massachusetts. “Foreclosure petitions, the first step in seizing a home, increased to 2,431 last month, up from 2,013 in April of last year, a nearly 21 percent jump, according to The Warren Group. Foreclosure deeds, which represent completed foreclosures, surged nearly 80 percent to 1,372 in April from 764 in April 2009. Foreclosure deeds, which represent completed foreclosures, surged nearly 80 percent to 1,372 in April from 764 in April 2009.”

“Timothy Warren, CEO of The Warren Group, noted that the time it takes for a Massachusetts property to move from the first stage of the foreclosure process to auction has shrunk to 138 days, down from 234 days in Massachusetts in 2008. ‘We believe that the faster track to auction stage in foreclosures is due to processing improvements that lenders have made as they become more familiar with compliance on government programs and regulations regarding foreclosures,’ Warren said.”

“A Boston developer bought 41 unsold condominiums within walking distance of Fenway Park at a foreclosure auction for $13.5 million. The Davis Cos., one of the region’s largest privately held owners and developers of commercial real estate, paid an average of $329,268 per unit for the dwellings at Audubon Park. But now Jonathan Davis, the company’s CEO, is figuring out what to do with them.”

“Completed in 2007, Audubon Park includes 53 studios and one- and two-bedroom condos. The six-story development’s finishes include marble bathrooms, stainless-steel appliances, granite countertops and bamboo wood flooring. But after the city’s housing market deteriorated, Robert Fox, the previous developer, sold only 12 units. Later, the remaining units went to foreclosure.”

“‘It was a double whammy,’ said Davis. ‘First, Fox was faced with a slow market, and then the lender stopped funding the project.’”

“Davis said he is considering renting the remained units or hiring a firm to sell them. The initial dozen units fetched from $289,600 to $700,000, according to the Suffolk Registry of Deeds. ‘I hope we will make money,’ said Davis. ‘I don’t know if we’ll make a lot of money, but I feel good that at the price we paid, we won’t lose money.’”

The Courier Post in New Jersey. “In 2005, when Wildwood’s Marina Bay was still on the blueprints, the opening bid for a slice of the Jersey Shore was $495,000. Since then, the market for vacation homes has wilted like cotton candy dropped on this resort’s celebrated boardwalk on a hot afternoon.”

“Last year, Marina Bay’s developer filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. On May 23, the bank will auction off 28 three-bedroom condominiums at the bay-view complex, which once had price tags as high as $699,000. ‘Wildwood is an overbuilt market with too much product and is likely to struggle for a very long time,’ said Jeffrey Otteau of Otteau Valuation Group, an East Brunswick-based real estate analyst.’

“While New Jersey currently has a nine-month inventory of unsold homes, the backlog in Cape May County is 22 months. In Wildwood, it is expected to take 29 months to find buyers for the glut of properties. RealtyTrac said prices have declined 20 percent in the town in the past 12 months.”

“In Wildwood Crest, 25 condos carved out of the former Nassau Inn will be auctioned May 16. ‘No distress here, just nice people who are getting older and want to sell their properties and get on with their lives,’ said Clinton-based auctioneer Max Spann.”

“Nassau Inn on the Beach features ocean views, furnished one-bedroom, one-bath units, a heated pool and a game room. ‘There is a management company that changes the sheets and takes care of things,’ Spann added. ‘We think that will appeal to buyers who want to stay there a couple of weeks a year and rent it out the rest of the time to help pay the mortgage.’”

“The minimum bid for the units, previously priced at $256,000, is $55,000.”

The Press of Atlantic City in New Jersey. “Home builders say that while the rest of the nation has been in a severe recession, they have been in a depression. From 1.8 million housing starts in 2006, the industry was cut to less than a third of its former self with a low of 553,000 starts last year, the National Association of Home Builders says. Sales of new single-family homes plunged 65 percent, from 1 million to 372,000.”

“The home-building slump has nearly halted the large new developments that were common in the growth townships of southern New Jersey during the mid-decade housing boom. Mary B. Anderson, director of sales and marketing for Tim Schaeffer Communities, sees inventory coming back more slowly than demand. ‘All builders have scaled back. The last thing they need is to be sitting on ground that is not doing anything,’ she said.”

“Anderson was an independent home builder before the downturn, and might do some building again in a joint venture with Tim Schaeffer Communities. ‘I’ve still got two lots. I’m sitting on those like a lot of builders, waiting for the market to turn around,’ she said. ‘We’re all just treading water and hanging in there.’”

Crain’s New York Business. “When Michael Lefkowitz’s client was offered $12 million for a Brooklyn apartment building, 12 times what he’d paid for it 30 years earlier, he jumped at the opportunity. The client, who declined to be named, then moved quickly to defer taxes on his 2007 sale by pouring the proceeds and more into the purchase of several small shopping centers across the country. During the recession, however, several of the chains went bust, pushing the shopping centers to the brink of foreclosure.”

“‘My client went from owning a good-quality property in New York City and making a large profit on its sale to having several foreclosures to deal with,’ says Mr. Lefkowitz, a partner at law firm Rosenberg & Estis. Cruelest of all, his client also owes the government millions of dollars in back taxes on the original Brooklyn apartment house sale.”

“Many other New York landowners are finding themselves in the same predicament, as so-called 1031 exchanges that they made years ago are pulled apart by the downdraft in property prices. With the value of many of those purchases down 30% to 60% and with some targeted for foreclosure, the owners find themselves in a bind. If they are forced into a foreclosure, they would not only lose out on that transaction, but would have to pony up huge capital-gains taxes on their earlier sales.”

“As a result, many owners who conducted 1031 exchanges during better economic times are feeling trapped in their money-losing investments. During the market boom, debt was cheap and plentiful, and many buyers relied heavily on borrowings to fund their deals. With property values down, often below the value of the mortgages, these owners find themselves with little or no equity to cover the taxes that are due on their earlier transactions, according to Lou Weller, a principal at Deloitte Tax.”

“Faced with bad news on virtually all fronts, many of those involved in 1031 deals are calling it a day. ‘Today, landlords are looking to unload their properties, pay taxes on their capital gains before the rates are raised and pocket whatever is left,’ says Peter DeCheser, a managing director at Jones Lang LaSalle.”

City Limits in New York. “Sara Monestime was one of 72 families, most of them first-time home buyers, who in 2004 bought into the Spencer Street condominiums in Bedford-Stuyvesant only to find a year later that their investments were worthless because the developer, Mendel Brach, failed to comply with zoning rules when he constructed four nine-story buildings in a neighborhood typically capped at five stories.”

“Because the buildings were rife with defects and building code violations, in 2005 the city revoked each building’s temporary certificate of occupancy–the document that entitles owners to legally occupy, refinance or sell their property. Events left buyers like Monestine owning properties that have no legal right to exist. With no certificate of occupancy, the residents have been forced to keep up on mortgage payments on properties they cannot legally sell or refinance. They worry that their money is going into a black hole.”

“Brach settled the suit by consenting to a judgment of $10.9 million to be awarded to the Spencer Street residents. He also agreed not to sell condos for five years. The agreement did not require him to admit fault. But so far the residents, who paid between $280,000 and $445,000 for their condos, have received little money and are struggling to come up with the millions of dollars needed for building repairs.”

“The residents themselves are the sort of newcomers associated during the real estate boom with gentrification in once-marginal neighborhoods around the city. From 2000 through 2008, the city added 170,000 new living units, according to the Furman Center for Real Estate and Urban Policy, many of them in ‘areas of the city that hadn’t seen large-scale building for some time.’”

“So far, most of the money that the residents have received has been in the form of garnished wages from Brach’s job at a Brooklyn Bakery, which amounts to just $280, or $3.88 per unit, a month. Spencer Street’s lawyer says that Brach may be trying to hide assets. Monestime is unsure how to proceed. On one hand, she wants the bureaucratic and financial nightmare to end. On the other is her desire for Brach to be held accountable. ‘We’re going to drop a $10 million judgment for air rights that should have been ours from the beginning?’ she says. ‘It’s just so twisted.’”

CBS News in New York. “Here’s the problem with the Obama Administration’s approach to foreclosure prevention: it depends entirely on the banks voluntarily doing the right thing, even when homeowners have held up their end of the bargain to prevent a foreclosure.”

“Take the case of three homeowners in Queens, New York. Permanent modifications denied. Delinquency reports to credit rating agencies issued. And the cherry on top–foreclosure. These three homeowners-each working full-time, with at least one job, working up to six days a week–are fighting back. With the help of the Urban Justice Center, a non-profit legal services provider in New York, they filed suit last Tuesday against the bank in federal court in Brooklyn.”

“The lawsuit alleges that Chase instructed homeowner Alex Lam to deliberately miss mortgage payments in order to become eligible for a modification. Lam bought his house in 2002 and refinanced in 2005. Lam says he skipped payments in February and March of 2009 on the bank’s advice. Those are the only payments he has ever missed but he now faces foreclosure. Chase says its Net Present Value (NPV) test–required by HAMP to determine if the value of a modification is worth more to investors than a foreclosure–is the reason Lam isn’t receiving a modification.”

“A Treasury spokesman told me the Administration is very concerned about moral hazard–rewarding people for taking out loans they never should have taken. But clearly the most hazardous moral around is continuing to cater to the banks’ interests. It doesn’t matter whether someone is losing their home because of a bad subprime mortgage, a lost job, or because they owe more on the mortgage than the home is now worth. Every foreclosure decreases the property value of a neighbor’s home. Every dollar lost in property value–and over $7 trillion in wealth has now been lost by American households–reduces local and state revenues.”

“As John Taylor, CEO of the National Community Reinvestment Coalition, recently put it, ‘Everybody has a dog in this hunt when it comes to these foreclosures.’”

“Tamara Williams lives with her two sons in a home she purchased in 2005 and has made three on-time trial payments of $1,274 this winter. She fell behind on her mortgage when she lost her job in November 2008, and went into foreclosure four months later. She now works doing post-renovation and demolition cleanup for a contractor and also attends school. ‘The Obama administration’s program was supposed to give people like me a lifeline and a chance to save our homes. But if the banks won’t play by the rules, what else are we supposed to do?’ said Williams.”