The Housing Bubble

Readers suggested a topic on mortgage brokers and lenders. “Here In Northern Ohio things seem to continue on a downhill slide. Local bank refuses to extend a small HELOC that I’ve had for 30 years. They wring their hands and say the government rules wont let them make any exceptions. I used a credit card to pay it off; interest went from 3.75 to 10.5 but avoided $800 in fees and an 8 percent rate. Bank would not let me talk to the local branch people I’ve dealt with. Made me call an 800 number and talk to some strong arm type in Reno. Wanted all new info, last two pay stubs, last two years IRS filings, with attachments, photo ID, electronic appraisal, in person hard appraisal.”

“Told them to take a hike, canceled the loan request and paid it off. Four days later they send a form letter saying my loan was denied. Maybe they want to charge me for having the audacity to ask for a loan. This may be a time bomb for people on the edge whose 10 year HELOC’s are coming due. Had my balance been $60K ( like a lot of people around here) instead of a measly $8K I’d have walked. The young branch manager I talked to when I paid it off said they’re seeing more and more of these denials. He didn’t know the outcomes; headquarters keeps them in the dark. When I advised him to get his resume up to date he went pale. His goodbye handshake was ice cold.”

“True story: how I contributed to the housing bubble: In 2004 I got a job as an originator with TARP bank. Our primary product was HELOCs, also fixed-term equity loans (the phrase ’second mortgage’ was never used) and credit cards. We got $8/hour+ commission. Things went really well at first and the commission dollars started to roll in.”

“It was a pleasant surprise to sell a customer a new HELOC and then have the appraisal come back higher than expected (because of rising house ‘values’) and offer them a higher credit line which meant higher commissions for me. We called existing HELOC customers with unused credit and convinced them either to roll over credit card balances to the HELOC or just to go out and spend on it, even offering to mail out a book of checks tied to the account.”

“Greenspan started raising interest rates every six weeks throughout 2005, and the HELOC rates (80% LTV: prime, 90% LTV: prime+1, 100% LTV: prime+2 for 720 and above credit scores) could no longer compete with conventional mortgage rates, and my commissions started dropping. I moved over to a salaried processor job before leaving TARP bank to start grad school in 2006.”

“While there were a few customers that I may have ‘helped’ by rolling their 20% APR credit card balances to a 5.5% HELOC, I wonder how much economic misery I am indirectly responsible for causing, how many divorces, bankruptcies, etcetera. Nobody I worked with then still works for TARP bank, and other then the commission checks when we were high-rollers, it was one of the worst jobs I ever had.”

A reply, “What caliber gun did you hold to their head to make them take the money?”

The St George News. “In October 2008, while working on the oil fields in Vernal, Utah, Anneliese Freeman-White found a lump in her left breast. When her doctor told her it was breast cancer, she didn’t immediately tell her husband or other family members. The first thing she did was call Wells Fargo, the holder of her mortgage and home equity loan. ‘Before I even told my family that I had cancer I called Wells Fargo,’ Freeman-White said. ‘I told them I needed to get my home loan modified, and that I’m going to need help because I was [the] main supporter of my family.’”

“Freeman-White and her husband bought the property and paid a contractor to build the house in 2004 for a total of $138,000. They put $30,000 down in cash – money they’d gotten from a settlement for her husband’s failed back surgery. In 2007 Freeman-White and her husband also took out a home equity loan with Wells Fargo to build a fence and landscape their yard. They only needed $15,000 to cover these expenses but the loan officer convinced them to borrow $45,000.”

“‘We were stupid,’ Freeman-White said. ‘We should have said ‘no, we’ll just get what we need to build the fence.’”

The Journal Sentinel. “Welcome to Arizona, real estate’s death valley. This is where Marshall & Ilsley Corp., the once-great Wisconsin bank company, and many other lenders lost billions of dollars when the real estate bubble burst, throwing countless homes into foreclosure, some with mortgages in the millions of dollars.”

“‘M&I became the place to go for construction loans and lot loans,’ said Jay Luber, owner of Galaxy Lending Group, a large Phoenix mortgage broker. ‘They were very aggressive. They had good rates and good programs.’”

‘Unfortunately, M&I targeted two market segments that are especially volatile, said Jay Josephs, owner of a Phoenix appraisal company that did work for M&I. ‘The worst segment of them all is the custom lot, and the second-worst is the luxury home, and (M&I’s) strategy focused on those two strategies,’ Josephs said. ‘ . . . It’s no wonder they’re in the positions they’re in.’”

“M&I’s prowess in writing loans stood out in some undeveloped areas of metro Phoenix because many other lenders - with the exception of the National Bank of Arizona - shunned those areas. M&I, which went from having 14 branches in Maricopa County in 2000 to 45, needed the loan revenue. ‘They decided, ‘We’re going to grow in Arizona - we have a bunch of branches now we need the loans,’ said Michael Thorell, president and CEO at the Pinnacle Bank in Scottsdale. ‘They had to support that growth, and the only way banks can make revenue is with loans.’”

“Some of the areas targeted by M&I are desolate - a few homes scattered amid dirt roads and undeveloped lots. ‘I go out there, and I see vultures. . . . You really see vultures,’ Brett Barry, a Realtor with about 20 years’ experience, said after reviewing one area north of Scottsdale that has properties foreclosed by M&I and other lenders. ‘People, many of them wealthy, were saying, ‘Hey let’s buy a piece of land, and when our kids are out of the house we could build a house there,’ Barry said.”

“It’s quite a change from a few years ago, when some areas outside Phoenix were flooded with people like the Lockwoods, driving prices up in their search for the perfect piece of land. ‘Everything just went to hell,’ Victor Lockwood said with a sigh during an interview in the couple’s spacious living room. ‘I just want out of this mess.’”

“The Lockwoods’ dream began to collapse in 2009 when Victor, 71, a tool and die maker, had health problems that prevented him from working. And Rita, 61, who deals poker at a casino, lost several months of work because of a broken wrist. M&I has rejected an extension of a loan modification, so when their interest rate and payments increase next year, they expect to lose the home - and move into a trailer across the dirt road.”

“‘What other choice do we have?’ Rita asks.”

“M&I will lose, too - the Maricopa County assessor values the home now at $390,000, about $200,000 less than the mortgage.”