The Housing Bubble

The Worcester Business Journal reports from Massachusetts. “Foreclosure activity started to pick up again in July, according to the latest numbers from the Warren Group. Currently, Worcester County contains more communities with high rates of homes either owned by banks or in foreclosure (also known as “distressed” homes) than any other Bay State county, according to an analysis by the Massachusetts Housing Partnership. Winchendon, North Brookfield, Athol, Fitchburg, Ashburnham, Worcester, Warren, Hardwick and Leicester all made the list of the top 20 most distressed communities in the state.”

“Rick Healey, president of Foster-Healey Real Estate in Leominster, agreed that foreclosures have affected sale prices in North Central Massachusetts. ‘Does it have an impact on the market and will it continue to have an impact on the market? Yes it will, in terms of keeping prices from appreciating,’ Healey said.”

“The silver lining for real estate agents, he said, is that people who are employed have been taking advantage of lower prices and interest rates as low as three to four percent. ‘That’s almost free money,’ he said.”

The Kennebec Journal in Maine. “The Choates’ home on Bassett Road has been foreclosed on before. Shari Gregory, a neighbor, said in her 16 years living on the road, there have been four owners. The neighborhood is desirable, Gregory said. If the Choates lost their home to foreclosure, she said, another family would likely move in. Gregory, who called herself a liberal Democrat, said though the government can’t bail out all homeowners who overextend themselves, those in trouble need aid.”

“‘I can understand it’s hard in this economy,’ she said. ‘Yeah, they deserve some help.’”

“Achieva Home Loans Inc representatives told the Choates in May 2006 they were eligible for an adjustable rate loan with a 9.25 interest rate for the first two years, with no money down. Because they were buying a house for less than appraised market value, the representative said they would be eligible for a 30-year fixed loan, dropping the interest rate to 3.5 percent after a year, because of the equity in the home. ‘The reason I fell for it, I guess, was he said because I paid so much less than what the house was worth, that we would have enough equity in our house to qualify for a lower interest rate,’ Lynne Choate said.”

“That loan, with easing terms, never materialized. Instead, rates went up. In September 2006, Massachusetts shut down Achieva and 10 other mortgage firms after investigators determined ‘brokers steered prospective home buyers into mortgages they couldn’t afford, and lenders looked the other way,’ according to published reports.”

“The Choates’ phone calls and letters now come from Litton Loan Servicing. Documents show Litton — an arm of investment giant Goldman Sachs until earlier this summer — has received its own federal bailout. Documents show it has been given $50.6 million under the Making Home Affordable program since 2007. According to a Bloomberg News report, Litton had about $41.2 billion in unpaid principal mortgage balances as of March 31.”

The Brooklyn Daily Eagle in New York. “Home sales are slow but prices are holding steady, according to the New York City Quarterly Housing Update (Q2 2011) released last week by NYU’s Furman Center for Real Estate and Urban Policy. Overall home sales volume declined 20 percent from the first to the second quarter of 2011, and is down 40 percent compared to the same period in 2010.”

“However, home prices increased citywide by about 6 percent from the first quarter to the second quarter of 2011, although they remain 21 percent below their peak in the fourth quarter of 2006, according to the report. In Brooklyn, home prices increased nearly 8 percent in the last quarter, but are still 24 percent lower than their peak.”

“In Manhattan, homes appreciated roughly 4 percent in the last quarter, and are now only 7 percent below their peak values. ‘We saw fewer foreclosure notices in this quarter than we did in the same quarter of 2010,’ said Ingrid Gould Ellen, faculty co-director of the Furman Center. ‘Yet, nearly 7,000 households were newly affected by a foreclosure notice in the second quarter of 2011 and nearly 3,100 of those households were in Brooklyn.’ Additionally, 52 percent of new foreclosure notices in the last quarter were issued to two to four family homes, mostly concentrated in Brooklyn and Queens.”

The Star. “Bob Wilmers, CEO of Buffalo’s venerable M&T Bank Corp for 27 years, ran M&T like its prudent Canadian counterparts until it mattered. Like so many of the world’s largest financial institutions in the mid-2000s, M&T gave in to peer pressure and criticism from securities analysts that it was unduly risk-averse.M&T accelerated its writing of ‘Alt-A’ mortgages, just a notch above subprime or junk mortgages, to borrowers of doubtful creditworthiness. M&T also bought $131.7 million worth of collateralized debt obligations (CDOs) from Deutsche Bank AG.”

“And M&T took a 20 per cent stake in Bayview Lending Group, a Miami-based commercial mortgage lender. The Buffalo bank was soon heavily exposed in Florida, California and Arizona. Just 15 per cent of M&T’s loan book was in those three states, but they account for half the bank’s writeoffs since 2007. In the mid-2000s, ‘we were looking pretty mediocre,’ Wilmers says, compared with spectacular gains posted by fellow regionals.”

“I ask Wilmers how could he sign off on the ill-fated CDO purchases, given his history of extricating the then-troubled M&T from exotic foreign loans. ‘I just wasn’t focused,’ he allows. ‘I had papers in front of me that said these were triple A- and double A-rated mortgages, which we fully expected to promptly resell. In hindsight, the shame of it is that our treasurer was proposing these CDOs as a means of squeezing an extra 0.25 per cent return over our customary investments. And we got left holding the bag.’”

“Like so many of his fellow bank CEOs, Wilmers says he didn’t know what either CDOs or the recent Wall Street ‘innovation’ of Alt-A mortgages were. Eyes rolled later when the music stopped and, failing to find a buyer for M&T’s unsuitable loans, Wilmers asked colleagues if the CDOs could be opened to see if there was something salvageable.”

“‘There was a long silence,’ Wilmers recalls, ‘until someone said, ‘Bob, there are 486,000 mortgages in this thing. It would take years to sort them out.’”

“It shouldn’t take hindsight to grasp something was bound to go horribly wrong when Japanese university endowment funds were holding mortgages on four-bedroom ’starter’ homes in Phoenix, and lenders in Charlotte were financing the debt of Greece. ‘You’re much less likely to do dumb things when you stick with the fundamentals of knowing your borrowers and their employees, suppliers and customers,’ Wilmers says. ‘Banking is not that difficult, you know.’”