Loose Lending Shock and Awe

Businessweek: "In a quarterly report that staggered analysts with the breadth of its bad news, the Kansas City (Mo.) subprime mortgage lender revealed a quarterly loss, said it may not have any taxable income through 2011, and strongly hinted its days as a real estate investment trust (REIT) are drawing to a close."

"Chris Brendler, an analyst with Stifel Nicolaus in Baltimore, called the report "alarming" and a "shock."'

"The company's news was especially unwelcome to the market, coming on Feb. 21 just as the Labor Dept. reported a 0.3% jump in core inflation, above the 0.2% increase analysts had expected. That dimmed the prospects of any interest rate cut by the Federal Reserve that could buoy the housing market."

"A subprime mortgage is one granted to borrowers with less-than-perfect credit histories because they've missed payments on credit cards, they are too young to have established a credit record, or a similar issue."

"As housing boomed in recent years, lenders rushed into making these loans, in some cases letting people borrow hundreds of thousands of dollars without ever having to prove their income or assets. Subprime lenders now represent about one-fifth of the overall $5.5 trillion U.S. mortgage market."

"Michael Simonsen, president and CEO of Altos Research, which studies California and 15 other major U.S. real estate markets, says subprime lenders' recent performance is "one of the scariest signs" for the larger housing market."

"The quick growth of subprime mortgages in the recent housing boom has been eclipsed by an equally rapid decline, with several major subprime lenders, ResMae Mortgage, Mortgage Lenders Network USA, and OwnIt Mortgage Solutions declaring bankruptcy since December. Others very well may follow."

'"The majority of the subprime business is with first-time buyers. So it may take several years to shake out," Simonsen says. "But when it comes time to sell and trade up we may find that the low end has been squeezed out." In other words, a meltdown in the subprime market could affect the supply of future buyers for years to come."

"Tightening credit standards may also ripple through the broader market. Lenders across the spectrum are rewriting their loan guidelines, checking applicants' incomes and credit histories far more diligently, and generally becoming more rigorous in the face of consumer and regulatory scrutiny. That will lead to fewer loans and less access to credit."

"On a pool of mortgages NovaStar securitized in September, 2006, more than 3% are more than 30 days past due. "If delinquencies in NovaStar's mortgages continue to rise, pullback from investors in its securities could create a liquidity crunch, limiting NovaStar's ability to originate new loans in the future," analyst Ryan Lentell wrote Feb. 9. After the latest NovaStar news, Lentell added that "liquidity remains our No. 1 concern associated with the firm."'

"In a Feb. 20 conference call with analysts, company NovaStar co-founder Hartman stressed his company's new, tighter lending guidelines and predicted future failures in the industry given the "pretty big number" that have already shut down."

You Shouldn't Buy a House You Can't Afford!!!

I keep seeing reader searches asking for: "house price appreciation in Sonoma County for 2006."

Multiple times a day these searches keep coming up.

So, House price appreciation in Sonoma County for 2006? There was none. Ok?

Click your heels. Tell yourself all you want: "housing prices never go down, never go down, never go down." or "real estate only goes up, only goes up, only goes up, and you can't lose, can't lose, can't lose..." It isn't going to help.

In Sonoma County prices are down -10.6%
In Sonoma Valley prices are down -11.4%

This is just the beginning.

This is not appreciation. It is not even negative appreciation. Appreciation is an assumption you cannot count on. Notice how even the word assumption has an ass in front of it? As in those who assume appreciation is in the bag for housing have their head up theirs.

This is good old fashioned depreciation. As in losing value. As in terrible time to be a loanowner for a depreciating asset that you purchased for more than it was worth.

In other news....
"Living in Sonoma County can mean a trade-off between paying for a roof over your head and saving for retirement. In high-cost areas like Sonoma County, it can be difficult to do both."

"Across the United States, more Americans are banking on rising home values instead of the stock market and savings to pay for their retirement."

'"They think of their houses as a savings account more so than a generation before," said Bruce Dzieza, a Sebastopol financial planner. "It's become more of a commodity, and people have the attitude that real estate will never go down."'

"Only 49 percent of U.S. families held stock in a retirement account or other managed asset account in 2004, down from 52 percent three years earlier, according to the most recent Federal Reserve Survey of Consumer Finances."

"At the same time, more families are buying homes and taking on larger amounts of debt to purchase real estate. The Fed survey found that 69 percent of American families owned a home in 2004, up from 67 percent in the previous survey."

Make note: the increase from the previous survey has many more loan owners than home owners.

"But consider that stocks have outgained increases in home values in Sonoma County, even accounting for the latest housing surge. Homes also are not liquid assets that can be easily sold to generate cash."

"Still, the recent housing downturn and declining property values doesn't appear to have lowered Sonoma County residents' expectations that homes are the key to financial stability in retirement."

'"The majority of clients we get, that's their biggest asset. And they don't have a lot for retirement," said Dale DeGennaro, president of the North Bay Chapter of the California Association of Mortgage Brokers."

'"Increasingly, the aim of paying down a mortgage is fading as more homeowners count on the market to generate gains in value. This reflects unflagging confidence in housing as an investment."'

'"If prices decline, you could owe more on a home than it is worth by counting on the market to build value rather than paying down a loan's principal balance."'

"Better to both pay down a mortgage and invest in a retirement account."Your home is not a brokerage account. It's a cushion; it's a reserve," Dzieza said."

"The price of a typical home in Sonoma County has climbed 208 percent since 1990, rising from $190,000 to $585,000 the end of 2006."

So in a County where the typical home price due to rampant speculation, is 10 times the typical income, how many FB's will all need to live in the same house in order to have an icecube's chance in hell of paying it off?

"When buying a home, aim for what you can afford and resist stretching too far financially. A majority of buyers in recent years, however, have taken out interest-only or minimum payment option mortgages in order to qualify for loans to purchase homes given soaring prices. While they have fallen out of favor, Dzieza still recommends 30-year fixed interest loans, which also include an interest-only option now."

Maybe take a look around Montini Ranch subdivision in Sonoma and count that there are typically 5 cars in every driveway. The ones with no cars in the driveway are the dogs that haven't sold because they are WAY overpriced and yet geared towards the suburban family to buy. Umm... better check the economic data for this county, the typical suburban family doesn't make enough to afford these $800-$900k overpriced chitboxes. Of those that gambled and are now the proud owners of a Jumbo Loan or two, I bet maybe 1 family on the whole block can actually afford the payments when their loans reset.

"I think that minimal forced savings of a principal payment is a good thing. Because we hate to see clients, especially in this market, owe more than a home's worth. It's happening," he said. "You shouldn't buy a house you can't afford."

Speaking of not buying stuff you can't afford... Video here

Dear Real Estate Industry Shysters,

Uncle Sam is looking for you

Today's Best Sonoma Housing Bubble Reader Search:

Domain Name: icz.gov (United States Government)
IP Address: xxx.xxx.x#: (U.S. Department of State)
ISP: U.S. Department of State

Referring URL
Search Engine: google.com
Search Words: "real estate fraud" investigative reporter


Dear Uncle Sam,

You will find those you seek working at McDonald's.

‘It’s a whole new world,’ said Guy Schwartz, a branch manager with San Ramon-based CMG Financial Services, whose products include home loans. ‘We’re hunkered down for a cold winter. We’re not sure when spring will arrive.’”

“CMG is far from alone. Ownit Mortgage Solutions filed for bankruptcy. Mortgage Lenders USA Inc. has ceased operations. Countrywide Financial Corp. has retrenched and chopped jobs. EquiBanc Mortgage ceased operations in January. Mandalay Mortgage exited the wholesale mortgage business.”

“A number of Bay Area residents who have worked for a long time in the financial side of the housing market are concerned about the severity of the slowdown.”

“CMG has been forced to respond to the slowdown by cutting its overhead. ‘We have cut staff,’ Schwartz said. ‘Loan agent assistants, loan processors, branch support people. We are down to the core and are trying to keep it lean.’”

"‘This is worse than I’ve seen it before,’ said Judi Ott, a San Ramon resident who has worked for a number of years in the design studio of an East Bay home builder. She was laid off in June. Ott said, ‘I didn’t really get any interviews. Everyone I talked to said they were laying off. Nobody was hiring.’”

“Ott found a job with a mortgage company. ‘It’s not hard to get a job with a mortgage company because they put you on straight commission,’ Ott said. ‘It’s just hard to make any money. It’s a bad time of year to get into it. It’s a bad time with the real estate economy. It’s just a bad time for this business.’”

“That’s an assessment shared by Akiko Davis, a Dublin resident and loan processor who has been laid off and is looking for work. ‘It’s very difficult,’ Davis said. ‘The companies are getting very picky. It is getting harder and harder to find jobs.’”

“‘It has slowed down tremendously,’ said Indira Winesberry, a San Francisco resident and senior loan processor. ‘During the busy times, I could get a job in two days. I haven’t even had a call in three weeks. I’m working as a real estate broker right now, but I haven’t even received any calls for that.’”

“There’s a lot of speculation about where the housing market is headed. Dave Hennigan and the company he works for, Home Center Realty, don’t have the luxury of waiting to see how the story will play out. They need to make a living now, and they’re betting that things are going to get worse. Maybe much worse.”

"The roster of agents has sunk to 52, only about half of whom are active. ‘The rest are looking for side jobs at McDonald’s,’ said Home Center President Jason Bosch. ‘It happened overnight.’"

Classic Market Failure

"Sonoma County's sagging housing market showed no signs of stabilizing in January as sales remained at a 10-year low and the median price fell 12 percent."

"Resale prices for single-family homes have fallen seven consecutive months when compared with a year earlier, the longest decline since 1993."

"In the Bay Area, sales of all new and resale homes and condominiums fell 4.1 percent in January, according to a report issued Thursday by DataQuick Information Systems. Sonoma County registered the deepest decline among the region's nine counties."

Remember, DataQuick reports foreclosure trustee sales as sales, so their data is highly suspect and the real number of sales is significantly lower than they are reporting. Therefore the % of sales falling is larger. Also, that impacts the sale prices they report as well since the loan amount is reported as a sale for the properties in foreclosure. Rigged system.

According to www.realtytrac.com

Sonoma County has: 938 properties in various stages of foreclosure

210 properties in Pre-Foreclosure
102 up for Auction
296 Bank Owned
297 are listed as resale
30 are new homes
3 are for sale by owner

www.foreclosure.com reports: 550 in foreclosure & preforeclosure

"Already one of the region's least affordable places to live, Sonoma County has fared worse largely because the local economy is the Bay Area's weakest."

"The county, which has one of the region's largest gaps between incomes and home prices, suffered job losses and poor income growth in summer and fall, further dampening demand for home purchases."

In 2006 only 7% of Sonoma County residents could afford a median priced home.

"Spring looms as a key indicator of where the market is headed, said Timothy Hedges, broker-manager for Prudential California Realty in Sebastopol."

"I don't feel the bottom of the market has occurred. I think it's going to be a little while," said Nick Dunlop, an appraiser who has pegged home prices in the county for 15 years. "It really was an eye-opener for me," he said.

"Many appraisers are lowering prices about 1 percent each month, Dunlop said."

"Price declines have not been enough to revive sales, largely because many families still cannot afford to purchase the typical home here. There also has been a psychological stalemate of sorts between sellers, who were slow to cut prices, and buyers, who remain cautious about paying too much."

www.ziprealty.com reports: 876 Sonoma County properties on the price reduced list.

'"The buyers that are out there are aggressively looking at really the comparable sales. They want to know what things have actually sold for. Base it on realistic sales, not maybes or what the neighbors are asking," Cary Fargo, a California Prudential Realty agent said."

"In another tactic, sellers are increasingly pulling their homes off the market for at least a month and putting them back up for sale as a new listing, perhaps at a lower price. The aim is to remove the stigma that the home couldn't sell, but agents can find a listing's full history."

"This trend was revealed by recent fluctuations in the supply of homes for sale in the county. The supply had been sticking in the six-month range, dropped to about four months in December, and then bounced back up to six months in January. Despite such maneuvers, the average number of days a home stays on the market before selling continues to rise."

The time it takes from when a home is listed for sale and put under contract: 134 days. a new record high.

"The supply of homes for sale should increase with the approach of the typically busier spring sales season."

Norcalmls: 2974 listings in Sonoma County



"U.S. Census Bureau data show that in 1979 the Bay Area median home price of $99,600 was almost five times the median household income. In 2005, the median home price of $645,300 was almost 10 times the median income. Not only does this wider gap make it more challenging to buy a home, it has altered the social dynamics of towns. "

Cynthia Kroll, senior regional economist at the Fisher Center for Real Estate and Urban Economics at UC Berkeley, who has been studying the California economy and real estate market for more than 20 years.

"With such a wide gap between home prices and incomes, there's a natural migration away from economic centers like San Francisco as people search for more affordable housing. The trade-off is usually a longer commute."

No Relief At North Bay Commuter Bottleneck
The California Transportation Commission recommended spending $141 million for car pool lanes on U.S. Highway 101 between Rohnert Park and Windsor River Road in Sonoma County.The recommendation is to widen the freeway from four to six lanes in both directions between Railroad Avenue and Windsor River Road. The Metropolitan Transportation Commission nominated the projects for funding.

However, the commission recommended not including the Marin-Sonoma Narrows widening project that would add two lanes in each direction to U.S. Highway 101 between Atherton Avenue in Novato and state Highway 116 in Petaluma.

The California Transportation Commission also didn't include a 4.1-mile, $30 million widening project along U.S. Highway 101 between state Highway 37 and Delong Avenue north of Atherton Avenue in Novato.

Bay Area home sales fell in January for the 24th straight month, and prices dropped to their lowest level in a year and a half.

"Last month's sales were the lowest for any January in 11 years, according to DataQuick. Compared with December, sales in January were down 26.3 percent."

"The Bay Area's falling housing prices match what is happening across the country. According to the National Association of Realtors, sales declined by 10.1 percent nationwide in the fourth quarter compared with the same period a year ago."

California was among the states with the biggest sales declines from October through December. National Association of Realtors reported, 40 states had drops in sales.

Sonoma County saw its median price fall 10.4 percent .

"Could lax underwriting standards during the housing boom years -- no verification of applicants' incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy debt -- finally be coming home to roost?"

The omens are unmistakable:

"Delinquencies in the $1.3 trillion impaired-credit mortgage market hit 12.6 percent in the latest quarter, up from 11.7 percent. Delinquencies exceeded 13 percent among borrowers with subprime adjustable-rate loans."

"Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection."

"HSBC Holdings PLC, Europe's largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses."

"New Century Financial Corp., a subprime lender in California, saw its stock plunge 36 percent in a single day when it said "buybacks" of delinquent loans have been more numerous -- and more costly -- than anticipated."

"Ownit Mortgage Solutions, another high-profile California subprime mortgage lender, abruptly went out of business when buyback demands reached a reported $100 million."

"Dozens of smaller subprime originators have ceased operations or are scaling back on new lending. One of the mortgage industry's top executives, Angelo Mozilo, CEO of Countrywide Financial, was quoted as saying "there's probably 40 or 50 (subprime loan originators) a day throughout the country going down in one form or another. And I expect that to continue throughout the year."'

'"At a recent Senate hearing, a leading consumer-protection advocate, Martin Eakes, CEO of the Center for Responsible Lending, called the subprime market "a quiet but devastating disaster." '

"The "ultimate effects are very much like Hurricane Katrina," he said, but "the difference is that this disaster ... is occurring every single day across the country, house by house and neighborhood by neighborhood."'

“In recent months, as home-price appreciation fell and borrowers faced rising interest rates, more people defaulted on their mortgages. Under mortgage contracts, mortgage originators must often repurchase loans that default very early in their term or that come with underwriting mistakes, such as flawed property appraisals.”

“‘Following early payment defaults, we exercised our contractual rights to return loans to ResMae and protect our financial interests,’ a Merrill spokesman said.”

"Accredited Home Lenders has had to come up with more cash after getting margin calls from some of its warehouse lenders, Stuart Marvin, executive vice president at the subprime specialist told analysts during a conference call on Wednesday.”'

“‘We have eight different warehouse lenders; I would say the majority of them are acting very rationally,’ Marvin said. ‘There is one that is acting somewhat irrationally, although I won’t mention them by name.”

Industry publication "National Mortgage News said this week that Merrill Lynch has been making margins calls. A Merrill spokesman declined to comment. In late January, J.P. Morgan CEO Jamie Dimon noted rising defaults in some of its riskiest home loans and said the bank had largely exited the subprime business.”

“In another sign of growing concern about mortgages made to high-risk borrowers, Standard & Poor’s said it would no longer wait for homes to be foreclosed on and sold at a loss before alerting investors in mortgage-backed bonds that it expects to lower ratings on the bonds.”

“‘In terms of performance, I’d say there are equal concerns’ about Alt-A loans and sub-prime loans at S&P based on early delinquencies, said Ernestine Warner, an S&P analyst. The Alt-A bond S&P warned about was issued by Calabasas-based Countrywide Financial Corp., the largest U.S. mortgage lender. Newport Beach-based Impac Mortgage Holdings Inc. made the loans.”

“Mortgages were written for a fee, sold to investment banks for a fee, then packaged and floated for another fee. At each link in the chain, the fees mattered more than the quality of the loans, which could always be passed on.”

“‘This was classic market failure,’ says Anthony Sanders, a mortgage expert at Ohio State University’s Fisher College of Business. ‘The private sector wanted fees and got them, and they did not much care what happened afterwards.’”

“Countrywide and Washington Mutual face some risks from so-called ‘recastings’ of pay-option ARMs. Unlike fixed-rate loans, which have decades of underwriting data behind them, pay-option ARMs haven’t been stress-tested in an environment where home-price appreciation is slowing, and even falling in some regions of the country.”

“Roughly 28% of Washington Mutual’s loans held are in these riskier option-ARM mortgage products, according to S&P analyst Stuart Plesser. By contrast, pay-option loans comprise more than 40% of Countrywide’s interest-earning assets.”

Who's the Biggest Liar?

There is plenty of blame to go around for the cause and effects of the housing bubble and subsequent crash currently in progress. The list is long and getting longer as it becomes apparent that there is systemic corruption within the ranks of this Pyramid scheme that has been perpetrated on the Unites States public on a scale that will make history.

The Liar's List

Realtors, Mortgage brokers, housing construction industry, NAR, CAR, Bank/Lending organizations, Loose Lending practices, Appraisers, Flippers, Specuvestors, Idiots & Lemmings who believe whatever a person collecting a commission tells them, Main stream cheerleading real estate industry PR service type media, Baby Boomers, Alan Greenspan...

A recent comment exchange has me asking... we know who to blame and more may still be added to the list, but how much blame? Who is the biggest liar? Where did the lies really start? Who perpetrated the biggest lies? Who do we hold most accountable?

(comment exchange below)

Anonymous said...
I believe that it is more the appraisers fault than anyone elses. It is their responsibility to say what the house is worth. I think now is the time to stop all of this scamming, black, white, blue, purple......money is hard to come by now days. The government screws the people enough without some cut rate appraiser trying to screw somebody out of something.
2/17/07 11:37 AM

Athena said...
I'm not sure I agree with putting the most blame on the appraisers. This is the person that depends on the recommendation from lenders and realtwhores to get business. This is the one that makes the LEAST amount of money and who's profession has been turned into a rigged rubber stamp game.

If appraisers were required to be picked at random and could not be blacklisted out of a job for telling the truth, and therefore being the turd in the punchbowl of easy lending kool-aid, that would be a different story. But in this pyramid scheme con game of real estate only goes up, nobody pays off their mortgage anymore scam... appraisers have been unwitting patsys.

I am sure that many of them saw what was happening, but really... should they all have to abandon their careers because the scammers who stand to pocket the most money have hijacked their career?

nopey nope nope. Not going to buy that the appraisers have the most blame here. They DO have some blame and bear some responsibility. There should have been a whole industry of them calling El Torro DOO DOO on this pyramid bubble scam. It would bode better for them if they had, being they will be dragged into the cesspool of misery with the rest of the pyramid builders.

2/17/07 11:48 AM

Scoop & Snoop

Calculated Risk has a great scoop on Fremont Investment & Loan.

An email from Fremont Investment & Loan:

"Sent: Monday, February 12, 2007 1:54 PM
Subject: PLEASE READ - IMPORTANT PROGRAM CHANGES at FREMONT
Importance: High

Due to general negative Industry sentiment, due to recent articles in the media, and the ripple effect to the secondary market, Fremont has made the difficult decision to speed up some changes that were set to take place later in the year. PLS READ BELOW.2nd MORTGAGES ELIMINATED effective TODAY!!!!!Any Prequals out there that are 80/20 or combo loans, pls contact me by email asap..." Read more

An interesting post by a commenter over there had this to say:

According to Bloomberg, the following mortgage related names were among the top 10 worst performing credit default swaps today:

(company) (% change in CDS premium)
Countrywide Home Loans Inc +14%
Radian Group Inc (MI) +14%
WaMu (sub debt) +13%
PMI Group +12%
MGIC +11%

Sacramento Landing had a housing nightmare to share today.

"There you are, living in the house of your dreams. It cost you $500,000, but
you're only paying $1,100 a month after you 100-percent financed your home with an interest-only pay-option adjustable rate mortgage, known as an ARM. Then the market changes. Your completely financed home, after the market has cooled, is now going to cost you almost $4,000 a month for your mortgage. Welcome to the world of some of Placer County's residents.According to DataQuick Information Systems' latest report, default notices, the first step in the foreclosure process, have risen 262.4 percent in the fourth quarter of 2006 in the
county..."

Dreamhomes turned Nightmares, coming soon to Sonoma County.

In other news, here are today's amusing searches done by readers landing at Sonoma Housing Bubble.


1. Search Engine: google.com
Search Words: file a complaint with the board of realtors, sonoma ca

SHB Answer: (California Department of Real Estate)
To find our who to call to file a complaint against Realtors, Appraisers, Lenders, etc… click Here:

2. Search Engine: google.com
Search Words: donald trump seminars frauds

3. Search Engine: google.com
Search Words: 49.5% high risk loans, fdic

4. Search Engine: google.com
Search Words: falsifying mortgage documents

SHB advice: Report it here or http://www.stopmortgagefraud.com/

Recommended Reading: FBI Report November 2006 on Mortgage Fraud (pdf warning)

5. Search Engine: search.comcast.net
Search Words: cash reward for reporting workers comp fraud in sonoma county

SHB answer: http://www.dir.ca.gov

6. Search Engine: search.comcast.net
Search Words: sonoma foreclosures

7. Search Engine: google.com
Search Words: can a buyer push it's lender to fund the loan in order to close

8. Search Engine: search.yahoo.com
Search Words: housing market in sonoma

9. Search Engine: google.com
Search Words: waiting for the market to drop

10. Search Engine: google.com
Search Words: house market foreclosures bubble greed

Seek and You Shall Find

It amuses me to see what readers are seeking when they crash land in the bubble zone. The following is the top ten list of search terms readers used that brought them to Sonoma Housing Bubble today.

To make the top ten list the terms either were repeated often enough that I lost count of the number of times they were used by multiple readers... or were just dang funny or interesting to me. Enjoy!

1. Search Engine google.com
Search Words is housing bust over in sonoma county

2. Search Engine google.com
Search Words how to make fake pay stubs

3. Search Engine search.msn.com
Search Words sonoma housing bubble

4. Search Engine google.com
Search Words itin mortgage "false social security"

5. Search Engine google.com
Search Words sonoma county housing bubble

6. Search Engine google.com
Search Words current housing market in sonoma, california

7. IP Address xx.xx.xxx.# (MERITECH MORTGAGE)
Search Engine google.com
Search Words refinancing with itin numbers

8. Search Engine google.com
Search Words sonoma home sale price drop 2007

9. Search Engine google.com
Search Words sonoma courthouse sale

10. Search Engine google.com
Search Words housing forecast sonoma county

We're Just at the Start of this Thing

"There's more trouble in the mortgage lending market — and that could mean problems for higher-risk borrowers who want to refinance their home loans."

"The shakeout in the sub-prime industry began last year as housing prices leveled off and interest rates rose, curbing demand for loans. At first, some companies loosened lending standards to keep loan volume high, a tactic that has produced a wave of early loan defaults."

"New Century is the second-largest sub-prime mortgage originator after San Francisco-based Wells Fargo, with HSBC just behind in the No. 3 slot. The Irvine company said late Wednesday that it had greatly underestimated the losses it would record as a result of loan buyers forcing it to repurchase mortgages that had quickly fallen into default."

"It said it would record a loss of undetermined size for the fourth quarter, rather than the $1.08-per-share earnings Wall Street was expecting. New Century also said it would revise downward its financial results for the first nine months of last year.""As much as $800 billion of adjustable-rate mortgages will reset to higher payments this year, and 1 of 11 home loans is both adjustable and sub-prime, according to the Mortgage Bankers Assn."

'"There could be a good chunk of borrowers with nowhere to go to get loans," said Gast, who follows the industry for the Center for Financial Research and Analysis, a Rockville, Md., forensic accounting and due diligence firm with mutual funds, hedge funds and insurers as clients."It means a lot of people are going to lose their homes."'

"Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected."

"Both New Century and HSBC blamed rising defaults on so- called subprime loans they made to borrowers who had little credit history or heavy debt loads. Defaults on subprime loans increased nationwide last year as competition and a slower housing market prompted lenders to lower their standards and give mortgages to borrowers who couldn't make their monthly payments."

'``It's kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,'' said Brian Horey, general partner at Aurelian Partners LP in New York, which has sold short shares of New Century. ``If you could fog a mirror, you could get a loan.'''

"Among subprime loans, delinquencies of more than 90 days plus foreclosures and seized properties are at their highest level in at least six years, according to a Friedman Billings Ramsey Group report."

'``That is the one area across all businesses in all firms that is actually in a bit of trouble now,'' David Viniar, chief financial officer of New York-based Goldman Sachs Group Inc., said today about subprime lending. ``That market's going to get worse before it gets better.'''

'``There's a lot of camouflaging going on in credit quality,'' said analyst David Hendler at CreditSights Inc. in an interview late last month. ``We're getting the sense in this shop that this is more than normal deterioration, that it speaks to deeper difficulties.'''

"Cooling demand for the mortgages spurred lenders including Wachovia Corp. and KeyCorp to shut or sell home-loan units in the past year. National City Corp. sold its First Franklin mortgage unit to get some of the riskiest loans off its books."

"Washington Mutual CEO Kerry Killinger blamed worse-than- expected erosion in credit quality among subprime loans for a $122 million fourth-quarter loss at the Seattle-based company. At IndyMac, CEO Michael Perry told shareholders Jan. 16 the Pasadena, California-based lender missed its own profit forecast as defaults increased."

"Chris Hagedorn, a money manager at Fifth Third Asset Management in Cincinnati. Hagedorn, whose company oversees $21 billion, wonders why bankers aren't more pessimistic. ``I got the sense that they're saying we're just at the start of this thing,'' he said on Feb. 5."

"Federal Reserve Governor Susan Bies said last month regulators are particularly worried about lenders that added layers of risk by combining low down payments with low documentation, or with interest-only loans that allow borrowers to skip payments and add the sum to the total amount of the loan."

"The Fed added a special set of queries on bad loans to its regular quarterly survey of senior loan officers. The Feb. 5 report found half expect credit quality on non-traditional mortgages, such adjustable-rate and interest-only loans, to get worse in 2007."

Bubble News by Max

Much thanks to "Max," who sent us this letter to the editor of the Press Democrat. (aka. local real estate industry PR service)

Thanks Max, keep them coming! Indeed, Ms. Whitehead Chan hit the nail on the head.

Loan defaults
EDITOR: You report that home loan default notices in Sonoma County doubled last quarter. Who could possibly be surprised by this development? Your article speculates that interest-only loans and mortgages with minimum payment options might be contributing to this phenomenon, as interest rates rise and minimum payments start to kick in after the “teaser” period is over. But why would the average home buyer have agreed to a loan with those kinds of risks?

A local banker is quoted as saying, “Just because of the higher-priced homes, that is the product that is in demand in order to qualify.”This statement implies that “creative financing” was developed as a consequence of high real estate prices.

I believe that just the reverse is true: Creative financing was developed for the express purpose of enabling the finance, insurance and real estate industries to successfully market the higher prices of homes so that they could make the income from increased insurance premiums, interest income and commissions from those sales. Without creative financing, if no one had been able to qualify for loans at the unrealistic prices real estate was going for four years ago, the current “market correction” would have been unnecessary because prices would have corrected themselves then.

ALICE WHITEHEAD CHAN
Sebastopol

Notices of Default Cause for Concern

So says Ms. Appleton-Young. Go ahead and have yourself a little panic attack. The experts have spoken.

"The steady increase in the number of people who have missed mortgage payments and received notices of default is cause for concern, Appleton-Young said."

"The number of California homeowners who fell behind on mortgage payments more than doubled during the last three months of 2006, pushing defaults higher than at any other time in the past eight years, according to an analysis by DataQuick Information Systems that was released last month."

'"You do have people, especially those who purchased in 2006 and 2005, who missed the big cushion of appreciation, who could get into trouble," she said.

"Scraping together enough money to buy a house was particularly difficult for first-time buyers.
People purchasing their first home were four times more likely to take out a loan with nothing down than repeat buyers, according to the report. About 40 percent of first-time buyers opted for loans without down payments."'

"But even as many first-time buyers showed a willingness to take on higher debt, the overall percentage of first-time buyers fell, reaching its second-lowest level on record."

"Still, Leslie Appleton-Young, chief economist for the California Association of Realtors, pointed out that buyers are taking on a high debt load at the same time that foreclosure rates are rising."

'"Buyers are really straining," said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto. "The prices have really become unaffordable in a traditional sense and the only way some people are able to buy is to become more heavily indebted and put less down. That's a scary sign."'

"The market is going to have to find a way to add new buyers," said Ed Leamer, director of the UCLA Anderson Forecast.

"That's another symptom of a market gone awry."

The report also found that sellers profited less in 2006 than in 2005. The median net cash gain dropped 8.4 percent the first decline in nine years.

"As economists are scouring data on the housing market, searching for evidence that the market is bouncing back, the report offered little to celebrate, Leamer said. "We're looking for some signs that the problems in the housing market are behind us," he said. "Nothing in this report supports that."'

"There could be trouble ahead in California's housing market as buyers are going deeper into debt while sellers are seeing less profit."

"More than 21 percent of buyers last year took out mortgages with no down payment, soaring from just 4.5 percent in 2000, according to the California Association of Realtors, the industry's trade group."

"The findings suggest that buyers are taking on more debt at a time when the market both statewide and in the Bay Area is slowing. The number of homes sold in the Bay Area dropped 19 percent last year compared with 2005."

This Story is Far From Over

"Housing is proving to be one of the biggest wild cards in the economy in 2007 ."

"Economist Tucker Hart Adams says the housing market won't stabilize in 2007. The combination of resetting adjustable-rate mortgages, homeowners unable to keep up with payments on so-called exotic mortgages such as interest-only loans, and other debt will lead to higher foreclosure rates and more homes on the market, she says."

'"It's really optimistic to think that it just took a little adjustment and everything is fine," she says. "It's one time I would like to be wrong."'

"The NAR's index of pending home sales, which is adjusted for seasonal variations, rose in December at the fastest pace since March 2004."

"Wachovia senior economist Mark Vitner says although recent housing data have been upbeat, they have been skewed by warmer-than-usual weather."

'"That brought out a few more buyers and allowed for more building in the Northeast," he says. Vitner says the warm weather "pulled sales forward." Come spring, housing activity will be slower than normal, he says."

'"I haven't met a home builder yet who thinks things have bottomed out," he says."

"Economists are zeroing in on a piece of data that could augur badly for the consensus view: the homeowner vacancy rate.That figure, an often-overlooked measure of how many homes for sale in the country are empty, has climbed to its highest level since the Census Bureau began tracking it four decades ago. Before 2006, the number had never risen above 2.0 percent."

The West had a 2.4 percent rate

"Goldman Sachs economist Jan Hatzius concluded in a report last Monday that rising vacancies signal that excess housing supply continues to grow _ and that new construction has to decline further this year."

"J.P. Morgan economist Haseeb Ahmed said the overhang of vacant housing stock could erode existing home values as sellers slash prices to move their vacant properties."

"Economists fear that many vacant homes are owned by speculators who are stuck with investment properties that they can't sell and may be under increasing pressure to drop their prices. ``We are concerned that there could be downward pressure on prices for awhile,'' Mr. Ahmed says."

"Jon Estridge, 34 years old, owned a pair of investment homes in Virginia that sat empty for several months last year. When the market slowed, it was difficult not only to find buyers, but also to find tenants who would pay enough rent to cover his mortgages. ``It eats you alive,'' said Mr. Estridge, who works for the federal government. ``The market is going down, and you are paying a mortgage.'''

"There's no doubt speculators had a major impact, but their numbers have been difficult to quantify. The recent vacancy data may be a useful measure of speculative activity and its fallout."

"A glut of vacant homes suggests that the U.S. housing market has not yet stabilized and may be poised for another downturn, Merrill Lynch said in a research note released on Monday."

"Merrill Lynch economist David Rosenberg wrote, "Looking at the inventory backlog and still-stretched affordability levels, this story is far from over."'

"A Commerce Department report showing the homeowner vacancy rate rose to 2.7 percent in the fourth quarter, well above the year-earlier level of 2 percent. That suggests a glut of almost 1 million homes sitting vacant, which will likely pressure selling prices for an extended period, Rosenberg said."

"Goldman Sachs analyst Jan Hatzius noted that the vacancy rate had fluctuated between about 1 percent and 2 percent for the past 50 years. "By itself, this would point to a fairly enormous supply overhang and little prospect of a bottom any time soon," Hatzius wrote in a research note."

Sales Will Decline, Foreclosures Will Rise

State of the Housing Market 02/04/07

Sonoma Valley MLS = 269 (many previously listed houses are now on the rental list)

Price Reduced = 100
Foreclosures = 45

Sonoma County MLS = 2854

Price Reduced = 917
Foreclosures = 543 (from foreclosure.com)

746 Rentals posted on Craig's list

Sonoma Valley rentals posted on Craig's list = 73

Santa Rosa rentals on craig's list = 300

Rohnert Park/Cotati rentals on craig's list = 109

Petaluma rentals on craig's list = 114

Sebastopol rentals on craig's list = 52

Russian River area rentals on craig's list = 57

Healdsburg/Windsor rentals on craig's list = 41

"Overall, sales of existing homes will decline 7 percent across California this year, Leslie Appleton-Young told local business leaders Thursday at the annual North Bay Economic Outlook Conference in Rohnert Park."

"Prices will likely stay flat in the Bay Area for the next 18 months, she said. Statewide, prices will decline 2 percent next year, she said."

"But Sonoma County will take longer to recover because of a recent exodus of jobs in the county, said Leslie Appleton-Young, chief economist for the California Association of Realtors."

"In other parts of the state, the slowdown is driven by an excess of homes, especially in the Central Valley. But in Sonoma County, the housing slump will be prolonged by job losses."

"The county has lost 2,000 jobs over the past year, primarily in tech manufacturing, retail stores and restaurants, according to fourth-quarter figures provided by the state Employment Development Department. The erosion of jobs in Sonoma County will likely impact sales of low- and midpriced homes the most."

'"Real estate is the Achilles' heel of the California economy," Appleton-Young said."

"Houses in California cost nearly triple the national average. And residents in the San Francisco area spend 41 percent of their income on mortgage payments, compared to the national average of 22 percent."People are spending more of their incomes," she said. "Budgets are stretched."'

"Consumer spending has slowed because fewer people are taking equity out of their homes and using it as disposable income. And the real estate industry will continue to shed jobs during the slowdown, she said."

"The result is a surge in foreclosure activity, which almost doubled in 2006. Lenders sent default notices to 913 Sonoma County homeowners who fell behind on their mortgages last year, up from 540 in 2005."

"Much of the foreclosure activity is concentrated among first-time buyers who purchased homes priced at the lower end of the market, said Michael Madsen, senior loan consultant with The Madsen-Shaw Home Loans Group. Many have seen their monthly mortgage payments soar in the past year because they used adjustable-rate loans to purchase homes they could otherwise not afford."

"Appleton-Young agreed that foreclosures will continue to rise."

"New home sales tumbled nearly 50% in Sonoma County last year, while the average price dropped 12.9%"

"Home sales have been falling because buyers are worried about overpaying for houses with prices sliding. In addition, fewer can afford monthly mortgage payments despite recent price declines and lenders are tightening standards to qualify for loans."

"Building permits for homes and apartments in Sonoma County fell 35% last year ."

"Sonoma County builders slammed the brakes on housing starts in 2006 as the market slowed."

Spending is the New Saving

"People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago."

"The Commerce Department reported Thursday that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases."

"During the Great Depression when one-fourth of the labor force was without a job, people dipped into savings in an effort to meet the basic necessities of shelter and clothing."

"Economists have put forward various reasons to explain the current lack of savings. These range from a feeling on the part of some people that they do not need to save because of the run-up in their investments such as homes and stock portfolios to an effort by many middle-class wage earners to maintain their current lifestyles even though their wage gains have been depressed by the effects of global competition."

"For December, the savings rate edged down to a negative 1.2 percent, compared to a negative 1 percent in November. The savings rate has been in negative territory for 21 consecutive months."

"The savings rate has been negative for an entire year only four times in history — in 2005 and 2006 and in 1933 and 1932."