Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, April 02, 2007

The Road to Housing Hell...


...is Paved with Loose Lending Standards.

"The crisis in risky mortgage loans is shedding light on aggressive lending practices by some of the largest U.S. home builders, which stand accused of using lax standards and illegal sales tactics to arrange financing for buyers."

"Last week, Beazer Homes acknowledged that its mortgage subsidiary is being investigated by federal regulators for loans made to hundreds of people who bought Beazer homes. But the complaints about loan practices go beyond Beazer."

"The Department of Housing and Urban Development is taking more actions against home builders and their affiliated lenders, says Brian Sullivan, a spokesman for HUD."

"We are seeing increased consumer complaints about builders," Sullivan says. "Including kickbacks and illegal referral fees, phantom incentives and other violations of our real estate laws."

"One of those complaints was from Griff Carmichael, who looked at a new home built by Ryan Homes in Winchester, Va., in October. The builder said it would finish the basement and give him $10,000 toward closing costs, if he used its lender, NVR."

"Carmichael signed a contract to buy a $378,000 home and put down a 10% deposit. He had a good credit history. But with his auto and student loans, NVR's loan broker said Carmichael would qualify only for an interest-only mortgage, according to a letter from James Sack, NVR's general counsel."

"Carmichael, 34, was willing to apply for the loan but insisted it be a "full documentation" loan, which has a lower interest rate than "low-doc" loans. But the broker said he would likely be denied. Sack wrote that Carmichael's "refusal to apply for loan programs for which he is more likely to be approved is evidence of not using good faith." Ryan Homes is refusing to return Carmichael's deposit."

"New Century Financial Corp., overwhelmed by rising defaults from borrowers with poor credit records, became the largest subprime mortgage lender ever to fail as it filed for bankruptcy today."

'``They're clearly going to be the poster child for bad practices in the mortgage industry,'' said Matthew Howlett, an analyst at Fox-Pitt Kelton in New York. ``When all is said and done, the management team will be to blame.'''

I think we will see a wave of lenders who will become the Enrons of the housing bubble.

'"The company rode the U.S. housing boom to become the largest independent mortgage lender to subprime borrowers, only to collapse as interest rates rose and home prices fell. New Century's market value soared to more than $3.5 billion in December 2004, and last year it made about $60 billion in loans. Like rival firms, the company lowered its lending standards to keep business flowing after demand slumped."'

"In the past two years, New Century underwrote about $120 billion of loans, or more than half the total since its inception. Subprime loans accounted for 86 percent of all New Century loans last year, the company said in today's court filings."

"The Wall Street firms that provided about $17.4 billion in credit lines to New Century after March 2 demanded that the company post $150 million in cash as additional collateral. The company had to halt new loans after it failed to make the payment and couldn't persuade the Wall Street firms to keep the credit lines open."

"New Century ranked second only to London-based HSBC Holdings Plc last year in total U.S. subprime mortgages granted. HSBC said last week it's planning to slash subprime lending operations."

"U.S. prosecutors opened a criminal probe of accounting errors and trading in securities at New Century, the company said March 2 in a filing with the U.S. Securities and Exchange Commission. Since then, more than a dozen states have told the company to halt operations, citing complaints from borrowers that their loans weren't being funded."

"Ownit Mortgage Solutions Inc. of Agoura Hills, California; Mortgage Lenders Network USA Inc. of Middletown, Connecticut; ResMae Mortgage Corp. of Brea, California; and People's Choice Financial Corp. of Irvine are among rival companies that filed for bankruptcy. "

"The subprime mortgage crisis is likely to spread to a higher tier of loans known as Alt-A, according to an economist affiliated with the University of California at Los Angeles."

'``The question is to what extent,'' David Shulman, a senior economist with the UCLA Anderson Forecast in Los Angeles, said in an interview. ``That could be the next shoe to drop. Certainly, it's a very reasonable concern.'''

'``We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,'' he wrote in a report released today."

"Lawmakers have criticized the Federal Reserve and other bank regulators in recent weeks for allowing too many borrowers to get mortgages they couldn't afford to repay."

7 Comments:

At 4/03/2007 07:11:00 AM , Anonymous tom stone said...

Alt-a will be a lot worse than subprime,the average loan balance is $400k rather than $100k,and these were even more creative products.I think WaMu or countrywide will be the next big one to bite the dust.and of course the surviving lenders will overtighten their criteria and goodbye market.I think Ivy Zelman's paper "mortgage du jour" will be studied for decades in the big schools,as much for who produced it as its quality,which is excellent.

 
At 4/03/2007 09:53:00 AM , Blogger sf jack said...

You guys must realize that we no longer just live by the SF Bay, we also live in the "Alt-A Bay Area".

 
At 4/03/2007 09:55:00 AM , Blogger sf jack said...

And you're right TS, people don't realize "these were even more creative products."

Usually when I see "creative" associated with things financial, I sense disaster.

 
At 4/03/2007 09:26:00 PM , Anonymous tom stone said...

I was in santa rosa today and spoke to David Bettencourt,a Real Estate broker i know and respect.he told me there are not even any lookers,let alone buyers right now.He knows the market,and prices his listings to sell.tlaked to a couple i know who bought the new house before selling the old one,they are a little nervous,but have a lot of equity,plan to live in the new house 'til they die,and will probably be ok with a little luck.talked to an accountant who bought at the peak with a 80/15/5.the first adjusted,and OOPS.they can qualify for an hybrid,fixed for five years,to buy time.or try to sell,and bring $ to the table,probably $25k or so.or send jingle mail.or BK.OOPS.i told them i could refi them NOW,since they still have 5% equity...but that equity would be gone in less than 2 months,and they would be underwater.I was asked what i thought the place would be worth in 5 years.my response was that i expected home prices to reflect economic value,so approximately 150xmonthly rent."that's less than half what we owe" yes,ouch.yes,an accountant.yes Alt-a.

 
At 4/03/2007 09:40:00 PM , Blogger Marinite said...

A friend of mine lives in Novato and 1.5 years ago bought a place in Hamilton. She is mad as hell now because prices in that community are down 15% or so from the peak. She is pretty well off (a business owner) and yet she got an interest only loan which she fears when it resets. I have not been too nosey as I want to keep her as a friend. Anyway, apparently no equity left and resetting rates. She might make it ok but how many others won't? And the preforclosures stat for Marin spiked the other day.

 
At 4/03/2007 09:43:00 PM , Blogger Athena said...

Sonoma County's foreclosure rate is up 79%. (sorry guys... backlogged and not keeping up with posts very well) Thanks for keeping things going!

 
At 4/04/2007 07:41:00 AM , Anonymous tom stone said...

The loans i'm seeing go bad are Alt-a,the borrowers have incomes of $125k plus,and are professionals.according to my friend the BK attorney they will not get a 1099 if they are technically insolvent at the time of bk and she is able to take them through a chapter 7 in about 3 months.most people who bought in the last few years will be better off with a BK than either a short sale,or a refi IMO.if you refi to a fixed loan,you may end up owing a lot more than the market value of your home,and if you do a short sale you get that nasty 1099,and a letter from the happy folks at the IRS demanding money NOW,then tax liens,penalties and garnishment.at least with the Bk you are done with it.as far as the lenders F'em,they are big boys and big girls and they walked into this with their eyes wide open,they are supposed to be pros,let them act like it.hell of a way for a loan broker to talk,ain't it?

 

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