We'll See Failures & Dumb Bankers

"Billionaire investor Warren Buffett said Friday the economy continues to be in a recession, by his definition, and will continue to be for at least several more months."

"During a live appearance on CNBC, Buffett said ripples of the credit crunch are continuing to cause problems in financial businesses and the economy. "

"Earlier this year he said a financial crisis reveals which players have been "swimming naked," because the tide goes out. That picture has worsened along with the crisis."

'"We found out that Wall Street has been kind of a nudist beach," said Buffett, who is chairman and chief executive of Berkshire Hathaway Inc., which is based in Omaha."

"Buffett said it's likely more banks will fail, especially in areas where there was a real estate bubble and the bank got heavily involved in the housing market."

"Sales of previously owned U.S. homes ticked higher in July thanks to lower prices, but record inventory suggested the battered housing market is unlikely to recover soon, a trade group report showed on Monday."

"The median national home price declined 7.1 percent from a year ago to $212,400 and the inventory of homes for sale rose to 4.67 million which would take 11.2 months to clear at the current sales pace. That matched a record set in April."

'"What we'll see is failures where the bankers were dumb in what they did," Buffett said."

"The median price, (in California), dropped 40.3 percent to $350,760, the biggest decline since the Realtors began tracking the market."

"In the Bay Area, the median sank 21.2 percent to $663,190."

"Additional waves of foreclosures are likely, because thousands of alternative-documentation loans and other exotic mortgages are scheduled to reset to higher monthly payments in the coming months, said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange. In addition, sales haven't increased enough yet to substantially reduce the high inventory across the state."

"There were 124,487 active listings in California last month, down 5.4 percent from 131,569 a year ago."

"Adibi doesn't expect the market to stabilize for at least another year."

"Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley, had a more bearish take on Monday's numbers."

"It doesn't reflect a recovering housing market; it reflects a broken housing market," he said. "It's a reflection of the fact that foreclosed homes are being liquidated at very low prices."

"Indeed, San Diego research firm MDA DataQuick reported that 44.8 percent of all the transactions in July were foreclosure resales, up from 7.6 percent a year ago. The trade group didn't provide a statewide figure, but Appleton-Young said it exceeded 50 percent in certain areas."

"Rosen believes that investors, not actual intended occupants, are buying up many if not most of the distressed properties in the hardest hit areas. That will do little to stabilize the markets in those areas, especially if prices fall further and foreclosures continue to climb, he said."

"The median price in Sonoma County dropped to $399,000, down 30.6 percent from a year ago, driven by sales of foreclosure and distressed properties."

"Nationwide, despite the third monthly sales increase this year, the number of unsold single-family homes and condominiums rose to 4.67 million, the highest number since 1968, when the Realtors group started tracking the data."

"Until the inventory level is reduced to more normal levels, analysts say, the housing slump is likely to persist. The inventory level is being driven higher by a massive wave of mortgage foreclosures."

"Between 33 percent and 40 percent of sales activity is coming from foreclosures or other distressed properties, estimated Lawrence Yun, chief economist at the Realtors group."

Sonoma Housing Bubble Buzz

News buzzing around the county.


"One in three homes sold in the Bay Area in July was in foreclosure at some point in the past year, said John Walsh, DataQuick's president."


'"Who knows how many more involved a desperate seller and a lender who accepted a short sale," Walsh said in a statement."


"The surge of foreclosure and distressed sales pushed Bay Area home prices to a 53-month low."

"Buyers in coastal areas such as Sonoma County are largely waiting for the market to hit bottom, Walsh said.

"Many would-be buyers, especially those eyeing costlier coastal homes, wait for signs of a market bottom or for the return of more favorable financing," Walsh said"


Exchange Bank CEO quits suddenly

"Exchange Bank's top executive, J. Barrie Graham, resigned unexpectedly as president and chief executive officer of Sonoma County's oldest and largest commercial bank."

"Graham, a former U.S. Marine with a no-nonsense demeanor, was just the sixth president of the 118-year-old bank. He joined Exchange Bank in 1995, leaving Wells Fargo & Co. to become the bank's chief operating officer. In 2003, Graham replaced Reinking as CEO and led the bank as it shifted strategy to pursue growth more aggressively."

"Colleagues inside and outside the bank were stunned by the news as it spread rapidly Tuesday across the county's business community."

"The bank opened its first office outside Sonoma County, a lending branch in Sacramento, as Sonoma County builders moved into the Central Valley and scrambled to develop subdivisions. Exchange Bank has long been a key lender for local builders. But the real estate slump hit builders hard, and Exchange Bank has felt the blows."

"I always like to say we're intelligent risk takers. That may prove to be wrong now," Reinking said.

"The Santa Rosa bank has suffered losses in two of the past three quarters -- its first in at least 50 years, according to bank officials -- and its stock has lost half its value over the past two years."

"The bank reported $3.1 million in losses for the second quarter, largely because of construction loans that went sour."

"Exchange Bank wrote off $14.5 million in bad loans during the first half of this year, compared with $500,000 a year ago, said Bruce DeCrona, the bank's chief financial officer."

"Overall, 5 percent of the bank's $1.2 billion loan portfolio is 90 days or more overdue or not accruing interest -- about 10 times what the bank aims for, DeCrona said."

""We did not go out of our market to make exotic loans to unknown people. We stayed with our bread-and-butter underwriting and made loans to customers we knew," DeCrona said."

"Exchange Bank could end the year with a loss as officials tap income to write off bad loans and sell foreclosed properties."

"It tells you a higher percentage of their loans are involved in construction. The bank made a lot of money on these loans. It was probably the most dynamic area of growth in their loan portfolio," Ptucha said. "With hindsight you could say they did go too far. But these were developers with multimillion-dollar net worth that Exchange Bank had longtime relationships with."

"Bank officials defended their lending standards and the decision to expand into the Sacramento area."

"The speed at which this thing fell apart was just unheard of," Reinking said. "You work with builders both in good times and challenging times."

"Santa Rosa narcotics officers Tuesday found a rental home converted into an indoor marijuana garden."

"A search of a home in the 300 block of East Robles Avenue turned up more than 80 plants, ready for harvest, Sgt. Mike Lazzarini said. He estimated the plants were worth about $16,000 if sold."

"No one was living at the home, which had been converted to accommodate the plants. Detectives are attempting to find out who was renting the home. But the initial search showed most of the rent was subsidized with payments from the Sonoma County Housing Authority, Lazzarini said."

Sliding Down the Slope of Hope

(headline shamelessly stolen from a clever and delightfully smartass poster on the pressdemocrat comments website)

"Cut-rate foreclosed homes being unloaded by banks wreaked havoc on the Bay Area's median price in July, sending it down nearly 30 percent to a level not seen in more than four years."

A third of all existing homes sold in the nine-county region in July were foreclosed properties. ~ DataQuick

'"There is deep discounting in inland markets that have been slammed by foreclosures," said Andrew LePage, an MDA DataQuick analyst."

" The biggest percentage of foreclosure sales was in Solano County, where two-thirds of all resold homes were foreclosures."

"Many potential home buyers are still taking a wait-and-see attitude since prices are continuing to drop."

'"From an average person's perspective, until prices start to stabilize, (they think), Why buy today when tomorrow will probably be cheaper?" said Sam Khater, senior economist at First American CoreLogic. That mental psychology will not change until prices level out, he said.
Homeowners who need to sell face a difficult reality."

"LePage said he thinks the bottom is not imminent - and is unlikely to usher in a quick turnaround."

'"Recent history suggests you could be looking at at least two or three years of price stagnation," he said. "It's looking like the bottom will feel more like a bog than something you just bounce off of."'

"Foreclosure resales -- homes sold in July that had been foreclosed on in the prior 12 months -- made up 33 percent of all resales. That was up from 29.9 percent in June and 4.2 percent in July 2007. Foreclosure resales ranged from 4.6 percent of the resale market in San Francisco to 65.9 percent in Solano County. "

""So much of today's market is driven by distress. Unless interpreted in that context, the stats give a rather distorted view of the overall market. We know one-third of the Bay Area's resales in July were homes fresh off foreclosure. Who knows how many more involved a desperate seller and a lender who accepted a short sale," said John Walsh, MDA DataQuick president."

Sonoma County Q2 Notice of Default stats:

NODs Q2 2007: 462
NODs Q2 2008: 1,376

197.8% increase

Sonoma County July 2008 sales of existing single-family homes: 410

Sonoma County MLS: 3529 (bareis mls)

8.5 month's supply of homes on the market

Rereport.com states median price of: $397,000 down 30.4% from 2007

Average time on the market from listing to sale: 103 days (rereport.com)

68 percent of all purchases were under $500,000 compared with 36 percent a year ago.

'“People are out looking for bargains. I think you’re going to see continued softening of prices into next year,” said Leslie Appleton-Young, chief economist for the California Association of Realtors."

"Homeowners facing rising mortgage payments are selling properties at deep discounts and banks are clearing out foreclosed homes."

"Prices now have fallen 25 consecutive months, dropping 35.5 percent from the record $619,000 set three years ago."

"Every week, lenders seize almost 80 homes from borrowers who have stopped paying their mortgages. Those homes go back on the market, sometimes within weeks, other times within months, almost always at a sharp discount."

"Sonoma County housing prices won't stabilize until sales cut into the glut of distressed properties hitting the market, bringing the overall supply of homes for sale into better balance with buyer demand, Appleton-Young said."

"Lower-priced homes will likely drive the county's housing market into next year because of the continuing wave of foreclosures, Appleton-Young said."

'"We've essentially got to work through the foreclosures that we know are coming over the next six to 12 months. So it's just a longer period of time where you're just kind of bouncing along the bottom," she said."

"Any recovery also could be slowed by tightened lending requirements, as well as the economy's downturn."

The pressdemocrat reports 2,386 homes listed for sale in Sonoma County.

One click on Bareis MLS lists 3529 single family residences listed for sale in Sonoma County.

What Bubble, Indeed!

Median household income in Sonoma County is about 60k. The median household should be able to afford the payments on a $180k house.

73.8% of Sonoma County homes lost value in Q2.

95.1% of Sonoma County homes lost value in the past 12 months.

% of Sonoma County Home Purchases that are now underwater (house value worth less than the outstanding mortgage amount)

50.4% of homes bought in 2007 are underwater

Median Price: $550,000

Average Price: $656,258

65.9% of homes bought in 2006 are underwater

Median: $580,000

Average: $673,785

66% of homes bought in 2005 are underwater

Median: $591,000

Average: $674,388

46.9% of homes bought in 2004 are underwater

Median: $499,000

Average: $571,652

22.3% of homes bought in 2003 are underwater

Median: $420,000

Average: $486,498

Percentage of Sonoma County home buyers choosing some form of I/O, Negative amortizing and adjustable-rate mortgages

2003 - 36.8%
2004 - 59.4%
2005 - 69%

Recent Sonoma Valley Courthouse Step Auctioned Properties

Sonoma Valley Sheriff Sale List, as of 8-13-08

















Sonoma Valley Foreclosed Properties, as of 8-13-08
69 properties on the "Foreclosed" list. (click picture to enlarge)

























Sonoma Valley Notice of Default List, as of 8-13-08
110 properties (click picture to enlarge)

One thing of note... there was an RE agent who used to publish ads in the local paper asking: "What Bubble?" ... That RE agent is on the notice of default list.

You can qualify a monkey to buy a house...

(SFGATE) "More than half of the people who bought Bay Area homes in 2005 and 2006 are under water, owing more than their home is worth. Of people who bought in 2007, there are 41.1 percent who are under water."

Sonoma County Owner Equity Chart

"Investors Trust Mortgage, once the largest privately held mortgage broker on the North Coast, has dramatically downsized its operations in the face of a dormant housing market and crippling credit crunch."

"The Santa Rosa-based company, which a few years ago had 27 offices, 200 employees and $33 million in annual revenue, is now a shell of its former self."

"While it has shuttered many of its branch offices in recent months, the company is alive and trying to resize to survive, said Chris Ratliff, the founder's son and managing director of Northern Pacific Mortgage, the company's mortgage banking arm."

"Broker Rick Hearn, who ran the Middletown office of Investors Trust until it closed Aug. 1, said there were discussions through the spring about some offices closing, but he said he was "shocked" by just how many have been hit."

'"A lot of us were left not knowing anything other than they were consolidating, and then they consolidated to next to nothing," Hearn said."

"Hearn said the blame game going on over who is responsible for bad loans all too often settles on brokers, he said."

'"The easiest guy in the world to point the finger at is the guy that got you there," said Hearn, who has since begun working for another mortgage broker."

"You can qualify a monkey to buy a house, but the question is can he afford it," Ratliff said.
Unlike its competitors, he said, Investors Trust's loan portfolio has not been plagued by bad loans the company has been forced to buy back from investors alleging fraud."

"Ratliff said it is painful for the company to part ways with so many people, it is necessary given the sharp drop in loan volume. From a high in 2005 of $33 million in revenue, the company last year generated about $15 million, he said. This year it is on pace to broker just $6 million to $7 million in home loans, he said."

"The company had hoped the housing market would turn around this summer, but Ratliff said by spring he realized that wasn't going to happen. He now doesn't expect a turnaround in the market until spring of 2010."

'"When times were great, we grew as quickly as we could, and now that things have slowed, we're contracting," Ratliff said."

"NEW YORK (CNNMoney.com ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery."

"Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income."

"Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport."

'"Home prices will drop for quite a while - maybe several years," he said."

"Washington Mutual CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise."

"Also last month, JP Morgan Chase CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier."

"The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance."

"Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier."

"And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance."

"Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price index."

"2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. That's up about 50% from three years ago, and near historic highs"

"The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. Lending standards have been tightening for months, but if prime loans start to look risky, lenders will be even more conservative about who gets a mortgage."

Housing market hangover

"A stumbling housing market and soaring energy costs dented consumer confidence in 2007, sending sales of big-ticket items tumbling."

"Nearly every car dealership saw sales sink, particularly those selling trucks and SUVs that have fallen out of favor with consumers as gas prices soared past $4 a gallon."

"Home builders, many of whom expected 2007 would be a rebound year, endured another wrenching stretch of stagnant sales and delayed projects."

"The combination of stagnant wages and rising food and gas prices has taken a toll on the previously impervious consumer."

"Home builders are one sector of the economy clearly suffering. Revenues at the county's largest home builder, Christopherson Homes, were chopped in half as the company dramatically reduced the pace of construction around the state."

"The company, which generated $178 million in revenues in 2006, saw its sales fall to $89 million last year. The drop was accompanied by deep staff cuts."

'"You don't want to let them go, but the market just kept changing and not in the direction that we would hope for," said owner Brenda Christopherson."

"In the last recession, which followed the Sept. 11, 2001, terrorist attacks and the tech bust, businesses pulled back on capital spending. But consumers charged ahead, pushing up housing prices while showing little fear of adding new debt."

"Despite predictions that the housing market is unlikely to turn around until next year, Christopherson is moving forward with a new phase of its Ragle Ranch subdivision near the Sonoma County Fairgrounds in Santa Rosa. The Chaparral project will include 138 homes selling in the low $700,000s."

"Sonoma County slowly began to slip into recession in April 2007, according to an index created by SSU."

"The recession was largely triggered by the crumbling real estate sector. The county's median home price has fallen 29 percent since peaking in late 2005."

'"It's difficult for anyone to know when the recession will trough," said Robert Eyler, chairman of the economics department at Sonoma State University. "There is still a lot of uncertainty."'

"The recession could end by spring 2009 if the real estate market hits bottom this fall. But that would mean foreclosures stop growing, the number of new homes on the market begins to slow, and more buyers step forward, Eyler said."

'"We're going to need six or seven months of seeing that trend before we can make the claim we're out of recession," Eyler said. "If that happens, the end of 2009 and 2010 would look really good."'

"Unfortunately, that scenario seems unlikely, Eyler said."

"The worst case scenario is that the housing market continues its tumble, gas climbs to $7 a gallon, and inflation continues to raise the price of everything from a stapler to a pot roast."

'"If that happens, we will be talking about this like it were another great depression," Eyler said."

"That worst case scenario is also unlikely, he said."

"The SSU forecast punctuates a week of bad economic news. Last week, oil prices soared to an unprecedented $142.99 a barrel while blue chip stocks tumbled to their lowest level in almost two years. The Dow Jones industrial average is now down 20 percent from its record high in October, a trend traditionally viewed as the threshold of a bear market."

"The 1991 recession sliced 900 jobs from the county's total employment, although the economy continued to grow slightly."

"In 2001 it was much worse. The county shed 7,600 jobs and its economic output contracted by 12 percent."

"The academic jargon "supply-side boom" means growth will come from innovation by manufacturers, such as happened in the late 1990s with advances in the Internet, telecommunications and computers. It stands in sharp contrast to the boom experienced from 2004 to 2006."

"The recent expansion was driven by low interest rates and cheap money. Consumers went on a spending spree as inexpensive loans raised home prices and made people feel wealthier. Eyler called that a "demand-side boom," and the economy is now experiencing a hangover from those raucous, free-wheeling days."

"Wages are expected to continue to decline in real terms through 2010 as higher costs for groceries, gas and other goods result in paychecks falling shorter. In two years, people will be making an average 6.7 percent less than at the beginning of the decade, according to the SSU forecast."

"And then there is the housing market, now a source of pain. At some point, prices will fall to a level sustained by local wages and by outsiders who want a home in Wine Country."

'"We are going to need to get to that point before we can have a turnaround," Eyler said."

'"I don't think all businesses are in a recession. Some sectors are hurting more than others," said Ben Stone, executive director of the county's Economic Development Board."

"The wine industry remains strong and has been boosted by exports that have increased due to the weak dollar."

"We are in the first nationwide housing crash since the 1930s, and no one yet knows where it will end."

"How could Americans not be in a grumpy, even fearful, mood? Every day they are faced with news of plummeting house prices and a collapse in home construction (which created a third of all new jobs in the past few years)."

"Bank failures are becoming more common. Then there's the rapid decline of the U.S. auto industry—not unrelated to rising oil prices, which are also curtailing the dream of the suburban lifestyle. And millions of Americans are starting to fear losing their jobs—and the family healthcare that goes with them. The American imagination is haunted by the Great Depression of the '30s."

"The fate of the U.S. economy now hangs in the balance. On one side of the high wire is an inflation risk that can beget a wage-price spiral that would in turn induce a powerful contraction by the Fed. On the other side is an economy getting weaker, provoking bank and housing defaults that put further downward pressure on growth."

"House prices, the strategic fault line, have plummeted for most of the 68 percent of American families who own one. They are falling at an accelerating rate, while inventories of unsold and foreclosed homes are rising."

"Just a few weeks ago, a major mortgage lender in California failed—the third-largest bank collapse in American history. Banks are struggling to cope with borrowers who are defaulting in droves on mortgages, consumer debt, credit cards, student loans, home equity loans, car loans—you name it. The losses to the financial system are horrific."

"With 10 million mortgages exceeding the value of the homes, that could take a long time. If the futures market is correct in predicting an overall price drop of 30 percent, the value of housing assets will shrink by over $6 trillion, which could permanently lower household spending by about $300 billion a year.

"Only when this huge inventory is cleared from the market and prices start to rise will we know where the bottom was."

"A new Zillow.com survey shows that 62% of U.S. homeowners think their house has either maintained or increased in value in the last year despite overwhelming evidence to the contrary."

"In fact, the real estate Web site says that, by its count, 77% of homes nationwide have lost value in the past 12 months."

'“Whether it’s apathy, confusion or just plain denial, homeowners seem to believe the housing crisis affects every other home but ‘not my house,’ underscoring a wide gap between homeowners’ inflated perception of their home values and the gloomy market reality,” says Zillow."

We're not even using the word "recovery" yet.

"“California, Florida, Arizona and Nevada combined represent 62 percent of all foreclosures on prime loans and nearly half of all subprime ARM foreclosures started in the first quarter, the Mortgage Bankers Association reported.”'

"Among the California homes sold in June, 41.9 percent were foreclosure resales, compared with 6.6 percent a year earlier, DataQuick said."

'"We still have a ways to go before we can say the housing market has turned and showed improvement," said Robert Kleinhenz, deputy chief economist with the trade group. "And we're not even using the word recovery yet."'

In Sonoma County 414 homes sold in June.

Nearly half of all homes sold were owned by lenders or short sales.

Some 47 percent of houses sold in June were bank-owned or short sales, where homeowners sell for less than what they owe on mortgages to avoid foreclosure.

Lenders with foreclosed homes and homeowners in financial distress flood the market.

Real estate companies are dedicating agents and staff to what industry analysts say is an unprecedented wave of troubled properties.

The median-priced house in the region sold for $404,500 in June, down 33.1 percent from a year ago -- the 24th consecutive monthly decline.

Bleakest market since the Great Depression

Fannie Mae (FNM.N) on Friday posted a much larger-than-expected second-quarter loss and slashed its dividend more than 85 percent to preserve capital as home loan defaults accelerated in the bleakest U.S. housing market since the Great Depression.

Fannie Mae Chief Executive Daniel Mudd told a conference call the company anticipates increasing its loss reserves.

"The housing crisis that we all observe as we drive home every single day continues to strain our results and our capital," he said.

By year's end, Fannie Mae will stop buying Alt-A mortgages, riskier mortgages that require less proof of borrower income. These loans made up about 11 percent of the company's total single-family mortgage credit business, but spurred about half of its credit losses in the second quarter.

Fannie said it has already reduced its holdings and purchases of Alt-A mortgages by 80 percent from peak levels. Far fewer such loans are being originated under tighter lending standards imposed as a result of the subprime lending crisis.

"With the slumping market, lenders are reevaluating borrowers' property values and risk profiles more frequently, triggering freeze notices for those with high loan-to-value ratios."

"During the first quarter of 2008, consumers fell behind on home equity credit lines at the fastest pace in two decades, according to the American Bankers Association."

"Morgan Stanley, the second-largest U.S. securities firm, is the latest to adopt the practice."

'"A segment of clients was recently notified of a change in the status of their home equity line of credit due to a change in the value of their property or their credit profile," Christy Pollak, spokeswoman for the New York-based lender, said Thursday."

"Washington Mutual, JPMorgan Chase and other big lenders have taken similar steps as home values continue to slide."

'"Lenders know real estate prices are dropping, and they're trying to mitigate their losses," said Dale DiGennaro, vice president of the California Association of Mortgage Brokers."

"So far, the trend hasn't spread to community-based banks and credit unions. "

'"We haven't taken that approach," said Anne Benjamin, vice president at Redwood Credit Union in Santa Rosa."

"The not-for-profit member cooperative, which has about 3,500 home equity lines outstanding, considers other kinds of security for its loans, she said."

"Santa Rosa's Exchange Bank also has avoided the practice, said spokeswoman Padi Selwyn. "We are not currently freezing home equity lines or loans," she said. "But we are reviewing the portfolio regularly."'

"Exchange Bank has more than 1,000 home equity lines outstanding."

...And the pain is nowhere near over

Historical fact: Californian home prices fell for roughly six years running from 1990 through 1996.

C.A.R. sales report that showed the YOY Californian median used home sales price down by 36 percent

Year over Year June Sonoma County Median Price

June 2008: $401,500

June 2007: $600,000

Year end Median Home Price trends

1998: $218,950

1999: $244,000

2000: $305,000

2001: $348,000

2002: $375,000

2003: $420,000

2004: $499,000

2005: $591,000

2006: $580,000

2007: $550,000

Freddie Mac on Wednesday posted a second-quarter loss that was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages.

Freddie's financial losses were concentrated in a handful of states -- notably California, Florida, Nevada and Arizona -- where speculation was rampant, prices skyrocketed, and buyers stretched to the financial limit to afford a home.

Today's challenging economic environment suggests that the housing market is far from stabilizing," Richard Syron, the chairman and CEO of Freddie Mac, told investors in a conference call held to discuss the company's earnings.

U.S. house prices will fall by as much as 20 percent nationally and the current mortgage finance crisis is about half-way through, the chief of major mortgage financier Freddie Mac said Wednesday.

Freddie is now reeling from loans -- made in 2006 and 2007 as the market turned sour -- to borrowers with solid credit but little proof of their incomes, or small or no down payments.

These so-called Alt-A loans make up about 10 percent of Freddie's portfolio, but accounted for more than half of the company's credit losses in the quarter.

"(Freddie) bought loans that . . . were on some level just as risky as what was subprime," said Ritch Workman, co-owner of Workman Mortgage Co. in Melbourne, Fla.

"And the pain is nowhere near over."

"As the slumping economy puts the squeeze on consumers, more shoppers in Sonoma County are turning to thrift stores to save a buck."

'"What we're finding is that shopping is up but the donations are in the tank," said Major George Hood, a spokesman for the Salvation Army."

"Thrift stores aren't just for the poor anymore, said Roger Playwin, national executive director of the St. Vincent De Paul Society, the Catholic charity that runs 408 retail stores around the nation."

"Middle-class people struggling with high mortgages and working two jobs to make ends meet are increasingly turning to thrift stores for the stuff they need, he said."

"I never go to the mall anymore," said Santa Rosa resident Malia Patterson, as she tried on a pair of flip-flops at the store Friday afternoon.

"Her friend, Gigi de'Marie, said the high cost of gas and food are only reinforcing her commitment to shopping at thrift stores and never to pay top dollar."

"She wore a colorful blouse she said was an expensive garment -- one that she had received as a gift from a friend who had herself purchased it at a thrift store."

'"It's so tough that we're even recycling thrift store clothes," de'Marie said."

"The median household income in Sonoma County was $60,821 in 2006, according to the U.S. Census."

"Putting food on the table is becoming a financial stretch for Americans of all income levels, according to a marketing research report."

"With budgets "strained to the breaking point" by rising costs for gasoline, energy, food and other necessities, more than half -- 56 percent -- of consumers earning less than $35,000 a year are having difficulty buying the groceries they need, the report said."

"Forty-four percent of consumers earning between $35,000 to $54,900 are in the same predicament, as are 24 percent of those making $55,000 to $99,900, and 16 percent of those making $100,000 or more."

'"These are very alarming statistics," said Sheila McCusker, a partner in Information Resources Inc., a private company which tracks consumer spending and released the report. "We're not talking about people saying, 'I can't buy that flat-screen TV' but 'I can't feed my family.'"

"Asked why higher-income consumers would have trouble buying food, McCusker said that people earning more than $100,000 typically own large homes and multiple large vehicles, which are expensive to maintain."

"Like smoke from lingering forest fires, a sense of unease hangs over many North Bay residents as they stretch their dollars to cope with rising costs, shrinking paychecks and a host of economic ills."

"...consumer confidence has hit a 16-year low and Americans are more economically pessimistic than ever."

'"There's always that little sense of foreboding in your mind," said Amy Stang, a Santa Rosa working mother of three. "I would hate to see the bottom fall out for our family."'

"In January, a power bill of nearly $400 sounded an alarm for Amy and Brian Stang, opening a year in which gasoline has soared to more than $4.50 a gallon, while food and airfare cost more and home values are falling."

"There is scarcely any good economic news these days, with inflation bumping up, take-home pay declining, thousands losing their jobs and mortgage-credit woes threatening to undermine the banking industry."

"It's made involuntary misers out of many who once felt pretty comfortable."

'"I put off paying bills, buying new tires, just about everything as long as possible," said Philip Tymon of Guerneville. "I look for bargains on everything I must buy."'

"He hasn't driven into Santa Rosa in weeks, and rarely spends money at night on movies or cafes. Vacation travel is out for at least the rest of the year, Tymon said."

'"Every penny counts at this point," said Katie Gonzalez, a working mother of three in Napa County's Pope Valley."

"Consumer confidence sagged in June to 50.4, the fifth lowest mark reported by The Conference Board, and it bodes ill for the nation's economy. When confidence nosedives, it typically means "people are going to hunker down and spend less," said James Wilcox, a UC Berkeley economist."

"Also in June, inflation reared up 1.1 percent, the second-highest monthly rise in 25 years. The only higher mark was in September 2005, after Hurricane Katrina shut oil refineries and energy prices spiked."

"Jim Kelly of Rohnert Park, who has lived on disability payments the past two years because of a back injury, said he's become virtually a full-time bargain hunter. Saving a dollar on a gallon of milk is "a big deal to me," he said."

"Cyndee Schenk of Santa Rosa said her job at the Penngrove post office pays well, but inflation consumed her latest raise. She quit going to Starbucks and shops for clothes at Wal-Mart and Kmart instead of Macy's and Mervyns."

"Financial Title Co. shut down all of its California offices Wednesday, including six in Sonoma County, becoming the latest escrow company to feel the bite of the housing slump."

"The shutdown came without warning, according to employees moving their belongings out of Financial Title's main office in Santa Rosa."

"A recorded message at several Financial Title offices in Sonoma County said the company is no longer in business and referred callers to its insurance underwriter, First American Title. A note with similar information was posted on the door to Financial Title's Santa Rosa office."

"Financial Title had 10 offices in Sonoma County as recently as last year, but it consolidated locations as business declined. The remaining offices were in Santa Rosa, Sonoma, Healdsburg, Petaluma and Sebastopol."

"Financial Title was the third-largest title company in Sonoma County, processing 12 percent of the escrows in the county, according to a report last November in the North Bay Business Journal."

Changing demographics

Census estimates show the number of Latino residents in Sonoma County increased 3.7 percent -- 1,869 people -- from 2006 to 2007.

The agency estimates there are currently 104,862 Latinos in Sonoma County, up more than 30 percent from the 80,619 living in the county in 2000.

The number of white residents dropped from 2006 to 2007 by 0.7 percent, or 2,250 people. From 2000 to 2007, the county's white population has declined 7.2 percent to 320,305 people.

Wave of Foreclosures & Crazy Landlords

(Press Democrat) "Police have arrested a Newark area landlord who allegedly rammed his Hummer into a renter's house, claiming the tenants were behind on their rent."

"New Castle County Police spokesman Cpl. Trinidad Navarro said the 30-year-old landlord crashed the SUV into a home on Lute Court in Harmony Woods about 3 a.m. Thursday."

"The landlord was charged with endangering the welfare of those inside, reckless driving and harassment, among other charges."

(From: Voice of San Diego) "More and more, unsuspecting tenants -- some who decided to rent to avoid the instability of the region's home prices -- arrive home to a notice on the front door. They're being evicted; their landlords have lost their homes."

"As much as one-quarter of the single-family homes in foreclosure in California have renters occupying them, according to an estimate from the California Apartment Association, an organization of rental property owners. That doesn't account for tenants of foreclosed apartment buildings or duplexes."

"That renters have become increasingly affected by foreclosure has caught the eye of a national homelessness advocacy group, whose recent report focuses on the "invisible victims" of foreclosure. A survey of homeless service providers nationwide reveals a growing number of applicants for assistance who were kicked out of their rental houses or condos because their landlords were in foreclosure."

"The displaced renter adds another face to the column of victims of mortgage fraud. Such displaced renters are usually in the dark about the financial situation that led their landlords to foreclosure."

'"It's a bad situation for good tenants to be in foreclosed properties," said Carlsbad eviction attorney James Burmeister. "A lot of these tenants are suddenly getting an eviction and then the tenant's the one losing his house, with his family and his kids and his school district and paying his rent on time."'

"Gov. Arnold Schwarzenegger signed a bill into law in July to extend the amount of time such tenants are given before they must vacate the house from 30 days to 60 days."

"Homeowners who live in their house are only entitled to three days once the bank has repossessed the house before they're evicted. Tenants get at least 60 days to stay there, and they don't have to pay rent."

(Press Democrat) "Sonoma County's housing market is saturated with bank-owned properties and by homeowners who are attempting to sell and avoid foreclosure, driving down property values in many areas."

"Every week, more than 100 borrowers in Sonoma County fell behind on payments or stopped paying mortgages, triple the number from a year ago."

"Of the borrowers in default, only 22 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe, DataQuick reported. A year ago, it was about 52 percent."

"Lenders seized a record 788 homes in foreclosure in Sonoma County during the second quarter, up 46 percent from the first quarter and nearly five times the total from a year ago, DataQuick reported Tuesday. Every week, lenders took back more than 60 homes from borrowers who had stopped paying their mortgages."

"Lenders sent 1,376 default notices, the first step in the foreclosure process, down 1.1 percent from the record 1,392 default notices in the first quarter."

"Analysts, however, warned that the wave of foreclosures will likely continue to rise in Sonoma County this year and potentially into 2009."

"'I have never seen this many of them in the 20 years I've been in this business. There appears to be no change in the immediate horizon," said John Binns, a CPS agent specializing in selling bank-owned homes."

Risk Assessment? We don't need no stinkin' risk assessment!

...(sentiments of CEO of Freddie Mac, Richard F. Syron?)

(from the NYTimes)

"In an interview, Freddie Mac’s former chief risk officer, David A. Andrukonis, recalled telling Mr. Syron in mid-2004 that the company was buying bad loans that “would likely pose an enormous financial and reputational risk to the company and the country.”'

"Today, Freddie Mac and the nation’s other major mortgage finance company, Fannie Mae, are in such perilous condition that the federal government has readied a taxpayer-financed bailout that could cost billions. Though the current housing crisis would have undoubtedly caused problems at both companies, Freddie Mac insiders say Mr. Syron heightened those perils by ignoring repeated recommendations."

"Mr. Syron received a memo stating that the firm’s underwriting standards were becoming shoddier and that the company was becoming exposed to losses, according to Mr. Andrukonis and two others familiar with the document."

"Mr. Andrukonis was not the only cautionary voice at Freddie Mac at the time. According to many executives, Mr. Syron was also warned that the firm needed to expand its capital cushion, but instead that safety net shrank. Mr. Syron was told to slow the firm’s mortgage purchases. Instead, they accelerated."

'“He said we couldn’t afford to say no to anyone,” Mr. Andrukonis said. Over the next three years, Freddie Mac continued buying riskier loans."

"Mr. Syron contends his options were limited."

'“If I had better foresight, maybe I could have improved things a little bit,” he said. “But frankly, if I had perfect foresight, I would never have taken this job in the first place.”'

"Mr. Syron, has collected more than $38 million in compensation since 2003."

"Stock prices at both companies (Freddie Mac & Fannie Mae) have fallen by more than 60 percent since February, destroying more than $80 billion of shareholder value."

"Mr. Syron and the Fannie Mae chief executive, Daniel H. Mudd, defended their choices, saying in interviews that they did not anticipate that the housing market would decline so quickly and that they were buffeted by conflicting pressures."

'“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things,” Mr. Syron said in an interview."

"Others, however, dismiss that explanation. “Sure, it’s hard to deal with the pressures of Congress and shareholders and regulators,” said a former high-ranking Freddie Mac executive. “But that’s why executives get paid so much. It’s not acceptable to blame those pressures for making bad choices.”'

"Mr. Syron joined Freddie Mac as chief executive and chairman in 2003, after the company revealed it had manipulated earnings by almost $5 billion. He came to Freddie Mac after serving as chairman of the Thermo Electron Corporation, a scientific instruments firm, and of the American Stock Exchange."

"Mr. Mudd was promoted to chief executive of Fannie Mae the following year, after that company was also accused of accounting errors totaling $6.3 billion. His compensation has totaled more than $42 million."

"By the time both men took over, the firms had perfected the art of making money by capitalizing on the perception they were implicitly backed by the government. That belief allowed Fannie and Freddie to borrow at relatively low rates and use those funds to buy mortgages as investments. The companies also collected fees in exchange for guaranteeing that borrowers would repay other home loans."

"By the end of 2007, the firms held mortgages worth more than $1.4 trillion combined, and guaranteed payments on loans worth $3.5 trillion more."

"Both firms had sophisticated systems to hedge against risks. But they remained exposed to one unlikely, but potentially catastrophic possibility: a wide-scale decline in national home prices.
The only real protection against such a downfall was purchasing only the safest loans."

"However, the companies were constantly under pressure to buy riskier mortgages."

"Mr. Syron and Mr. Mudd eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out."

'“The thinking was that if something really bad happened to the housing market, then the government would need Freddie and Fannie more than ever, and would have to rescue them,” Mr. Andrukonis said. “Everybody understood that at some level the company was putting taxpayers at risk.”'

"For years, the companies collected rich profits. But some executives grew increasingly concerned."

"Mr. Andrukonis wrote his memo in 2004. At the time, he also briefed the risk oversight committee of the board of directors, but did not share his memo with them, he said. A member of that committee declined to return phone calls."

"In 2007, as home prices were falling and defaults rising in some areas, people at both firms urged their chief executives to scale back on mortgage purchases. Fannie Mae shrunk its mortgage portfolio slightly."

"Mr. Syron’s Freddie Mac, however, increased its portfolio by $17 billion."

"That same year the companies posted combined losses of $5.2 billion. This year, they have announced losses of $2.4 billion, and analysts say they may lose an additional $24 billion or more."

"Last month, after weeks of rumors and bad news, investors began dumping the companies’ shares, driving their stock prices down almost 60 percent apiece. The selling did not subside until Mr. Paulson unveiled a rescue plan with powers to inject billions of taxpayer dollars into the companies." (now a law)

"The law, signed by President Bush last week, also gives the government sweeping new regulatory control over the firms."

'“It basically worked exactly as everyone expected — when things got bad, the government came to the rescue,” said a second former high-ranking Freddie Mac executive. “But we didn’t expect it would come at the cost of a new regulator who now has the power to burrow into our business forever.”'

State of the County

"Median-priced house in the region sold for $404,500 in June, down 33.1 percent from a year ago -- the 24th consecutive monthly decline. The county's median, the point at which half the homes sell for more and half sell for less, reached a record $619,000 three years ago before housing's downturn."

'"This is unlike any market I can recall. Every recovery starts at the bottom of the market, but in this market the bottom is so much lower," said Rick Laws, Santa Rosa manager for Coldwell Banker, which prepares the home sales report."

"47 percent of houses sold in June were bank-owned or short sales, where homeowners sell for less than what they owe on mortgages to avoid foreclosure."

"Unemployment has been rising steadily over the past year in Sonoma County, where the weak economy left 15,100 job-seekers out of work in June, a 31 percent increase over a year ago. It is the largest number of people without jobs since January 1995, the state Employment Development Department reported."

"We've kind of had the perfect storm the last few months. The slowdown is taking hold more broadly," said Ben Stone, executive director of the county Economic Development Board."

"Much of the slowdown is tied to the housing downturn and cutbacks in consumer spending, which are deepening as the economy slumps and prices for gas and other goods rise."

"The biggest losses over the past year were 1,000 jobs in construction, 300 among finance and insurance companies, 300 restaurant and bar jobs and 500 in other services."

"Overall, unemployment in Sonoma County stood at 5.6 percent in June, up from 5.1 percent in May and 4.4 percent a year ago."

"The job outlook is not expected to improve for at least the next several months.

Several sectors tied to housing continue to shed jobs."

'"Construction has been losing jobs for the past 14 months. Financial activities has been losing jobs for the last 23 months," Singh said."

"Tourism-related businesses aren't hiring as in past years, indicating a drop-off in consumer spending, Singh said."

"Every week in Sonoma County, banks take back 60 homes from owners who have fallen behind on their loan payments."

'"Almost everything I look at these days is a foreclosure. I'm surprised when it isn't," said Pete Deatherage, co-owner of Pacific Appraisals in Rohnert Park."

"Foreclosure tours are one of the newest strategies used to introduce potential buyers to the market for distressed homes."

"Once a tiny niche in the real estate market, distressed properties are now a major focus for real estate agents and mortgage brokers."

"Summer's still swinging, but parents are already dragging their kids to local retailers in search of back-to-school bargains that won't break household budgets already rattled by the recession."

'"Consumers have been pessimistic for several months, primarily because of the strains on their budgets from higher gas and food prices," said Stacy Janiak, retail analyst with financial services firm Deloitte."

"The company released a study showing 71 percent of people plan to spend less on back-to-school items this year, while almost half planned to reduce spending by more than $100."

"Zootis, a real estate agent in Windsor, said the soft housing market has been tough on her family and caused her to do everything she can to "squirrel away money for a rainy day."

Ironically, that means more shopping, not less, as she hunts harder for the best deals. "

"It's not so much that we have financial problems, but the job stability is just not there," she said."

"It's been 14 months since Santa Rosa's effort to have a private developer build a downtown residential high-rise and public garage fell apart because of financial difficulties."

"Now, city officials are touting a new developer's plan to build on the same site a six-story boutique hotel that also would include a city-owned, seven-story parking garage."

'"Right now, housing in the downtown seems to be a moot point. The economy is just not there for condos at this time," Bender said."

'"Offering the gloomiest assessment of personal economic progress in close to half a century, a new survey has found that most Americans think they have not made economic progress over the past five years, as their incomes have stagnated and they have increasingly borrowed money to finance their lifestyles."'

"Debt-to-income ratios more than doubled between 1983 and 2004, going from 0.45 to 1.19, the report said."

"About a quarter blame the government, 15 percent blame the spiraling price of oil, 11 percent blame themselves and 8 percent blame foreign competition."

All The News That's Fit To Print...

.... and they did!

(NYTimes)

Housing Lenders Fear Bigger Wave of Loan Defaults

"The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time."

"The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building."

"Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults."

'“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”'

"Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments."

'“The wave on the prime side has lagged the wave on the subprime side,” said Rod Dubitsky, head of asset-backed research at Credit Suisse. “The reset of option ARM loans is a big event that will drive the timing of delinquencies.”'

"Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets."

"What will sting borrowers more than rising interest rates, analysts say, is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Such loan terms were popular during the boom with alt-A and prime borrowers and appeared appealing while home prices were rising and interest rates were low.
But now, some borrowers could see their payments jump 50 percent or more, and they may not be able to sell their properties for as much as they owe."

"Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year."

"The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 percent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif. The firm said the median age of the loans increased to 26 months from 16 months a year earlier."