Housing starts expected to hit half-century low

WASHINGTON (MarketWatch) — Few observers have ever seen anything like the economic data that will be released in the coming week, with the consumer price index and housing starts each expected to breach records dating back to the late 1940s. Read more

One in five US homeowners with mortgages underwater

United States - By Jonathan Stempel

NEW YORK (Reuters) - Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American (nyse: FAF - news - people ) CoreLogic.

The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.

Seven hard-hit states — Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio — had 64 percent of all “underwater” borrowers, but just 41 percent of U.S. mortgages.

“This is very much a regional problem, and people tend to forget that,” said David Wyss, chief economist at Standard & Poor’s, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

“Most of the country is not in bad shape,” he continued. “Things seem to be stabilizing in Michigan, but the big bubble states — Florida, California, Arizona and Nevada — are still very overpriced.”

About 68 percent of U.S. adults own their own homes, and about two-thirds of them have mortgages.

JPMorgan Chase (nyse: JPM - news - people ) & Co, one of the biggest mortgage lenders, Friday offered to modify $70 billion of mortgages to keep a potential 400,000 homeowners out of foreclosure. Bank of America Corp (nyse: BAC - news - people ), which bought Countrywide Financial Corp (nyse: CFC - news - people ) in July, also has a large loan modification program.

HOME PRICES, ECONOMY UNDER PRESSURE

U.S. home prices fell a record 16.6 percent in August from a year earlier, with declines in all 20 major metropolitan areas measured by the S&P/Case-Shiller Home Price Indices.

Foreclosure filings rose 71 percent in the third quarter to a record 765,558, according to RealtyTrac.

Meanwhile, the Commerce Department said gross domestic product fell at a 0.3 percent rate in the third quarter. Some experts expect the worst U.S. recession since the early 1980s.

Yet despite a series of expensive government programs to spur lending, mortgage rates are rising, making it tougher to borrow or refinance. The rate on a 30-year fixed-rate mortgage jumped this week to 6.46 percent from 6.04 percent a week earlier, Freddie Mac (nyse: FRE - news - people ) said.

Meanwhile, borrowing costs on hundreds of thousands of adjustable-rate mortgages are expected to reset higher in the coming months. The problem may be particularly serious for borrowers with rates tied to the London Interbank Offered Rate, or Libor, which is abnormally high relative to benchmark U.S. rates.

Last week, Wachovia Corp (nyse: WB - news - people ) said borrowers with its “Pick-a-Pay” ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth. Wells Fargo (nyse: WFC - news - people ) is buying Wachovia.

NEVADA HARD HIT, NEW YORK AT RISK

First American CoreLogic, an affiliate of title insurance and real estate services company First American Corp, said states with large numbers of homes with negative equity either had rapid price appreciation, many homes bought with subprime mortgages or as speculative investments, steep manufacturing declines, or a combination.

Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of what their homes were worth, and 48 percent had negative equity. Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of borrowers underwater.

New York fared best, with an average 48 percent loan-to-value ratio and just 4.4 percent of mortgage borrowers with negative equity.

But Wyss said this could change as financial market upheaval transforms Wall Street. This month, New York City Comptroller William Thompson estimated that the city alone might lose 165,000 jobs over two years.

“We’re going to see home prices coming down pretty significantly in New York,” Wyss said. “A lot of people are losing jobs, and won’t be getting their usual bonuses, and that leaves less money for housing.” (Reporting by Jonathan Stempel; Additional reporting by Al Yoon; Editing by Brian Moss)

Reuters | Jonathan Stempel | Friday, October 31, 2008

Fast and loose housing market is history

The trillion-dollar question everyone keeps asking about the economy is: When will the housing market come back?

The answer should be apparent: It won’t.

Oh, home sales will slowly rebound and prices will at some point stop falling.

But the fast and loose housing market that made the industry billions and fueled the world financial market crash has gone the way of nickel pop and $1 gas. Read more

For bailout to work, housing market needs to mend

Until housing markets improve, banks may stint on lending despite OK of $700 billion bailout

NEW YORK (AP) — Washington’s financial bailout plan is now law. So the credit spigot will start flowing again, banks will resume lending, and an economic recovery can begin, right?

Wrong. Experts say the most important thing that needs to happen before the $700 billion bailout even has a chance of working: Home prices must stop falling. That would send a signal to banks that the worst has passed and it’s safe to start doling out money again. Read more

FBI saw threat of mortgage crisis

A top official warned of widening loan fraud in 2004, but the agency focused its resources elsewhere.

WASHINGTON - Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

“It has the potential to be an epidemic,” Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. “We think we can prevent a problem that could have as much impact as the S&L crisis,” he said.

Today, the damage from the global mortgage meltdown has more than matched that of the savings-and-loan bailouts of the 1980s and early 1990s. By some estimates, it has made that costly debacle look like chump change. But it’s also clear that the FBI failed to avert a problem it had accurately forecast.

Banks and brokerages have written down more than $300 billion of mortgage-backed securities and other risky investments in the last year or so as homeowner defaults leaped and weakness in the real estate market spread.

In California alone, lenders have foreclosed on $100 billion worth of homes over the last two years and are foreclosing at a rate of 1,300 houses every business day, according to a recent report from ForeclosureRadar.com.

Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn’t just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.

Now that the problems are out in the open, the government’s response strikes some veteran regulators as too little, too late.

Swecker, who retired from the FBI in 2006, declined to comment for this article.

But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.

They ended up with fewer resources, rather than more.

In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and ’90s, said Anthony Adamski, who oversaw financial crime investigations for the FBI at the time.

The FBI says it now has about 200 agents working on mortgage fraud, but critics say the agency might have averted much of the problem had it heeded its own warning.

“The FBI correctly diagnosed that mortgage fraud was epidemic, but it did not come close to meeting its announced goal,” said William K. Black, who was a federal regulator during the S&L crisis and now teaches economics and law at the University of Missouri-Kansas City.

“It used everyday procedures and woefully inadequate resources to deal with an epidemic,” he said. “The approach was certain to bring symbolic prosecutions and strategic defeat.”

The mortgage debacle has laid bare a system marked by dubious practices at every stage of the process. Lenders often made loans to borrowers who had limited ability to repay them but little desire to pass up the dream of homeownership. Many loans lacked basic documentation, such as information about borrowers’ incomes.

Still, mortgage companies could hardly sell them fast enough, packaging the loans as investment securities and peddling them to eager buyers on Wall Street.

The FBI defends its handling of the crisis, with officials contending that as home prices were rising several years ago, the trouble brewing in the mortgage market — and the potential crimes behind it — was not immediately apparent.

Officials said they began approaching mortgage companies and others in an attempt to raise awareness about the growing fraud problem. But the lenders had little incentive to cooperate because they were continuing to make money. Black says that in many cases, they were part of the fraud.

“Nobody wanted to listen,” Sharon Ormsby, the chief of the FBI’s financial crimes section, said in an interview. “We were dealing with the issue as best we could back then.”

Over the last three years, the FBI and other agencies have brought dozens of mortgage-fraud cases. The bureau has rooted out foreclosure rescue schemes in which homeowners are tricked into signing over the deeds to their homes to operators who buried the properties even deeper in debt. Agents have disrupted cases of identity theft in which criminals open — and exhaust — home equity lines of credit and leave homeowners stuck with the bill.

Many of the cases have been relatively small, however, with about half the investigations involving losses of less than $1 million — the size of two or three loans.

But the tepid response also reflects a broad realignment of law-enforcement priorities at the Justice Department in which mortgage fraud and other white-collar crimes have been subordinated to other Bush administration priorities.

That has reflected, in part, the ramp-up in national security and terrorism investigations after the Sept. 11 attacks. But the administration has also put more support behind efforts against illegal immigration and child pornography.

In a way, the mortgage debacle could not have come onto the FBI radar screen at a worse time. Just as Swecker was making his doomsday forecast, the FBI, under pressure from Congress and the White House, was creating a crime-fighting brain drain, transferring hundreds of agents from its criminal investigations unit into its anti-terrorism program. About 2,500 agents doing criminal work — 20% or so of the entire force — were affected.

Even as the number of new white-collar cases started declining, the Justice Department did pursue some high-profile corporate prosecutions, such as those arising from the collapse of Enron Corp. But some former prosecutors question the administration’s current commitment to pursuing complex, high-stakes cases.

“I think most sitting U.S. attorneys now staring at the subprime crisis find scant resources available to pursue sophisticated financial crimes,” said John C. Hueston, a Los Angeles lawyer who was a lead federal prosecutor in the trials of Enron executives Kenneth L. Lay and Jeffrey K. Skilling.

Absent a major shift in priorities and resources, he said, it is likely that the Justice Department and the FBI will continue on their current path of focusing on simple cases “that don’t go to the heart of the problem.”

The FBI says it has 21 open investigations into possible large-scale fraud related to the subprime meltdown. The Times reported last month that a federal grand jury in Los Angeles had subpoenaed records from three large California lenders: Countrywide Financial Corp. (now part of Bank of America Corp.), New Century Financial Corp. and IndyMac Federal Bank.

Among other possible targets, the FBI has said, are investment firms that sold billions in securities backed by shaky subprime mortgages and credit rating agencies that gave high marks to the now-worthless securities and failed to protect investors.

But it may be hard to jump-start such probes. Trying to prove that a major mortgage company intended to defraud buyers of its securities, for example, could take years of digging into records and testimony.

Moreover, some of those involved may have special legal protection: Credit rating firms have in other cases successfully asserted that their opinions about the values of securities are protected by the 1st Amendment.

“I am happy to have investigations going on, but these investigations should have taken place years ago,” said Blair A. Nicholas, a San Diego lawyer representing investors who lost money in the collapse of several subprime mortgage lenders. “They seem to always get involved after the horse has left the barn. It is always cleaning up the mess rather than being proactive.”

Could the crisis have been averted, or at least mitigated, if the FBI had intervened more forcefully?

“Until there is a catastrophic loss, there is no incentive to investigate criminal conduct,” said Cynthia Monaco, a former federal prosecutor in New York. “Nor are there people coming forward with evidence” such as angry investors or whistle-blowing corporate employees, she said.

Even now, Monaco added, it is far from clear whether the damage — suffered by investors and homeowners alike — was the product of clear-cut fraud.

Ormsby says the FBI is more actively working with other federal investigative agencies in the hope they will pick up the slack. The Secret Service, for example, in a departure from its traditional missions of protecting presidents and heads of state and investigating counterfeiting, has assigned more than 100 agents to examine mortgage fraud, said spokesman Edwin Donovan.

The Justice Department is also starting to mobilize. The department offered what it described as a “basic seminar” on mortgage fraud cases to about 100 prosecutors last week at its national training academy in South Carolina.

Los Angeles Times | Richard B. Schmitt | Monday, August 25, 2008

Land grab starting in US: Foreign money to scoop up tens of thousands of discounted foreclosed homes across country

There’s a new land grab starting in America.

Foreign money, which up to now has focused its attention on investing in iconic commercial real estate - like Barneys New York and the Chrysler Building - is now moving to scoop up tens of thousands of discounted foreclosed homes across the country.

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.

The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.

Neither Iversen nor Hanson would disclose the name of the client, but sources told The Post it’s a sovereign fund.

The unidentified fund joins individual US investors, hedge funds and Wall Street banks in kicking the tires of REO homes, which have fallen in value so much that they are now tempting investments.

A sovereign fund would have two distinct advantages over other investors - the depressed value of the US dollar makes the homes a bargain, and sovereign funds have deeper pockets.

The sovereign fund of Abu Dhabi, for example, has a reported $875 billion in assets, while Norway has $391 billion, Singapore has $303 billion and Kuwait has $264 billion in their sovereign funds, which are funded by proceeds from oil sales.

The Abu Dhabi Investment Authority is expected to announce next month what type of US distressed assets they will be investing in and real estate is at the top of the list, according to a report in Financial Times last week.

ADIA did not respond to an e-mail question about REO investments.

So far, prices on bulk sales of REO properties vary based on location and are selling from 60 cents to 80 cents on the dollar. Hanson started out offering 40 cents on the dollar for about $2.5 billion worth of California properties owned by IndyMac and Washington Mutual but was turned down. The banks refused to comment.

Hanson is now willing to pay 50 cents to 60 cents on the dollar for a collection of California REOs worth at least $500 million.

In fact, this week Hanson’s team negotiated a $2 billion package mixed with homes across the country for 31 cents on the dollar. While progress seems slow, Hanson reminds us this is only a nine-month old industry.

Some market experts think such deeply discounted REOs, like the deal Hanson just closed, are more fiction than fact.

“The size and discount of that type of deal isn’t the norm yet,” said Robert Pardes, with Recourse Recovery Management Services, a provider of mortgage advisory services.

“The critical mass of bulk REO is in well-capitalized institutions that don’t need to sell yet in bulk at a deep discount because they are better off not taking substantial hits to the capital just to get the assets off their books,”

This may change, should the market become more crowded with bank failures and distressed institutions, he said.

Enoch Lawrence, senior vice president of CB Richard Ellis, says “This type of bulk buy would make an impact on the market. They are in a unique position because they have a long time horizon to invest and a cheap cost of capital. It’s actually a perfect time for them to acquire these REO assets.”

New York Post | TERI BUHL | Sunday, August 10, 2008

Greenspan Says Housing Prices Not Yet Near Bottom

July 31 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan said falling U.S. home prices are “nowhere near the bottom” and the resulting market turmoil isn’t showing signs of abating.

While the odds of a recession are 50-50, achieving stable markets will “take a while,” Greenspan said today in a CNBC interview.

The economy grew at a 1.9 percent annualized rate in the second quarter after expanding 0.9 percent in the first quarter, the Commerce Department said in Washington. Gross domestic product was revised to show a contraction in the final three months of 2007.

More Americans filed claims for unemployment insurance last week than at any time in more than five years, the Labor Department said. Fed policy makers have cut the benchmark rate to 2 percent from 5.25 percent since September, halting the reductions in June amid rising concern about inflation.

Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, are a “major accident waiting to happen,” Greenspan said. “The solution” is the “nationalization” of the companies, he said.

After the former Fed chairman spoke, Washington-based Fannie Mae dropped 69 cents, or 5.7 percent, to $11.52 at 3:48 in New York Stock Exchange composite trading. Freddie Mac fell 55 cents, or 6.3 percent, to $8.18.

“It important that we focus on stabilizing the financial system,” Greenspan said. Policy makers also need to reconcile slowing economic growth with rising prices, he said.

The U.S. faces “a very substantial change in the balance between growth and inflation,” Greenspan said.

Bloomberg | Steve Matthews | Thursday, July 31, 2008

Video | Ron Paul on Bernanke’s testimony

Video | Ron Paul discusses mortgage crisis on Glenn Beck

Bargain hunting picks up as Southern California home values fall further

Prices in the six-county region drop 29.3% in June compared with a year earlier. Some areas see sales rise as foreclosed houses are deeply discounted.

Southern California home values keep spiraling down, but sales volume is picking up in the Inland Empire and other areas where bargain hunters are snapping up foreclosed properties at steep discounts.

Home prices plunged 29.3% last month from a year earlier, to a median of $355,000 in six Southern California counties, a real estate information service reported Wednesday. That’s about where prices were in 2004.

The number of homes sold in June was down 13.6% from a year earlier. But Riverside County posted an 11.8% jump in sales, thanks to repossessed homes being sold at fire-sale prices, according to DataQuick Information Systems.

Low prices are luring both first-time buyers and full-time real estate investors such as Kurtis and Cindy Squyres of La Quinta.

The couple have been buying two to four houses a month, most of them foreclosures in the Coachella Valley and Inland Empire. They look for the cheapest properties they can find, aiming to buy and quickly resell for a modest profit of perhaps $10,000.

“That’s the new market,” Kurtis Squyres said of foreclosures, which made up 62% of all home sales in Riverside County last month.

The housing market “would really be in trouble if these bargain hunters weren’t so active,” DataQuick analyst Andrew LePage said.

Without these buyers, homes would languish even longer on the market, leading to steeper price cuts, LePage said. But he cautioned that the uptick in sales activity probably wouldn’t lead to a bump in values in the near-term.

“At some point prices stabilize, but that is six to 12 months later easily,” LePage said. “Then you’re also looking at years of relative stagnation” before prices actually rise.

Price declines in Los Angeles and Orange counties have been less severe than in the Inland Empire, but they are falling just the same. Home values were down 23.9% in Los Angeles County in June from one year earlier, to a median of $415,000.

In Orange County, the median price in June was $495,000, down 23.3%. The median is the point at which half the homes sell for more and half for less.

By comparison, home values in San Bernardino and Riverside counties dropped more than 30%.

By the time the slump is over, home values throughout the region will be down about the same amount — probably 40% to 50% below peak levels, predicts Los Angeles economist Christopher Thornberg of Beacon Economics.

Home values in Los Angeles and Orange counties are down roughly 25% from their peaks last year.

“In the places that were harder hit, it’s pretty clear we’re getting close to the bottom,” Thornberg said, but “places like West L.A. — where people said, ‘It can’t happen here’ — are starting to stumble now. It’s a function of time.”

Kurtis Squyres believes that many of the desert towns where he buys houses have hit bottom.

“Houses are already down 50%” in some neighborhoods, he said.

To find the best bargains in a market cluttered with abandoned properties, Squyres said he and his wife spend all day scouring real estate listings, phoning brokers and sending postcards to absentee property owners, asking whether they are interested in selling.

They work out of a room in their rented house; they sold their own home in 2005 when they thought the market was about to crash.

Often, they buy houses that others might consider dumps.

“You’ve really got to find that oddball and take advantage of it,” Kurtis Squyres said.

After buying a property, the couple try to unload it as soon as they can to investors they court on their website, FarBelowMarket.com. Those buyers typically try to flip the homes for a quick profit too.

Foreclosures and short sales — homes offered for sale at prices below their mortgage amounts — are increasingly shaping markets even in long-established communities.

In Orange County, for instance, foreclosures and short sales constitute the majority of homes for sale in eight cities, among them Aliso Viejo, Santa Ana, Garden Grove and Anaheim, according to an analysis of listing data by Aliso Viejo real estate broker Steven Thomas.

Overall, foreclosed homes made up 41.1% of the homes sold in June, the first time the percentage has topped 40% in this real estate cycle. In June 2007, foreclosed homes made up just 7.3% of home sales.

When banks foreclose homes, they offer them first for sale at an auction, typically at a price lower than even the amount of the defaulted loan. Last month in California, foreclosed homes went to auction with opening bids set at an average of 31% less than the amount owed on the loan, according to ForeclosureRadar, a seller of default data.

Few of those homes find buyers at the auction. In California, 97% of homes auctioned are bought back by the lender because of the lack of higher bids, ForeclosureRadar said. Those homes are then sold by lenders on the open market, sometimes at prices even lower than the auction price.

The spread of foreclosures beyond the newly built developments in the inland counties is now affecting prices in more affluent areas. Some analysts had predicted the high end of the market might escape substantial price drops. But in June, the sales price of Southern California homes valued in the top one-tenth of the market declined 20% from a year earlier, according to DataQuick.

Richard Green, newly appointed director of USC’s Lusk Center for Real Estate, said prices might be nearing the bottom, even in higher-priced areas. Green has been shopping for a house for himself in the Pasadena area.

“Two years ago I never would have bought a house” in the neighborhoods where he is now shopping, he said.

Green estimates the homes he is considering have fallen about 20% in value since then, he said, which is far enough for him.

“I plan to live there until I retire, so if it goes down another 10% while I’m living there I will not care,” he said.

Los Angeles Times | Peter Y. Hong | Thursday, July 17, 2008

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