Housing Bubble

It’s been two months since my last update of Maricopa County’s Notices of Trustee’s Sales. January’s 1623 notices didn’t beat the past 145 months’ record high of 1738, like I initially thought they would. However, before you go shouting such fantastic news from the rooftops, you should know that 1623 is the second highest number. Here are the latest descriptive statistics: Trustee’s Sale Notices Mean917.2Median811Mode746Standard Deviation296.35814Range1256Minimum482Maximum1738Sum132994Count145 Since I started compiling this data I’ve noticed a sharp uptick in real estate gurus trying to sell info on the latest real estate investment fad: the “Short Sale” - a technique designed to get around the problem that most of the defaulting mortgages behind these sad numbers are less than 2 years old, and thus are tied to properties with zero equity. I’ll probably write a little more about this technique at some point over at Die Eigenheit. I promise to update this post as necessary.

The Arizona Republic has just caught on to the fact that there’s a lot of mortgage fraud going on in Phoenix: A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals. Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona’s real estate market. The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated. Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy. While the extent of the fraud is unclear, an Arizona Republic investigation into these cash-back deals found organized groups of speculators have bought multiple homes this way, leaving whole neighborhoods with inflated values. Add to these the individual deals done by amateurs who hear others talk about the easy money they made from cash-back sales. State investigators and real estate industry leaders want more enforcement and greater public awareness to stop the spread of cash-back deals before the damage mounts. “Mortgage fraud in the Valley has become so prevalent people think it’s a normal business practice,” said Amy Swaney, a mortgage banker with Premier Financial Services and past president of the Arizona Mortgage Lenders Association. Under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to the deal is subject to prosecution. Felecia Rotellini is a Notre Dame law school graduate and former assistant attorney general who is now superintendent of the Arizona Department of Financial Institutions. Her agency regulates mortgage lenders, state banks and credit unions in the state. Alarmed by what she was hearing from lenders and real estate agents, she has just pulled together state and federal regulators to form an Arizona mortgage fraud task force. “People need to understand these cash-back deals are illegal and stop,” she said. “We are going after mortgage fraud." I think this is likely to be too little, too late. When I was actively suing telemarketers using illegal prerecorded calls to residences in 2003, the worst offenders were mortgage brokers. In the process of going after some of them, I found signs that some of them were engaged in other illegal activities as well, such as defrauding other lenders, defrauding their customers, defrauding the IRS and Arizona Department of Revenue, and transferring assets between entities prior to filing bankruptcy to evade creditors. I found the Arizona State Department of Banking (now known as the Arizona State Department of Financial Institutions), which regulates mortgage brokers, to be completely uninterested in investigating–though they did send some warning letters after I won judgments against brokers, which prompted some of them to pay their judgments. They said that they did not have resources to investigate my claims of violations, even though I offered up specific areas of the law that they are supposed to enforce (they don’t enforce the Telephone Consumer Protection Act or FCC regulations). There’s more on this subject at Ben Jones’ Housing Bubble Blog. UPDATE (January 22, 2007): Arizona Senator Jay Tibshraeny has introduced a bill making mortgage fraud a felony. But it’s already criminal activity covered under current laws–adding more laws against it doesn’t do anything to cause those laws to be enforced.

Trump Mortgage started business this April, with alleged seasoned pro E.J. Ridings appointed to head the organization. Ridings claimed that honesty was one of the differentiators for Trump Mortgage, but it turns out he’s misrepresented his experience. He claimed to be “a top executive at one of Wall Street’s most prestigious investment banks,” when in fact he was a retail stock broker for Morgan Stanley’s Dean Witter Reynolds subsidiary for less than three months, and was only a registered broker for six days of that period. Ridings said he was an “established leader” at a leading New York mortgage boutique, but was only “a relatively minor player” at GuardHill Financial from June 2003 to April 2005, working as an entry-level mortgage originator. Ridings also claimed 15 years of experience in the financial industry, but all that anyone can dig up besides his Dean Witter time (that began in 1998) and his GuardHill position are in documents from the NY State Banking Commission which say he was also a day trader for two years and worked for a year at subprime lender Equity Funding prior to GuardHill. That’s a total of less than six years of financial experience. Ridings claims he also had financial experience in his earlier jobs–running a company that sold nutritional supplements and health drinks, and a cleaning service. Trump Mortgage has lost six residential mortgage professionals in the last six months, and may not reach $1 billion in residential mortgage originations, despite Ridings predicting that they would hit $3 billion in 2006. The mortgage business is not a business I’d want to be in right now, as the U.S. housing bubble deflates.

Einzige has posted the latest graph for notices of trustee’s sales in Phoenix, and concludes: It would seem, now, that the question is no longer “Is there a housing bubble?”, but “How big is the pop going to be?" Check it out here. Historical Comments Einzige (2007-01-06): A bit of an update, in lieu of putting up a whole new graph (which I will do in February): December saw a slight dip in the numbers, with the total getting to “only” 1407 notices recorded–79 less than November. ...

For the first time in the last decade, year-over-year median home prices in the metropolitan Phoenix area have dropped, from $263,000 to $256,900, down from the peak of $267,000 in June 2006. Former housing bull Jay Q. Butler of the Arizona Real Estate Center at ASU says: Even though mortgage interest rates have been declining for the last few months, limited home appreciation and household income continues to raise concern about the ability of some homeowners to maintain their homes. … This may be especially evident for those that have used some of the more creative financing instruments, such as option payment plans and initially low interest rate adjustable mortgages.Florida is seeing growing foreclosures, especially among those with Adjustable Rate Mortgages (ARMs) with negative amortization options. There are $200 billion in ARMs resetting their rates in 2006 and another $1 trillion plus will be resetting in 2007, expected to lead to more foreclosures. This will apply further downward pressure on prices, and we should expect to see some of the same here (an increase has already been seen in Maricopa County notices of trustee sales), though I think Arizona has had a lower percentage of ARMs, interest-only, and negative amortization option loans than other parts of the country.

Here’s a nice chart from Yale economist Robert Shiller showing U.S. housing prices back to 1890. What will the regression to the mean look like over the next few years? On Wednesday Moody’s issued a widely-covered report on housing prices with predicted price declines by region. Here are their predictions for Arizona cities: Peak-to-Trough Peak Trough % House Price Decline Year/Quarter Year/Quarter Tucson, AZ -13.4 06:1 08:2 Phoenix, AZ -9.3 06:1 08:2 Prescott, AZ -2.0 06:1 08:2 I think that their predicted 9.3% decline between first quarter of 2006 and second quarter of 2008 for Phoenix is wildly optimistic–it wouldn’t surprise me if we saw that level of decline by the end of this year or first quarter of next year. It depends on whether Phoenix continues to have rapid population growth, which in turn depends on job growth (especially outside of real estate-related jobs, which will be declining).

A bit of an update from my post in May where I asked “Is there really a housing bubble?” Although I wasn’t completely convinced then, I think it’s getting a lot more difficult to question the evidence now. The graph below chronicles Maricopa County’s Trustee Sale Notices over the past 11 years. The blue line is the monthly count. As you can see, this number is pretty variable from month to month, so I’ve included the orange line, which is a 1-year moving average. Presumably it’s a better indicator of trends. ...

The small town of Martinsville, Virginia (population 14,925) now has many residents named as defendants in a massive civil suit from Countrywide Home Loans regarding a $40 million mortgage scam. The New York Times reports: In a tightknit neighborhood, where people’s social lives often revolve around their churches, Beulah Penn and her daughter, Sharon, were well-connected and trusted. Beulah Penn was a lay minister in a local church; her daughter, Sharon Penn, dressed hair. Using these connections, according to a recent lawsuit, the two women and another relative in Indianapolis perpetrated one of the largest mortgage frauds in American history, victimizing dozens of local residents and, according to sources with knowledge of the accusations, at least $40 million in fraudulent loans — perhaps even twice that amount. ...

Phoenix’s inventory of homes for sale continues to rise (continuing from where we left off on June 16). My first report, in October 2005, showed an inventory of 10,748 homes on July 20, 2005, rising to 19,254 on October 2. (Data comes from ziprealty.com, via posts to Ben Jones’ Housing Bubble Blog.) 6/17/2006 49402 6/18/2006 49546 6/19/2006 49504 6/20/2006 49432 6/21/2006 49453 6/22/2006 49867 6/23/2006 50296 6/24/2006 50599 6/25/2006 50526 6/26/2006 50413 6/27/2006 50295 6/28/2006 50395 6/29/2006 50878 6/30/2006 50347 7/1/2006 50492 7/2/2006 50404 7/3/2006 50264 7/4/2006 50511 7/5/2006 50284 7/6/2006 50227 7/7/2006 50667 7/8/2006 50944 7/9/2006 50638 7/10/2006 50167 7/11/2006 51396 7/12/2006 51124 7/13/2006 50995 7/14/2006 51302 7/15/2006 51478 7/16/2006 51642 7/17/2006 51698 7/18/2006 51704 7/19/2006 51682 7/20/2006 51557 7/21/2006 51758 7/22/2006 52110 7/23/2006 52363 7/24/2006 52137 7/25/2006 52019 7/26/2006 52540 7/27/2006 52228 7/28/2006 52595 7/29/2006 52413 7/30/2006 52482 7/31/2006 52535 8/1/2006 52230 8/2/2006 52396 8/3/2006 52337 8/4/2006 52600 8/5/2006 52802 8/6/2006 52845 8/7/2006 52953 8/8/2006 52560 8/9/2006 52513 8/10/2006 52681 8/11/2006 52417 8/12/2006 52895 8/13/2006 53126 8/14/2006 52757 8/15/2006 52793 8/16/2006 52693 8/17/2006 53102 8/18/2006 52855 8/19/2006 53014 8/20/2006 53350 10,748 on July 20, 2005 to 53,350 on August 20, 2006–that’s a 496% increase in inventory in 13 months. Einzige–how about an update on trustee sales? ...

The Arizona Republic prints a story on some housing speculators now being burned: Two houses on the same north Valley street, similar in size and age, are for sale. One lists for $749,000 and the other for $775,000. A third house came on the market on the same street a few doors from the other two. The new listing was similar to the others in size and age but priced at $659,000. Reaction: outrage. “The neighbors were really mad,” said Thomas Stornelli, principal of Global Network of Homes in Scottsdale. “They knocked on the door and asked, ‘What are you thinking?’ For a lot of people, their home equity is their bank. It’s like taking money out of someone’s bank, their retirement account. People (future buyers) are going to use that house as a comp, even if it doesn’t have the same upgrades. It’s going to leave a mark." The owners of the least- expensive home were equally upset. They were in the midst of a corporate relocation and wanted to sell quickly. Suddenly, angry neighbors were confronting them. One night, someone tore down their for-sale sign. Stornelli is the listing agent for one of the higher-priced homes. His approach is to try for the higher prices, which he believes are justified in Scottsdale. “Whenever you mix emotion and finance, there’s going to be stress,” he said. “As a Realtor, we deal with that every day." The market has proven everyone wrong. None of the houses had sold as of the third week of this month.Another account in the same story: A woman walked into Barry’s Realty Executives office about nine weeks ago, sat down and began crying. She said she bought two houses last year, fixed them up and quickly sold them, making a $50,000 profit on each. She was a novice investor, but it all looked easy. She took her profits, threw in some extra money and bought five more houses. She spent money fixing them up, but when she put the houses on the market, she realized she had bought at the peak, Barry said. “Her eyes just started to well up, and she just started bawling,” Barry said. “She said she couldn’t sell them for what she bought them for. She said her monthly payments were about $20,000." Barry suggested turning them into rentals. She told him she couldn’t get enough rent to make it worthwhile. “She was expecting to flip them,” he said. “The market flipped her. She was devastated. People have forgotten that houses are not a liquid asset. They never were meant to be."There are a few others in the report. I expect we’ll see more stories like this over the next couple of years as ARMs reset on people who are unable to sell or refinance. Also check out the comments on this story at The Housing Bubble Blog. ...