Cities fining overwhelmed lenders for neglecting foreclosures

Growing impatient with overwhelmed lenders which are allowing their foreclosed homes to fall into disrepair, cities across the U.S. are now instituting ordinances and levying fines for those whom don't cooperate. From a BuilderOnline.com story:

Frustrated by the increasing number of foreclosed properties sitting vacant and untended, cities across the country are responding with ordinances that require the owners--the lenders that took back the houses--to maintain the properties or face heavy fines.

The California legislature is expected next week to pass a statewide law that would allow local governments to assess a fine of up to $1,000 a day on the owners of foreclosed properties who don’t maintain them. The bill also has strict requirements for notifying mortgage holders that the foreclosure process has started, and gives tenants living in a foreclosed property additional time to move. Considered an urgency measure, the bill would take effect immediately after being signed by the governor...

Cathedral City, located in what was once the white-hot real estate market of Riverside County, Calif., is one of the cities that has recently passed laws requiring owners of foreclosed properties to register the property with the city. Among other requirements, the ordinance requires owners to pay a $70 annual registration fee, secure the property, keep it free of debris, landscape the front and side yards to neighborhood standards, clean or drain the pool, and hire a local property manager to inspect it weekly.

Las Vegas feeling impact of recession

For years Las Vegas managed to continue growing despite national peaks and troughs in the economy, but today a combination of higher gas prices, pricier airline tickets, a shift away from gambling revenue towards high-end restaurants and shops and new competition abroad is taking its toll. What does that mean for Sin City? A story in the Wall Street Journal speculates:

The gambling slowdown that began early this year is taking a serious toll on Las Vegas, with banks, investors and private-equity funds growing as tightfisted as the consumers who are gambling less in the slumping economy.

Once believed to be recession-proof, casinos are proving to be highly vulnerable to the economic downturn, which is striking the industry at a bad time. Las Vegas is entering its lethargic summer season, and a boom-time frenzy of grand expansion plans and private-equity buyouts has left casinos laden with debt...

The industry is facing what insiders and analysts call its biggest challenge in years. Rising gasoline prices, the housing crisis and other economic troubles are prompting consumers not just to gamble less, but to spend less at the luxury boutiques and restaurants where casinos draw most of their profits. Struggling airlines are cutting service to Las Vegas. And pressures are building on casinos that cater to local residents, who have been hard hit by economic troubles...

The gambling industry has survived economic famine before. But the current consumer-driven downturn, coupled with a recent industry shift away from gambling and toward luxury amenities, high-priced entertainment and dining, has created a dangerous situation for Las Vegas.

The problems are weighing heavily on gambling companies that cater to the local Las Vegas population with low-glitz, high-profit casinos built away from the tourist zone known as the Las Vegas Strip. Those companies thrived on the boom in southern Nevada's population, as families flocked to the area for jobs in the casino industry. But now those customers are holding back, pinched by a housing crunch and rising unemployment.

Ruling on mortgage case could change the industry

A lawsuit that has been referred to the 7th U.S. Court of Appeals and which could be decided any day could not only allow a class of borrowers to sue mortgage lenders for violations of the Truth in Lending Act, but also force the lenders to rescind the loans. From a Reuters story:

A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law...

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC.N: Quote, Profile, Research, Stock Buzz) mortgages originated under "unfair or deceptive practices."...

Federal appeals courts disagree over whether class-wide rescission under the Truth in Lending Act is available, said attorney Christine Scheuneman, whose firm represented Chevy Chase at the district court.

"If class treatment is found to be available for rescission ..., given the current crisis not predicted in 2005, the result all over the country could be massive class suits," said Scheuneman, a partner at Pillsbury Winthrop Shaw Pittman LLP.

The Truth in Lending Act, a 1968 federal law designed to protect consumers against lending fraud by requiring clear disclosure of loan terms and costs, lets consumers seek rescission, or termination, of a loan and the return of all interest and fees when a lender is found in violation.

Should the 7th U.S. Circuit Court of Appeals agree with Judge Adelman, banking industry associations predict "confusion and market disruption" as banks curtail lending further...

...the Andrews' attorney, Kevin Demet, said lenders want to scare the judiciary into banning class action rescissions because they were unable to convince Congress to do so in the 1990s.

Both sides said the case will likely be decided by the U.S. Supreme Court.

Vulture investors returning to the existing home market

First it was funds going after distressed land assets, now the second phase has begun, which targets the existing home market. The housing vulture investors have returned, but this could help provide a pricing floor to the market that so far Congress has been unable to address. From a CNNMoney.com story:

Rock-bottom home prices have finally begun to lure vulture real estate investors into the fray... Peter Zalewski, founder of Florida-based Condo Vultures, LLC, which specializes in bulk purchases of condo properties, is finding very deep discounts for his clients. In one deal he recently negotiated in Tampa, a developer's lender agreed to sell 149 units for $12 million - a 43% discount to the outstanding $21 million loan... ...buyers like Jeff Ball, president of Austin, Texas-base Econohomes, purchase packages of bank-owned homes from lenders and resell them after little if any rehab. He buys five to 50 houses at a time, sight unseen. Often, the homes come with encumbrances, like back taxes, water bills or other liens that can add up to tens of thousands. Still, he comes out ahead...

His business has been criticized; usually city officials would prefer the homes be renovated before they're resold. But Ball said the money spent doing that would make the business unprofitable; nobody would buy at the prices he would have to charge. They would sit vacant and become havens for squatters, looters and drug dealers.

"The most significant thing is to stabilize the situation," Ball said. "Get people back in the house." The new owners move in and start taking care of the properties, according to Ball. If that starts to happen in large numbers, these communities may spring back to life....

Despite these bargains, many big investors who buy in bulk have been slow to start shopping, according to Jack McCabe, a Florida real estate consultant. They're after even deeper discounts, and prices are indeed projected to keep falling in the next year - by double digits in parts of California and Florida.

Free information on 939 housing markets!

Looking for some great (and free) data such as economic growth, home sales, permits and prices for 939 markets across the U.S.? HousingIntelligence.com is now offering such data on a quarterly basis as a way to promote their robust data sources:

Each free report has a national page and a local page. On the national page, we cover 2006 to present by month on the following metrics:

• Annualized Real GDP Growth
• Unemployment
• Interest Rates
• New and Existing Home Sales
• Single Family Permits
• Median Existing Home Price

On the local page, we cover 2006 to present by month on the following metrics:

• Total Households
• Total Employment
• Unemployment
• Total Permits
• Median Existing Home Price
• Affordability

Unlike our monthly enhanced reports available to subscribers, the Free Reports are only updated quarterly. So starting with the June edition, we’ll update the Free Reports at the end of each quarter.

Barack Obama on the economy

Eager to know where Barack Obama stands on the best ways to fix the economy? You can find that here courtesy of Fortune magazine.

John McCain on the economy

In the mood to learn about John McCain's plan to fix the economy? Fortune magazine has a detailed interview right here (the one with Barack Obama will be posted separately).

Business Week on "the housing abyss"

Arguing that the measures taken so far to prevent an overly large erosion in housing values have fallen flat, Business Week asks what can be done to avoid falling to the bottom of the 'housing abyss:'

The housing crisis is entering a new and frightening stage. On June 24, Standard & Poor's announced that the S&P/Case-Shiller 20-City Home Price Index had fallen more than 15% in April from a year earlier. Adjusted for inflation, the decline is the biggest since 1940-42, according to data collected by Yale University economist Robert Shiller.

The risk for the financial system and the economy is that the price drop, already horrifying, will start feeding on itself. When home values fall low enough, hard-pressed homeowners become less able or less willing to keep paying their mortgages. That forces lenders to repossess homes and then dump them back on the market at fire-sale prices, which depresses prices further and leads to even more foreclosures...

Efforts by the private sector and government to stop the slide before it gets out of control haven't done the job. Poorly designed mortgage securities rife with conflicts of interest, as well as legal disputes over priority between creditors, are forcing many homes into foreclosure needlessly, accelerating the market decline.

Sure, Congress is expected soon to pass a huge legislative package aimed at preventing needless foreclosures and stimulating first-time home purchases. But many analysts and advocates are already warning that more dramatic measures will ultimately be required. "The depth of pain is not being registered in D.C.," says Mike Shea, executive director of nonprofit advocacy group ACORN Housing in Chicago...

...the housing optimists have systematically misjudged the market. Some became convinced that the huge runup was justified by fundamentals such as population growth, rising incomes, and land scarcity. And because sharp national housing price declines are so rare in U.S. history, analysts assumed that prices would, at worst, flatten out for a few years...

What they forgot was that markets can overshoot on the downside just as easily as on the upside, with both financial and psychological forces feeding the decline...

...the fall in house prices is so precipitous that it is changing homeowner psychology, eroding the long-held taboo against walking away from a home. In hard-hit markets such as Las Vegas and Phoenix, many homeowners are beginning to conclude that their home purchase comes with a "put option"—the right to hand the keys back to the lender if things don't work out. Indeed, risky payment-option ARMs that allow unpaid interest to be added to the principal, 70% of which were issued in California and Florida, are going bad even before they reset upward, as homeowners see trouble ahead and bail. "Commercial real estate borrowers have always looked at things this way. Consumers simply caught on to the game," says Tom Lindmark, a managing director of Phoenix-based Metropolitan Real Estate...

Mass foreclosures accelerate a neighborhood's decline, triggering a spiral of abandonment and decay. A survey of agents this year for Inside Mortgage Finance by Geosegment Systems and Campbell Communications found that about half of foreclosed properties have significant damage, which reduces a property's value by about 25% (e.g., $100,000 on a $400,000 house). Ruined floors and carpets, holes in walls, and missing appliances lead the list...

Who can fix this mess? Certainly not lenders. They're part of the problem. To repair their damaged balance sheets, they're aggressively reducing lending. And they haven't geared up for the wave of defaults...

What more might government do? The Federal Reserve has already intervened heavily, of course. In addition to slashing short-term interest rates, it has extended more than $150 billion in secured loans to banks. Anything more from the Fed would leave it open to charges that it was subsidizing the banks and raising the risk of inflation...

If the housing market continues to weaken, action in Washington could heat up next January, when a new President and Congress take office. The next President, whether Democrat or Republican, will have more flexibility to be bold because he will be starting with a clean slate, although Barack Obama has taken a far more interventionist stance than has John McCain...

But expect strong pushback on that last idea from fiscal conservatives. The Wall Street Journal's editorial page observed on June 21 that the FHA lost $4.6 billion last year, making it a less-than-obvious candidate to guarantee billions in troubled loans.

Envisioning life with oil at $200 per barrel

When I first wrote about the theory of peak oil last fall, I thought it was at least a couple of years away. But now, for a variety of reasons, the potential impact of oil supplies becoming scarcer while demand increases is rolling out not in terms of years, but weeks. What does this mean for a society which (myopically) assumed cheap energy was something to be tapped forever? A story in the L.A. Times takes it on:

Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.

The pain would probably be particularly intense in Southern California, which is known for its long commutes and high cost of living. "Throughout our history, we have grown on the assumption that energy costs would be low," said Michael Woo, a former Los Angeles city councilman and a current member of the city Planning Commission. "Now that those assumptions are shifting, it changes assumptions about housing, cars and how cities grow."

Push prices up fast enough, he said, and "it would be the urban-planning equivalent of an earthquake."...

Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers

"The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won't have the ability to buy much of anything," said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book "Winning Our Energy Independence." BIGresearch of Worthington, Ohio, said more than half of Californians in a recent survey said they were driving less because of high gas prices. Almost 42% said they had reduced vacation travel and 40% said they were dining out less.... Nationwide, $200 oil and $7 gasoline would force Americans to take 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report...

As for the state's beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers...

Already Californians' mobility is being curbed. Traffic on the state's freeways fell almost 4% in April compared with a year earlier, and ridership on many subway and bus lines operated by the L.A. County Metropolitan Transportation Authority has risen in recent months. But a huge influx of riders would strain aspects of the system, MTA says, noting that many buses are overcrowded at rush hour now. Quickly adding capacity to meet demand from new riders wouldn't be easy, because new buses cost hundreds of thousands of dollars and take up to two years to deliver...

Dramatically higher transportation costs would usher in an era of virtual mobility, or zero mobility, for many workers. "We're seeing companies go to four-day workweeks, place increased emphasis on working at home, show bigger interest in setting up satellite offices -- anything that gets commute times down and gets people off the road," said analyst Rob Enderle of Enderle Group in San Jose. Videoconferencing, touted as "the next big thing" for years, would finally have its day, thanks to improved technology and a desperation to cut corporate travel budgets.

Telecommuting, or working from home, is easier than ever because of the spread of high-speed Internet access, said Jonathan Spira, chief analyst at Basex Inc., a business research firm in New York. In particular, workers in "knowledge" jobs that can be performed with computers and phones would benefit. But Gilligan of USC noted that lower-income workers tend to be in jobs that don't favor telecommuting, such as retail and food service.

Home swapping gains in popularity

Given the continuing state of the slow housing market, home swapping is starting to gain popularity as a way to trade places with someone else. From an article in the L.A. Times:

For years people have been swapping homes for vacations. Today, the idea of permanent exchanges is gaining support among disillusioned property owners struggling to sell in a glacial real estate market.

Although the number of completed trades isn't being tracked, interest is such that several home-swap websites have sprung up in the last year and now claim close to 40,000 combined swap listings nationwide. Others appear regularly on Craigslist.org...

Though the number of swap listings is still a small fraction of total property listings, website operators are confident they have hit upon a simple way to help ease today's market woes -- matching buyers and sellers.

"It's like a dating service for home sellers," said Greg Holt, chief executive and co-owner of Denver-based Pad4Pad. "We're bringing people together."

From St. Augustine, Fla., Sergei Naumov, creator and owner of GoSwap.org, agrees. "The concept works as simply as: 'I will buy your house if you buy mine.' "

These websites, along with others such as OnlineHouseTrading.com, DomuSwap.com and DaytonaHomeTrader.com, say once potential swappers feel they have the makings of a match and begin negotiating, they are on their own and the process runs much like any other real estate transaction.

Having decided to swap homes, both parties need to agree on the value of their respective properties and secure fresh mortgages. Any difference in value will be paid either in cash or by using funds from the new mortgage...

Pad4Pad's Holt said because both parties have already connected, he has found real estate agents willing to assist for a flat fee of about $700 instead of more costly percentage commissions.

Sites also suggest that people share the same title company to ensure that both deals go through simultaneously and that nobody is left holding mortgages on two properties.

Finding the next President for anxious times

Now that we've whittled down the presumptive nominees to Barack Obama and John McCain, it will be very interesting to see their plans not just for the real estate market, but the overall economy, a real energy policy and what we can expect from their respective administrations.

Friends, family and colleagues get very irritated with me when I tell them I've not yet decided who will get my vote in November (the building industry tends to lean conservative and my friends are a mixed bag), but that's because I simply don't know enough about either man to make an informed choice, so for me the debates will be crucial.

As a 'decline to state' for many years (also known as an Independent), I don't vote party lines and think it's irresponsible and lazy to do so -- what's next, "I like the sound of his name?" (don't joke, that's how some people vote for local judges). For those people who decided months ago who would get their vote -- well before we've seen the two candidates argue the issues -- I would argue that the choice is not one of intellectual honesty, but of emotion. And, according to an op-ed piece by Thomas Friedman in the New York Times, that's exactly what we do NOT need. Amen to that. Let's ask people to THINK this time:

Just a few months ago, the consensus view was that Barack Obama would need to choose a hard-core national-security type as his vice presidential running mate to compensate for his lack of foreign policy experience and that John McCain would need a running mate who was young and sprightly to compensate for his age. Come August, though, I predict both men will be looking for a financial wizard as their running mates to help them steer America out of what could become a serious economic tailspin...

My fellow Americans: We are a country in debt and in decline — not terminal, not irreversible, but in decline. Our political system seems incapable of producing long-range answers to big problems or big opportunities. We are the ones who need a better-functioning democracy — more than the Iraqis and Afghans. We are the ones in need of nation-building. It is our political system that is not working...

We used to try harder and do better. After Sputnik, we came together as a nation and responded with a technology, infrastructure and education surge, notes Robert Hormats, vice chairman of Goldman Sachs International. After the 1973 oil crisis, we came together and made dramatic improvements in energy efficiency. After Social Security became imperiled in the early 1980s, we came together and fixed it for that moment. “But today,” added Hormats, “the political system seems incapable of producing a critical mass to support any kind of serious long-term reform.”..

We need nation-building at home, and we cannot wait another year to get started. Vote for the candidate who you think will do that best. Nothing else matters.

Illinois also suing Countrywide

It looks like Illinois is joining California in suing Countrywide Financial for "the company and its executives defrauded borrowers in the state by selling them costly and defective loans that quickly went into foreclosure." From a New York Times story (reg. required):

The lawsuit, which is expected to be filed on Wednesday in Illinois state court, accused Countrywide and Mr. Mozilo of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like its heavily advertised “no closing costs loan.” Countrywide also created incentives for its employees and brokers to sell questionable loans by paying them more on such sales, the complaint said.

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge.”...

The civil lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present...

The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January.

New home market still in free-fall

After a small rebound in April, new home sales in the U.S. continued to fall during May. Prices have also continued to fall while the inventory timeline rose slightly to nearly 10.9 months. From a BuilderOnline.com story:

New-home sales declined 2.5 percent in May, after registering their first increase in five months during April, according to the United States Census. Sales of new homes fell on a seasonally adjusted basis to 512,000 units in May, from 525,000 units the previous month.

New-home sales peaked in this cycle on a seasonally adjusted basis in July 2005, at 1.371 million units. The low point so far during the current bust was registered in March, which has been revised several times and is now recorded at 501,000 units, according to the Census.

Wall Street analysts were predicting 515,000 new-home sales for May, according to Forbes.

New-home sale prices also declined in May, with the median sale price declining to $231,000 from $243,500 in April, and average sale prices declining to $311,300 in May from $321,200. Both price indicators have moved up and down over the last few months, with low points for both falling in October.

Inventory of new homes also increased, rising from a 10.7 months' supply in April to a 10.9 months' supply in May. Inventory hit its peak of an 11.4 months' supply in March.

California sues Countrywide

In a clear sign that government is taking the residential lending bust to a new level, California Attorney General (and former Governor) Jerry Brown has sued Countrywide Financial, arguing that the company set out to deliberately relax underwriting guidelines and deceive borrowers with Option ARM and other adjustable rate loans that were in fact financial ticking time bombs. From an L.A. Times story:

Countrywide Financial Corp. and its chief executive, Angelo Mozilo, were sued today by California Atty. Gen. Jerry Brown, who accused them of forcing thousands of Californians into foreclosure by deceptively marketing risky adjustable-rate mortgages to borrowers who didn't understand that their monthly payments would one day "explode."

In a complaint filed in Los Angeles County Superior Court, Brown alleges that Countrywide and its top executives, beginning in 2004, plotted to loosen or ignore lending standards so they could make more sub-prime mortgages and other adjustable-rate loans that were promoted by emphasizing low initial rates.

By deceiving borrowers about the risks of these loans, Countrywide's top executives sought to double the lender's share of the national mortgage market to 30%, mass-producing loans that could be sold off and transformed into complex bonds, the suit said...

The California suit, which also names Countrywide President David Sambol as a defendant, asks the court to order an end to what it calls the misleading and unfair practices, and demands that homeowners victimized by the alleged scheme have their money and property returned. The complaint doesn't specify what procedures might be used to accomplish this restitution.

Case-Shiller: where will prices go next?

Despite the continuing declines in the Case-Shiller index, some economists still think that prices in certain cities have more decreases in store before hitting bottom. From a BuilderOnline.com article:

As Cleveland goes, so goes the nation?

That's one hopeful way of looking at the Case-Schiller Index, which tracks home prices in 20 major cities. The data for April, which were released this morning, show that Cleveland—whose prices had fallen nearly 14 percent from its peak in August 2006—might be stabilizing. "The fear had always been that prices in markets like Cleveland would go too low, but the data suggest that Cleveland has found a bottom and may be bouncing back," observes Dean Baker, economist and cofounder of the Center for Economic and Policy Research.

Baker presented his latest take on housing market conditions during a teleconference this morning, and on the whole his prognosis is not good. The Case-Schiller Index in April, at 169.85, is down 15.2 percent from the same month in 2007. Adjusted for inflation, the decline is closer to 20 percent, Baker estimates, which means that over the previous 12 months, the housing market lost $4 trillion in value.

While some cities, such as Seattle, Dallas, and Denver, have enjoyed modest price increases, other major metros have seen home prices spiral downward. The composite annualized index during the first quarter for the cities Case-Schiller tracks declined by 22.1 percent, a falloff that Baker observes hasn't been as steep since the Depression era in the 1930s. "Bubble cities," which experienced huge price run-ups earlier this decade, have even seen an acceleration in their price erosions, says Baker: Annualized rates during the first quarter were off 35.6 percent in Phoenix, 33.7 percent in Los Angeles, 35.6 percent in San Francisco, 36.8 percent in Las Vegas, 31.5 percent in Miami, and 29.3 percent in Tampa, Fla...

Baker is considered to be among the more pessimistic of housing economists, but his outlook now sounds practically mainstream: This morning, Global Insight’s housing analyst Patrick Newport told MarketWatch that he also believes the Case-Schiller Index might need to fall another 20 percent to 30 percent, and that prices would need to go down another 10 percent, before the housing market stabilizes. Both Baker and Newport agree that the overabundance of unsold homes on the market is one of the primary reasons why home prices keep declining. Baker, though, points to two other factors: interest rates and unemployment, which have both been creeping up. Baker expects interest rates to hit 7 percent by the end of this year.

He also notes that declines in home prices are being exacerbated by the sheer volume of foreclosures that are dragging down prices in all markets. Baker worries that foreclosures will put more stress on Fannie Mae and Freddie Mac, which are now guaranteeing about 80 percent of the mortgages being issued.