Speculation Fueled Housing Bust
harryh...@yahoo.com
Rising Number of Defaults
Also Could Complicate
Effort to Help Homeowners
February 6, 2008; WSJ
By RUTH SIMON and MICHAEL CORKERY
As lenders pore over their defaulted mortgages, they are learning that
the number of people who bought homes as investments is much greater
than previously believed.
Such borrowers turn up frequently in analyses of loans that defaulted
within months after origination. In many cases, these speculators lied
on loan applications, saying they intended to live in the homes in
order to obtain more favorable loan terms or failed to provide the
requested information.
Roughly 20% of mortgage fraud involved "occupancy fraud," or borrowers
falsely claiming they intended to live in a property, according to an
analysis by BasePoint Analytics, a provider of fraud-detection
solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked
at 45 subprime loans that defaulted within the first 12 months even
though the borrowers had good credit scores. In two-thirds of the
cases, borrowers said they intended to live in the property but never
moved in.
Some home builders have come to similar conclusions: They now believe
that as many as one in four home buyers in some markets were investors
during the boom, up from their earlier estimates of one in 10 buyers.
The high number of hidden speculators helps explain some of the
problems roiling the housing and mortgage markets. The loans backing
these speculator purchases turned out to be riskier than ratings
agencies and investors who bought mortgage-backed securities once
thought. Investors tend to be more likely than borrowers who live in
the homes to walk away from their purchases when home prices fall. "We
couldn't understand what was driving so many borrowers to default so
early in the life of their mortgage," said Glenn Costello, a managing
director at Fitch.
Much of the occupancy fraud was concentrated in markets such as
Florida, Nevada and Arizona, where prices were appreciating by double-
digit percentages annually, said Kevin Kanouff, president of Denver-
based Clayton Fixed-Income Services, a unit of Clayton Holdings Inc.
that reviews about seven million loans a month on behalf of investors.
In Las Vegas, as many as 60% of the foreclosures last year involved
non-owner-occupied homes, according to Applied Analysis, a real-estate-
research firm. The Las Vegas firm compared the addresses of the
borrowers with the locations of their homes. Where the addresses
didn't match likely indicated a speculator.
The temptation to lie can be substantial and may have been encouraged,
or at least tolerated, by mortgage brokers and real-estate agents
eager to close a home sale. Standards tend to be tougher for borrowers
purchasing investment properties, since these loans are considered
riskier.
Lenders typically allowed investors to finance no more than 90% of a
home's value, but if borrowers said they planned to live in the
property, they could buy a home with no money down, even if they had
scuffed credit and didn't document their income, said Pete Ogilvie, a
mortgage broker in Santa Cruz, Calif., and president of the California
Association of Mortgage Brokers.
In the early years of the housing boom, demand for homes rose because
of strong economic fundamentals and low interest rates, which made it
more affordable for a large swath of Americans to buy homes. But as
home prices began to soar, hordes of investors jumped in.
Once there was a whiff that prices could no longer rise, this
speculative demand evaporated, sending prices falling in some markets.
The housing boom would eventually have cooled, anyway, but investors
amplified the boom and bust.
Rising defaults among speculators may complicate government efforts to
assist home buyers. The Bush administration has said it wants to help
only homeowners facing foreclosure, not speculators. But foreclosures
of investor-owned properties can create ripple effects in
neighborhoods, pushing down prices and making it tougher for people
who live in those communities to refinance or sell their homes if they
can't make their mortgage payments.
Lenders and builders said they tried to weed out speculators during
the boom. To discourage flipping, some builders put clauses into
contracts stating that investors who resold their homes soon after
they bought had to give up some of their profits.
"We had people at the end signing four-page documents, 'I am not an
investor. I am not an investor. I am not an investor,' " Robert Toll,
chief executive of luxury builder Toll Brothers Inc., said at a UBS AG
conference in 2006. And the person "turned out to be an investor, of
course."
While it is true that occupancy fraud can sometimes be difficult to
detect, fraud experts said lenders and builders could have vetted
their borrowers more closely. Pulling a borrower's credit report, for
instance, may reveal multiple mortgages. In other cases, appraisal
reports will sometimes indicate that a tenant lives in the property,
and Internet searches can also turn up indications that a borrower
owns multiple homes.
"There's a lot of telltale signs," said Frank McKenna, chief fraud
strategist for BasePoint, which develops computerized fraud-detection
tools. But "the industry was very focused on volume," he said.
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Buffet...@gmail.com
Doobie Keebler
wrote:
> You have an uncanny ability to convey the glaringly obvious
Well, c'mon Buffy... our new friend Harry just discovered usenet 2
days ago, and wants to share his newfound revelations with us.
"Mortgage fraud? Hmmm.. you don't say..."
This is what's fascinating about this n/g: the "glaringly obvious" was
discernible over a year ago to anyone paying attention, and now we can
observe the degree of latency as it becomes a revelation to the
masses.
Of course, Joe Sixpack won't pay attention until he gets his 401 (K)
statement, and assuming he even reads it, see that half or more of his
life savings is disappeared.
I wonder if there's survey data on this? What is the percentage of
retail investors who actually know their account balance within 3% of
actual?
My guess is that's a non-trivial segment of the investing public.
They've been told repeatedly to "invest it and forget it," just check
those asset allocations once a good year.
. d