MAY 2007: COVER STORY; BANKING/FINANCE
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THE PARTY'S OVER
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GLOBAL
INSIGHT:
A year ago, short sales made up just a sliver of the Oregon
housing market. Now they’re becoming increasingly common,
according to industry experts. Title companies do not track
them specifically, but insiders say short sales are growing
more prevalent from Happy Valley to Medford and are approaching
50% of all closings in Deschutes County, where real estate
offices get phone calls daily from would-be sellers who owe
more on their homes than they are worth. Says Steve Brown,
director of operations for the Portland office of First
American Title: “I’ve been in the business since
the late ’70s, and I’ve never seen so many short
sales go through. They are a bigger factor than ever
before.”
When the hottest real estate transaction is a money loser for
lenders, there is a problem. Over the past year, Oregonians
have taken pride in how well the state’s economy and
housing market have withstood the national mortgage meltdown
and the global credit crunch. But Oregon is not sheltered from
the housing storm any more than it is immune to the forces of
supply and demand, or gravity.
In 2007, real estate markets in Central and Southern Oregon
were the first to fall. Now home values in the large metro
regions of the Willamette Valley have dropped. Metro Portland,
the state’s largest market, held up honorably for a
while, but it could not stand alone. On March 25, the first
cracks in the armor appeared: Standard & Poor’s
Case-Schiller index found that Portland home prices had dropped
.5% from January 2007 to January 2008, Portland’s first
year-over-year decline since the index was created in 1987. If
the trends from other U.S. cities are any indication of what is
to come, the Portland market will almost certainly get worse
before it gets better, because once home values begin to fall
buyers become scarce and sellers grow desperate, resulting in a
spiral of oversupply and stagnation.
Mark McMullen, a senior economist for Moody’s
Economy who tracks Oregon, predicts it will be about five years
until Portland’s median home prices return to their
summer 2007 peak levels. “The correction will only be 10%
or 12%,” says McMullen, “but we will be seeing some
pretty lackluster gains following that.”
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Portland’s home prices did not spike as extremely as
markets such as Miami or San Diego, but they rose higher from
their 2000 levels than cities such as Minneapolis, Chicago, and
Boston. Housing markets in these other cities peaked and began
correcting downward in 2005 and 2006, while Portland’s
home prices did not peak until August 2007 and have remained
flat since.
A national report by the economic forecasting company Global
Insight released in February identified Bend as the most
overvalued housing market in the U.S., at 59% above true market
value. The same report pegged metro Portland as 32% overvalued.
The cities where home values have dropped precipitously, such
as Los Angeles, Las Vegas and Phoenix, were identified as less
overvalued than Portland in the Global Insight report because
their markets began correcting earlier.
“There is this surface veneer that we as Oregonians want
to believe that the meltdown isn’t happening here,”
says Tim Duy, a University of Oregon economist and director of
the Oregon Economic Forum. “I keep telling people, the
market in Oregon started to rise later than in the rest of the
country. We’re just lagging the cycle by 12 to 18 months
here. It’s a story that people don’t want to hear
for a whole host of reasons. But that is what’s
happening.”
OREGON’S ECONOMY has managed to side-step recession so
far. But the state has lost thousands of housing-related jobs,
defaults are on the rise, banks are scrambling to mitigate
losses and mortgage brokers and real estate professionals are
working harder and earning less.
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Between March 2007 and March 2008, Oregon lost 8,500 jobs in
real estate, finance, construction, wood products and logging,
according to the Department of Employment. Statewide
foreclosure filings in March were up 119% from March 2007,
according to RealtyTrac, a national research firm. Some of the
state’s most successful homebuilders, such as Renaissance
Homes and Ryan Olsen Development, have been hit hard with
foreclosure. The lack of demand for building supplies has
weakened an Oregon timber industry already slumping from low
log prices.
Home building has slowed because the Oregon housing market is
out of balance, clogged with debt-burdened sellers who borrowed
beyond their means:
• In Lincoln County, sales of all homes fell from 3,392
in 2005 to 1,734 in 2007.
• In Central Oregon, home and residential property sales
dropped from 10,541 in 2005 to 4,950 in 2007.
• In Douglas County, oversupply peaked in January with
enough inventory on the market to last 20.4 months. (A healthy
market has about six months of inventory.)
• In Curry County, a home’s average
number of days on the market before selling
ballooned to 221 in February.
• Metro Portland hit a record high of oversupply in
January, with 12.8 months of inventory.
Even Homer Williams, the characteristically optimistic
Portland developer who helped build the Pearl District and
South Waterfront, paints a bleak picture of the current market.
“Until the ground stops moving and people get a sense of
where we’re heading, there’s not going to be any
movement in the market,” he says. “Unless people
have a specific reason to move, like a job transfer or a
divorce, they’re not buying.”
Williams has found out the hard way that Portland’s
appetite for condominiums has faded. His $40 million 2121
Belmont project in southeast Portland went on the market last
year but had not sold a single unit by mid-March, when he was
forced to convert to apartments. Portland’s oversupply
problem is easy to see in the condo market, with two years
worth of inventory on the market, and in the new subdivisions
that have sprouted up in the suburbs. It is less apparent
within Portland’s close-in neighborhoods, but even those
submarkets have seen price reductions. Brian Spear, an agent
with John L. Scott who specializes in inner Northeast Portland
properties, normally represents equal numbers of buyers and
sellers. Earlier this spring, he found himself with nine
clients all hoping to sell, five of whom had never lived in
their homes. “The investor market is a huge part of the
marketplace, and it has dried up,” says Spear. “A
lot people got in over their heads, and everyone is rushing to
the exits.”
OREGON’S MORTGAGE BROKERS — those who are still in
business — are acutely aware of the connection between
Wall Street’s troubles and Oregon’s. The rates they
offer are dictated by global markets; the loans they sell are
bought by Wall Street investors — at least they were
prior to the meltdown. Since last July demand for
mortgage-backed securities has plummeted on Wall Street, as has
the number of jobs for loan officers in Oregon. At the end of
2006 there were 13,112 licensed mortgage originators in Oregon;
by the end of February there were 8,157.
About 50 of the survivors gathered in a conference center in
the KOIN tower in downtown Portland in mid-March, after a wild
weekend on Wall Street when the magnificent collapse of Bear
Stearns raised ominous questions about the state of capital
markets. Ken Perry, CEO of Broker Knowledge Group, a Vancouver,
Wash.-based continuing education provider for mortgage
originators, opened his talk with a stark list of monumental
changes in the industry: Bear Stearns down and nearly out after
investing too exuberantly in mortgages; mortgage giants New
Century and Option One shut down and bankrupt; ever-tightening
clampdowns from banks and mortgage insurance companies;
ever-changing guidelines and standards that make for longer
processing times and more rejections; fewer products to sell
and fewer qualified borrowers to sell them to; less money to
move and less business.
“Raise your hand if you have not been shaken by
this,” Perry said.
Not one hand went up.
The discussion was led by Perry and Mark Aalto, a senior loan
officer for First Pacific Mortgage in Clackamas. Aalto had his
best year ever in 2005, closing $62 million in loans. In 2006
he closed $52 million. He was on pace to equal that in 2007
when the meltdown hit and the money stopped flowing freely.
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It is a scenario that mortgage originators throughout Oregon
know well. “It’s really difficult to find financing
right now because everyone is cutting back on their loan
programs and the mortgage insurance companies aren’t
backing a lot of the loans we used to offer,” says Renee
Spears, president of Portland-based Rose City Mortgage
Specialists. “I’ve been in the business for over 20
years, and this is the worst I’ve seen it.”
Spears and Aalto built their businesses the old-fashioned way,
through referrals and loan volume. Others in the industry
specialized in riskier loans, which paid larger commissions.
Some of these loans start at deceptively low teaser rates and
reset at higher permanent rates. Others require that the
homeowner pay only a portion of the interest each month, losing
rather than gaining equity.
At the peak of the housing boom, more than 8,000
out-of-state mortgage brokers were licensed to work in Oregon
and many of them specialized in high-risk loans. Of the 203,360
home loans made in Oregon in 2006, 51,556 were sub-prime,
according to data collected by the Federal Financial
Institutions Examination Council. That doesn’t include
the profusion of “no doc” loans, sometimes
criticized as “liar loans” because they allow
borrowers to state income without proving it.
Now that the mortgage insurance companies have clamped down,
the riskiest loan products are history, and so are many of the
brokers who specialized in selling them, including about 4,000
out-of-state mortgage brokers who are no longer licensed to
work in Oregon. But the dodgy loans they sold remain on the
books. Borrowers already have seen dramatic increases in their
monthly payments. Some will see their payments double.
“We’ve gone from an economy based on greed to an
economy based on fear,” says Aalto.
THE CLAMPDOWN by the insurance companies and banks
doesn’t just shrink the pool of qualified buyers. It also
can trap homeowners and speculators who have invested beyond
their means. They no longer have the option of borrowing from
the future value of their homes, because that value is in
doubt.
Thus the rise of the short sale.
Margot Murphy, a Portland real estate broker with RE/MAX and
author of an 80-page how-to short sales guide, conducts about
two training sessions per month about how to close short sales.
She recently presented in Los Angeles and Las Vegas, and she is
seeing more demand for her expertise locally as well. One of
her clients owes $1.25 million on a home he built on Rocky
Butte; after failing to attract any offers with a price of
$997,000 Murphy dropped it to $797,000 and received two offers,
both below $600,000.
Murphy emphasizes that short sales take time and patience.
Sellers must submit detailed paperwork explaining their
hardships and proving they have no hidden sources of income or
savings. Brokers must convince lenders that the sales price is
the best the market will bear. Loss mitigators must balance a
complex equation of debt and value to meet fiduciary
responsibilities. In any market, the process is highly
negotiated and frequently frustrating. In the current market,
it can be a nightmare.
But like them or not, short sales will not be going away any
time soon. On Easter Sunday, 20 new posts on Portland’s
Craigslist website advertised properties as short sales. The
listings varied from a $169,900 “Investors-Rehab
Special” to a discounted $499,950 new home near a creek
and a golf course. Even if these homes draw offers, they could
remain in limbo for months while lenders attempt to untangle a
complex web of creative financing. They will also compete with
a growing number of bank-owned properties on the market, such
as the home in Happy Valley that was purchased for $748,900 in
2005, appraised at $1.2 million in 2006, and put back on the
market for $599,000 in 2008 by Premier Asset Services, a wholly
owned subsidiary of Wells Fargo Bank that specializes in
foreclosure.
But as is the case in the rest of Oregon’s housing
market, supply is overwhelming demand. “I’m getting
a lot of great deals, but I’m having a hard time
selling,” says Michael Mason, president of Magic Kingdom
Properties in St. Helens, which buys 20-30 distressed
properties per year as investments. “Nobody’s got
any money because credit is so tight.”
Credit is tight for a reason. Oregon’s banks, large and
small, are scrambling to keep their losses at a minimum after
suffering precipitous drops in their stock prices. Bankers are
working overtime, re-examining terms, restructuring loans, and
increasingly, initiating foreclosure.
RANDY SEBASTIAN MOVED into the Bend market in January 2006 for
the same reason other homebuilders did. There were fortunes to
be made and demand seemed insatiable. Sebastian, president of
Lake Oswego-based Renaissance Homes, got financing to build two
large subdivisions in Bend, including the $120 million,
210-home Renaissance Ridge. But while he was building the
market was crashing. Median prices on homes sold in Bend in the
first quarter dropped by 12% from a year ago. He tried price
reductions, gift certificates, free Mercedes Smart Cars to
buyers, even offers to buy down interest rates. Still he was
unable to keep current with his loan payments because sales
were slow.
On March 7, Sebastian received a letter from KeyBank informing
him he had five days to pay the bank $13 million. When he could
not pay, KeyBank filed for foreclosure.
Sebastian’s experience was extreme but not unique. The
same market forces knocked Lake Oswego-based Ryan Olsen
Development into insolvency. Olsen launched his company in 2002
with the goal of bringing inner-Portland-style craftsman homes
to the suburbs. By 2005 he was running one of the
fastest-growing private companies in Oregon. His revenues
leaped from $915,000 in 2003 to $7.6 million in 2006, according
to Inc. magazine. But Olsen’s luck has run out in outer
Gresham, where his partially completed, 17-lot subdivision of
homes originally priced in the “low 600s”
languishes vacant and in disarray. The finished homes there are
listed as short sales, while the undeveloped lots have been
repossessed by Sterling Savings Bank and are up for sale as
bank-owned properties.
Olsen’s business phone has been disconnected.
Most banking executives say they prefer to avoid foreclosure,
but in some cases it is the best, or only, option. “The
process of foreclosure can have a benefit to the bank in that
it does bring the borrower to the forefront and force them to
deal with their problem,” says Brad Copeland, Umpqua
Holding Corp. senior executive vice president and chief credit
officer.
Umpqua Holding, based in Portland, bought out several banks in
California prior to the real estate slowdown there, and the
bank has assembled a “special assets” team to
handle inherited loans that have become problematic. “In
these kind of times, I can tell you that everybody’s
workload in that department is stretched,” says
Copeland.
Umpqua’s stock price sank more than 40% between April of
2007 and April of 2008. During that same period Bend-based
Cascade Bancorp fell more than 60%. Cascade’s
non-performing assets ballooned from $3 million in 2006 to
$55.7 million in 2007 as a result of loans for building
projects. “The real estate market is more difficult for
all banks,” says Cascade CEO Patricia Moss. “There
are more people who aren’t able to pay, and that’s
creating more work in the system.”
It is also creating serious losses. Washington Mutual
announced on April 8 it would close 11 home loan centers
throughout Oregon as part of a massive restructuring forced by
$1.1 billion in losses over the first quarter. WaMu bet heavily
on sub-prime loans and is paying dearly as foreclosure rates
rise.
The largest mortgage lender in Oregon, Wells Fargo, reports a
foreclosure rate 20% below the industry average, but the
largest provider of refinancing loans in Oregon, Countrywide,
makes no such feel-good claims. Countrywide’s national
foreclosure rate doubled from .8% in February 2007 to 1.6% in
February 2008, and the company is facing multiple lawsuits for
alleged abuses of the foreclosure system.
Through the end of 2007, Oregon’s default and
foreclosure rates were well behind those of other states. But
they are rising. Notices of default have tripled in Jackson and
Deschutes counties from the first quarter of 2007 to the first
quarter of 2008, and have nearly doubled within the Portland
metropolitan market during the same time period. The Pew Center
for the States projects that one out of 34 homeowners in Oregon
faces a significant risk of foreclosure by 2010.
That isn’t necessarily bad news — for investors
with cash, not to mention bankruptcy attorneys and default
servicing companies.
One such Oregon business that stands to benefit significantly
from the current housing market is Wilshire Credit Corp. of
Beaverton, which handles problematic mortgage loans on behalf
of Wall Street investors, including collections and
foreclosure. Wilshire was founded by infamous Portland
financier Andrew Wiederhorn and sold to Merrill Lynch for $52
million in 2004. As the national housing market has crumbled,
Wilshire has grown to more than 800 employees and added a
second office in Salem. According to a Merrill Lynch spokesman,
Wilshire serves as intermediary for about 150,000 mortgage
loans worth more than $15 billion.
What does it say about the state’s economy when one of
the biggest winners is the local foreclosure mill?
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THERE ARE TWO BASIC views about how well Oregon’s economy
will hold up amid the housing slump. One holds that the
boom was less extreme here so the bust will be minor,
especially when balanced against the strength of the
state’s export economy. The other view counters that the
housing party came to Oregon late, meaning the hangover will be
delayed but just as painful as in other states.
Only time will tell which forecast is more accurate because
the immediate landscape can be contradictory, and economists
disagree about what the numbers mean.
Seasonally adjusted initial unemployment claims decreased in
February after seven consecutive monthly increases, but then
rose again in March. Oregon residential building permits also
made a surprising recovery, from 1,012 in January to
1,850 in February. Oregon’s manufacturing, agriculture
and clean tech sectors appear to be holding up well, with new
state subsidies bringing investments into renewable
energy. The weakened dollar has boosted large exporters, such
as Nike and Intel, while surging commodity prices have helped
the state’s agricultural sector.
Joe Cortright, an economist with Impresa Consulting in
Portland, argues that Oregon’s export-heavy, diversified
economy is better positioned to deal with a recession than the
rest of the country. “We are going through one of the
biggest corrections we’ve ever seen in the housing market
and Oregon’s economy is faring at least as well and maybe
a little bit better than the rest of the country,” says
Cortright. “We have transformed our economy from one that
is dependent on the housing cycle to one that
isn’t.”
But even the most positive of prognosticators predict it will
take time for the myriad problems created by the mortgage
meltdown — especially the growing backlog of short sales
and foreclosures — to work their way through the system,
so that the system can be rebuilt and consumer confidence can
be restored.
Oregon state economist Tom Potiowsky, no fan of doom and
gloom, expects the economy to return to more typical levels of
growth later this year — “but don’t expect a
big bounce-back in 2009.”
Developer Homer Williams agrees. “These downturns always
last a little longer than people think they will,” he
says. “It’s not just a few months; it’s often
a year or two years. We’ve got some time to go on
this.”
Mark McMullen of Moody’s forecasts a relatively mild
Oregon recession that will be mostly isolated to the housing
sector, with the last indicator to recover being home
prices.
“Developers have cut back on building, but now
we’re getting all these foreclosures coming onto the
market,” he says, “so we’re still seeing too
much supply. Until that balances, you won’t see a
recovery.”
U of O’s Tim Duy agrees. His recommendation: “Hope
for the best, prepare for the worst.”
To comment, email feedback@oregonbusiness.com.
Current Issue | OCT 08 |
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