Thread by @ReformedTrader

1/ Underwater: How Our American Dream of Homeownership Became a Nightmare (Ryan Dezember)

"I’d left town, but I was still sending mortgage payments to Alabama.

"Most people aspire to buy a first home. I spent a decade trying to get rid of mine." (p. 4)

amazon.com/Underwater-Ame…

2/ "I tried to sell, but when the housing market collapsed in 2007, the property’s value fell far below the amount I had borrowed.

"I was ensnared despite being a reporter who had made a career writing about the frenzied and doomed real estate market along Alabama’s beaches.

3/ "I never doubted that it would end poorly. I thought I was at the zoo, though, watching some wild behavior from behind a barricade. As it happened, I was standing in the middle of the jungle." (p. 4)

4/ "Underwater homeowners couldn’t relocate for better jobs, move growing families into bigger houses, enroll in better schools, tap home equity to pay for their children’s college tuition or emergency expenses, or refinance to take advantage of historically low interest rates.

5/ "By our tenth high school reunion, people born in the 1970s owned homes at a rate of 42% (compared to rates of 37% and 35% for people born in the 1950s and 1960s at that age).

"But our rate at age 38 was 52% (vs. 61% and 63% for Americans born in the 1950s and 1960s.)

6/ "Yet for some plucky entrepreneurs and deep-pocketed investors, the housing crash presented a once-in-a-lifetime opportunity. Large companies own and manage tens of thousands of tidy suburban rental homes; such businesses didn’t exist a decade ago.

7/ "Previous crashes have generally been in the stock market, mostly affecting the rich. The housing crash delivered a direct hit to the middle class.

"I had been $70,000 in the hole on a house for which I had put up only a few thousand of the $137,500 purchase price." (p. 7)

8/ "Locals made money: mortgage brokers, builders, title agents, lawyers, landscapers, property managers, and countertop installers. Farmers grew sod that was rolled up like big pastries and trucked off to building sites. Condo developers and Realtors occupied the social apex.

9/ 1980s: "The savings & loan associations that had fueled the boom with profligate lending imploded. Double-digit interest rates and proposals to eliminate the deductibility of mortgage interest on second homes kept demand for Alabama beach condos below the supply of new units.

10/ "In 1987, the market collapsed again. Prices plunged by as much as half along the beach, where properties had been bought as investments rather than primary residences. Foreclosures mounted, sending prices into a tailspin. Owners who had put 20% down were in a pickle.

11/ "Bob Shallow put together deals, unloading properties for builders who were stuck with unsold condos and desperate enough to dangle financing to buyers. He sold whole buildings’ worth of condos and realized that a lot of money could be made in a crash." (p. 13)

12/ 2003: "Units that sold for $240,000 in the first Caribe tower were fetching $550,000 by the time Shallow began selling them in the third building. One 2100 sq.ft. unit sold for $480,000. That was two buyers and 4 months after it was first sold by the developer for $295,000.

13/ "It wasn’t unusual for pre-construction units to change hands 4-5 times.

Two men from Michigan closed on a condo for $250,000. They signed it over the same day to a St. Louis couple for $282,400. Two deals later, the condo was sold again to a Georgia couple for $554,100.

14/ "A little over a year later, $420,000 Island Tower condos were selling for more than $700,000 apiece, even though the tower was still many months from completion. Word of the easy money spread. Soon, there were more people wanting to buy condos to flip than there were condos.

15/ "Surfside lots were $40,000 per foot of shoreline. It took a lot of condos stacked on top of one another to cover land costs like that.

"The ideal outcome was to flip to someone else before the condo was finished so you wouldn’t have to actually ever pay for it.

16/ "The S&P 500 index gained 29% in 2003. That was chump change compared with what could be made along the beach in much less time.

"Though developers required 20% down payments, they didn’t actually need it in cash. A letter of credit from a bank sufficed.

17/ "Because of government policies intended to spur homeownership among Americans and Wall Street’s hunger for home loans that could be bundled into securities and sold to investors, banks happily facilitate speculative real estate bets." (p. 21)

18/ "Homeownership has been an American ambition from the onset. Alexis de Tocqueville, the Frenchman who traipsed through early America to describe the new democratic society for his European audience, cast the family home as the young nation’s stabilizing force.

19/ "Whereas Europeans of the time liked to escape their troubles at home by stirring trouble, the American withdrew from “the turmoil of public life into the bosom of his family.... [yet] he will build a house in which to pass his old age and sell it before the roof is on.”

20/ "But real estate was no sure bet. Take Benjamin Franklin’s own father: when Josiah Franklin’s heirs sold his four-unit Boston property in 1754, they received about 40% less than the patriarch paid for it in 1712.

21/ "As transit systems allowed workers to live beyond a walk from work, more property became suitable for housing. Tolls and fares were secondary to the profits transit tycoons could make speculating on land along transit lines.

22/ "Social control was the point: Pennsylvania Railroad executives preferred that employees own their homes so that they couldn’t afford to strike. Willard Phillips, a 19th-century political economist, reasoned that homeownership gave individuals a stake in society." (p. 26)

23/ "Residential construction collapsed during the Great Depression, when more than half of all mortgages defaulted.

"After Pearl Harbor, everyone was so busy with the war effort that there weren’t many people available to build houses. Materials went to the war, too.

24/ "Families doubled up in dwellings meant for one. Thousands of people lived in Quonset huts, prefabricated lean-tos with arched sheet of galvanized steel for a roofs. Old trolley cars were sold as homes in Chicago. In North Dakota, people moved into grain bins." (p. 27)

25/ "In 1979, Volcker raised rates to rein in inflation. Short-term rates shot up. Savings banks had to pay more to depositors than they were getting back from the interest on the 30-year mortgages they’d made.

"S&Ls unloaded loans at fire-sale prices in order to stay afloat.

26/ "In 1981, the federal government bailed out the S&Ls by allowing them to sell their mortgages at a loss, spread the loss out over many years for tax purposes, and purchase higher-yielding investments such as construction loans or even another thrift’s jettisoned mortgages.

27/ "A trading frenzy erupted. Salomon printed money by shuttling piles of mortgages from one savings and loan to another." (p. 30)

More on this:

Inventing Money

https://twitter.com/ReformedTrader/status/1275551716360876034

The Ascent of Money

https://twitter.com/ReformedTrader/status/1308935278266998786

Liar's Poker

https://twitter.com/ReformedTrader/status/1291056406708150274

28/ "By 1999, more than half of mortgages had down payments of <10% (rather than the traditional 20%). That had been the threshold that Fannie and Freddie would buy on the secondary market. But loan guarantors went lower, accepting 5%, then 3%, and finally, in many cases, zero.

29/ "To meet the needs of aspiring homeowners and yield-starved investors alike, lenders lowered their standards.

"Speculators often took out regular 30-year mortgages, sometimes several at once, even if they only intended to own for a few months.

30/ "The market for mortgage-backed securities enabled unloading of risky loans to the government-sponsored guarantors and buyers in the booming market for privately-issued mortgage bonds. Lenders were now paid to originate loans; collecting on them was someone else’s problem.

31/ "The emergence of millions of new house hunters nudged the homeownership rate past 69%, pushed up home prices, and made mortgage-backed securities even more attractive. That, in turn, increased the amount of money that investors made available to home buyers.

32/ "Rising home prices, falling interest rates, and the rich fees that could be earned making home loans and bundling them for investors created ripe conditions for homeowners to pull cash out of their homes by refinancing at higher values or taking on second mortgages.

33/ 2004: "Builders held lotteries to winnow the buyers for tract homes that hadn’t been built yet in Phoenix, Las Vegas, and LA. In south Alabama, people lined up outside the doors of real estate offices to plunk down $10,000 deposits for nonexistent condominiums." (p. 32)

34/ "In 1996, governor Fob James signed a law making it easier for developers to build private toll roads in Alabama.

"The prospect of an expressway going through their land prompted nineteen of twenty landowners along the route to donate roadway to the cause." (p. 35)

35/ "Wetlands were filled in to support foundations. Orange Beach’s sewer system was overwhelmed and overflowed during busy summer weekends. Sewerage installed beyond city limits routinely failed, fouling creeks and bays. Downpours resulted in sewage spraying from manhole covers.

36/ "The dunes that fortified the shoreline were bulldozed, dooming taxpayers to the expense beach renourishment: prospecting for ocean-bottom deposits of white quartz and pumping it ashore into unanchored mounds at a cost of tens of millions of dollars every few years." (p. 41)

37/ "On the day AIG Baker offered preconstruction contracts on the Wharf’s first condos, buyers clutching $10,000 checks for the deposits lined up.

"The 190 condos in the planned mall’s canal-facing Levin’s Bend building were gone in moments. 1300 people signed waiting lists.

38/ "By the end of the day, people who had been first in line with their deposit checks had already listed their future condos for sale on the aftermarket. Some were asking $100,000 over what they had agreed to pay that morning." (p. 60)

39/ "Even Shallow’s mistakes were minting money. He sold a a property for $3.5 million, but the Florida investors had gotten the location wrong. He re-sold it for $5 million. The investors made $1 million, and Shallow produced another six-figure commission for himself." (p. 63)

40/ "Working for Orange Beach was like working for a hot tech company. Employees who had bought homes before the boom were in the money.

"An employee had paid $74,000 two years ago and was now selling for $249,000. She made more owning that old house than working for the city.

41/ "At $249,000, that was as cheap as anyone could expect to find a house in Orange Beach. Yet it was beyond the reach of most working people: the median income was $47,000.

"Instead of spooking me out of the market, this nudged me toward buying while I still could." (p. 68)

42/ 2004: "The U.S. homeownership rate reached 69%. Existing homes changed hands at the highest rate ever, and prices rose everywhere. New houses were built at the fastest pace in a quarter century. 1/8 of new jobs being created were in construction. Mortgage debt increased.

43/ "Besides taking out loans for all those new houses, homeowners were borrowing hundreds of billions of dollars against their existing gains using HELOCs and spending the money on cars, college tuition, and vacations.

44/ "The number of homes in Orange County, CA that were being flipped within six months of purchase was soaring. Speculators from the mainland were overheating the market in Hawaii. In San Antonio, foreclosures were at record highs, yet so, too, were building permits.

45/ "In Baltimore, a 20% YOY increase in listings didn’t cause lower prices. Houses around Annapolis had become so expensive that teachers, police officers, and other civil servants had to move so far away to afford houses that they were driving an hour to work each morning.

46/ "Interest-only mortgages and piggyback loans, which reduce the amount needed for a down payment, were allowing house hunters to buy more than they would otherwise be able to afford. Low credit scores and histories of defaults didn’t disqualify borrowers as they once had.

47/ "Home buyers secured “no down payment” mortgages even though they had defaulted on home loans a year earlier. In Alabama and parts of Florida, people were getting their hands on yet-to-be-built luxury condos with little to no money down and trading them like securities.

48/ "If rates rose, new homeowners who’d signed adjustable-rate mortgages might be unable to make payments.

"The national vacancy rate for rental properties exceeded 10% for the first time on record. Empty apartments were especially numerous in the Midwest and the South." (p.73)

49/ "By the end of 2005, >2600 condos had piled up on the market. Many of those listed for sale were in buildings that were scheduled to be completed in the new year. Wishful flippers were on the hook to actually pay for them unless they could find a buyer.

50/ "Thirteen hurricanes had struck the U.S. in 2004 and 2005. Insurance premiums soared, forcing some who owned homes along the water to sell and move inland. Wind insurance for pair of nine-story buildings in Orange Beach jumped from $40,000 to $1.1 million." (p. 75)

51/ "Real estate agents and city officials seemed unfazed by the cracks in the market.

"The widely held expectation was that as Ivan and Katrina receded further from the public’s conscious, insurers would return, which would lift the market. Developers didn’t slow down." (p. 76)

52/ "Schoolteachers were flipping condominiums that should have been well out of their price range. Something was amiss in the market." (p. 76)

53/ "In 1792, there was a frenzy over a stone carriage path. Shares of the road were a huge hit when they were offered to the public, like a hot tech-stock offering today. Government employees, infected with the Turnpike Rage, skipped work and went to the stock offering.

54/ "At the sale, there were more orders than shares. A riot ensued.

"Turnpikes proliferated, as states didn’t have the resources to build public roads. But because they were often built ahead of settlement and tolls were easily skirted, they rarely paid dividends." (p. 79)

55/ "Brown did work for the mayor but never sent a bill. The unpaid jobs were a small price to pay to protect his livelihood.

"There were millions of dollars to be made buying property and convincing the city council to rezone it for greater density or bigger buildings." (p. 81)

56/ 2006: "Given the stories circulating about $30,000-a-year clerical workers on the hook for condos that cost several hundred thousand dollars, it seemed likely that many preconstruction buyers could not afford to walk away without a fight.

57/ "The first wave of buyers agreed to pay between $215,000 and $485,000. But many of the residences had been flipped in the ensuing years.

"Condos that had changed hands for $650,000 before Hurricane Katrina were turning up on the market for less than $500,000." (p. 95)

58/ "Interest-only loans and option ARMs with low teaser rates were popular with people who didn’t plan on hanging on to houses or condos they’d just bought. Ideally, home prices rose fast enough that they could sell higher before the teaser terms expired." (p. 97)

59/ 2007: "With prices falling, people who had counted on refinancing before their payments shot up found themselves stuck. Many were unable or unwilling to make much higher mortgage payments. Countrywide and New Century Financial were buckling under mounting losses." (p. 101)

60/ "Bear had launched one of its hedge funds in 2003 to invest in CDOs.

"If borrowers paid their bills, investors made money. By August 2006, the fund had a 36% cumulative return as home prices soared, so Bear launched another fund that layered on even more borrowed money.

61/ "The more leveraged fund managed <$700 million but had $15 billion in assets in spring 2007. The same leverage that juiced returns also amplified losses.

"Bear for a 60-day moratorium on margin calls. Attendees were stunned. They wanted their money back before it was gone.

62/ "Bear ended up bailing out the older fund with a $3.2 billion loan to stop the bleeding. The newer, riskier fund was too far gone. By the end of July, it had lost all value. The less leveraged fund fell further, with assets worth pennies on the dollar.

63/ "Given the high grades that credit-rating firms had given them, CDOs were supposed to be as safe U.S. Treasuries. They were not. Their opacity and illiquidity hadn’t really mattered while home prices were surging and their continued rise was taken as an article of faith.

64/ "During the first half of the decade, there had been such strong demand that lenders began to cut corners in order to produce enough loans to pack the CDOs. Sometimes lenders didn’t verify borrowers’ income. Appraisals were fudged and values inflated.

65/ "Mortgage underwriters didn’t care much about the consequences because they were able to unload the risk to Wall Street operations that were pooling the home loans and selling slices of the mortgage bundles to investors." (p. 103)

66/ "Not even Lewis Ranieri, who had pioneered mortgage-backed bonds in the 1980s at Salomon Brothers, was sure he understood CDOs. There wasn’t much information about what collateral they held. Plus, CDOs often invested in other CDOs, which made things muddier." (p. 105)

67/ "I had to try to sell my house to comply with my divorce agreement.

"In November 2007, it was listed for $149,000 with the understanding that we’d accept less. I could drain my retirement account to make up the difference between what we owed and what the house fetched.

68/ "I scrubbed the house, planted flowers, and dabbed a bit of paint by the front door (to create the scent of newness).

"Pam placed arrow-shared signs and tied balloons to the yard sign. She baked cookies and wrote her mother’s name in a guest book so it would not be empty.

69/ "After a few fruitless months trying to sell my house, she pulled up her sign and moved on. I stuck a FOR SALE BY OWNER sign in its place, hoping, along with ever more Americans in similar predicaments, for a quick rebound." (p. 105)