Kungel Appraisals LLC
Industry Articles

By: Kevin Dobbs, American Banker
Date: January 7, 2008

While Wall Street economists debate the likelihood of a national recession, a stalled economy is an accepted reality in California. The residential real estate bust is weighing heavily on the nation's largest state. And economists say no industry is feeling the pinch more than the banking sector. Few are bold enough to predict the precise timing of a housing turnaround, but by most accounts, the market will get worse before it gets better. California "is the epicenter of housing excess and high-risk lending," said Scott A. Anderson, senior economist at Wells Fargo & Co. "There will be a long, long hangover," he added in a recent interview. "I'd say the odds of recession there are 50% in 2008 and, if anything, greater than that." California's unemployment rate hovers around 5.6%, well above the 5% national rate reported last week. Home sales plunged 36% in November, compared with the same month a year earlier, and 8.5% from the prior month, the California Association of Realtors reported last week. The median price of an existing home fell 12% from a year earlier, to $488,640, in November. This trend has been reflected on balance sheets. At the end of the third quarter, California bank and thrift companies held about $585 billion of assets, down 22% from the year earlier, according to data compiled by the Federal Deposit Insurance Corp. Total loans fell 23%, to $436 billion, in the same period. Regional and national lenders alike have been squeezed. Downey Financial Corp. in Newport Beach reported last month that its nonperforming loans had spiked $105 million in November, a 27% rise from the month earlier. This came after big jumps in every month since the housing bubble began to deflate in earnest last August. Downey was a big player in the option adjustable-rate mortgage business, and as the rates on those loans reset and borrowers defaulted en masse, the company quit the business in late 2007. Its assets plunged along the way, falling by $900 million from Sept. 30 to Nov. 30. Countrywide Financial Corp. in Calabasas, the nation's largest home lender, has been hit especially hard. It reported a third-quarter loss of $1.2 billion, citing subprime mortgage woes. That compared with profit of $648 million a year earlier. It cited woes in California, in particular, projecting further problems in the fourth quarter. In recent months, the company has aggressively pulled back on the volume and types of loans it makes. Last month, it said the November delinquency rate in its servicing portfolio, as measured by the share of unpaid principal balances, had soared 237 basis points from a year earlier, to 6.52%. Loans in foreclosure more than doubled, to 1.28%. The company wrote $17 million of subprime loans in the month, just 1% of the volume it had originated a year earlier. Angelo Mozilo, Countrywide's chief executive, said he wished he knew where California stood in the current housing cycle. "Values on homes continue to go down, and as they do, the problem gets exacerbated," he said last month during a forum sponsored by the Office of Thrift Supervision. Tim O'Brien, an analyst in Sandler O'Neill & Partners LP's San Francisco office, said that, as the use of exotic loans by thousands of speculative buyers drove up prices, housing eventually became unaffordable for ordinary homebuyers. Now that overextended buyers are backing into foreclosure, "the supply curve is dominated by distressed" sellers, Mr. O'Brien said in a recent interview. Home prices must continue to fall well into this year, he said, in order to lure ordinary buyers back into the market. "When will that happen? That's the wild card." The immediate indicators offer little encouragement. In Southern California, foreclosures were up 177% last year, according to a report released last week by Default Research in Mount Pleasant, Pa. San Diego County, at 216%, had the highest rate. Northern California, thanks in part to a strong housing market in San Francisco, bucked the trend in early 2007, but problems emerged in the second half. The report said foreclosures soared 165% last year in the northern part of the state. With a 242% spike, the Contra Costa area fared worst. "After weathering the foreclosure storm in 2006, Northern California was not as fortunate in 2007," Serdar Bankaci, Default Research's president, said in the report. Foreclosure rates in California might not peak until the fourth quarter of this year, he said. The mortgage mess has not gone unnoticed by California lawmakers. State Sen. Michael Machado, a Democrat who is chairman of the banking and finance panel, said last week that he plans to introduce legislation this month to encourage more oversight of, and transparency among, mortgage lenders. Among other things, the legislation would require mortgage servicers to report to the state Department of Real Estate details about the loans they process - so the state can better track subprime lending - and give state income tax relief to borrowers who have had some portion of their mortgage debt forgiven by their lenders. To be sure, there are optimists. The California Building Industry Association has predicted that developers will apply for 10% more residential building permits this year than in 2007. Alan Nevin, the group's chief economist, said on a conference call last week that the state's housing market is nearly bottomed out and poised for recovery. He said, "2008 represents an opportunity to move forward." Sandler O'Neill's Mr. O'Brien said countless homebuyers are standing on the sidelines waiting for prices to fall further. Several economists said home prices probably will fall throughout this year. Mark Vitner, senior economist at Wachovia Corp., estimated that prices must decline 30% from their peak; in most California markets, this means prices must fall another 5% to 10% before sales will pick up. Should the national economy stumble into full-blown recession, conditions could worsen even more in California, some economists said. This, observers said, could produce a circular effect because California makes up such a large share of the national economy. "The state represents close to one-third of [the] nation's gross domestic product, so if California suffers badly, it could prolong the broader recession - if there is one, that is," Jack A. Ablin, the chief investment officer at Harris Private Bank, part of Bank of Montreal's Harris Bankcorp, said in an interview last week. Such a scenario would pinch a wide range of banking companies nationwide, analysts said. "It's safe to assume everyone is paying attention to California," Mr. Ablin said.

Kungel Appraisals LLC Office Info: PO Box 100 Cedar, Minnesota, 55011 Contact Info: Lisa: 763.425.9696 / Jena: 763.607.2226 Fax: 763.792.0805 Email: info@KungelAppraisals.com

www.KungelAppraisals.com     www.KungelAppraisals.biz
www.PropertyAppraiser.biz     www.TwinCityRealEstateAppraiser.com