Union of construction laborers sounds off on subprime

Guest blog by BusinessWeek Associate Editor Mara Der Hovanesian, who has closely followed the housing bubble and bust:

Some of the hardest hit neighborhoods across America are ones that never even got off the ground. Brand new subdivisions on the outskirts of sprawling cities in Florida, Arizona, California, and Nevada have been fast turning into ghost towns. Foreclosures are soaring on homes never occupied because so many were purchased by speculators hoping to flip them. While many players-—subprime lenders, Wall Street, greedy buyers—have been taken to task for contributing to this epic housing meltdown, scant attention has been paid to the role of large homebuilders who were active lenders offering some of the most toxic mortgages in these new communities.

In the last decade, builders jumped into the mortgage business big-time. We laid out the story last summer in a cover story called Bonfire of the Builders, and showed how Wall Street provided homebuilders the same encouragement it offered other subprime lenders to pump up the volume. Even as the housing supply began to exceed demand last year, builders kept up sales by pushing exotic adjustable-rate mortgages that are now moving to higher, unaffordable rates.

The impact of these practices is part of a new 23-page report, “Ticking Time Bomb,” by the Alliance for Homebuyer Justice, a project by the Laborers International Union of North America (a union consisting of 12 million men and women employed by the construction industry). It takes a deep dive into mortgages made in 2005 and 2006 in Maricopa County, Ariz., and the lending practices of three large homebuilders: Richmond American, Lennar and KB Home. What’s happening in Maricopa County-–home to more than 3.7 million people-—is instructive because the area led the nation in the number of housing units built from 2003 to 2006, according to the study. Median home prices for newly constructed homes were on a rampage, jumping 74% from the beginning of 2004 to mid-2006. But as we all know, the music stopped and now the area is besieged with foreclosures. Maricopa County today can make the unhappy claim of having the seventh highest rate of foreclosures among all metropolitan areas in the country, according to foreclosure tracker RealtyTrac.

The new study, which includes personal anecdotes about troubled borrowers, tries to make the case that the housing troubles may persist until 2011. It finds that 30% of the mortgages in Maricopa County will reset in 2010 and 2011. The assertion is that if prices haven’t recovered by then, many of these homeowners will be trapped into their loans and not able to refinance due to their high loan amounts and their decreasing home values. It also finds that the largest home builders had a much greater percentage increase in the number of subprime loans they issued than prime loans. Case in point: Hovnanian issued 34% more prime loans in 2006 over 2005. But the number of subprime mortgages it underwrote in that same time frame surged 92.8%. Worse, almost all the builders financed the entire home purchase with so-called “piggy-back” loans or second lien loans. Those second mortgages are now worth nothing because the value of the home has declined to the point where the borrower owes more than the house is worth.

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