January 8, 2006

A Home Boom Busts

· Shanghai's hot housing market has fizzled after a run-up fed by speculators, threatening a significant part of China's economy.

By Don Lee, Times Staff Writer

SHANGHAI — American homeowners wondering what follows a housing bubble can look to China's largest city.

Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.

For the first time, homeowners here are learning what it means to have an upside-down mortgage — when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.

"The entire industry is scaling back," said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn't stop ringing a year ago, say their incomes have plunged by two-thirds.

Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.

Although the city's 20 million residents represent less than 2% of China's population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country's property value. About 1 million homes in Shanghai alone — about half the number of housing starts for the entire United States in 2004 — are under construction.

"They'll remain empty for years," Xie said, adding that a jolting comedown also was in store for other Chinese cities with building booms — including Beijing, Chongqing and Chengdu — though other analysts say the problem is largely confined to Shanghai.

Shanghai's housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation. With China's economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30% to 40% of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.

"Ordinary people had no option but to follow the trend," Zhang said. "Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible."

The Shanghai government only pushed the market higher, he added. "Many of the officials said Shanghai's property market was healthy and wouldn't drop before the World Expo" in 2010.

For Wang Suxian, the tale of two lines illustrates how the bubble has burst.

When home prices were at the tail end of the boom in March, Wang hired two migrant workers to stand in line for a chance to buy units in what the developer said was modeled after an apartment community on New York's Park Avenue.

The workers waited 72 hours, including cold nights, but the 35-year-old was thrilled to come away with two apartments, one for $110,000, about the average price for a new home in Shanghai, and another for $170,000. They were among Wang's four investment properties.

And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring.

But today, prices at the complex have fallen by a third, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.

On a recent frosty morning, she stood in a line herself with about 40 other buyers outside the builder's headquarters, demanding that it negotiate a deal to return their money. "This is ridiculous," Wang huffed.

The company, Da Hua Group, invited Wang and other homeowners inside, served them hot tea, then told them to forget it.

"I think it'll take at least three years before the property market becomes healthy again," said Zhu Delin, a finance professor at Shanghai University and former head of the Shanghai Banking Assn.

The typical home being built is in a high-rise complex, with two bedrooms and about 850 square feet of living space.

Developers say many of Shanghai's homes are valued at about $70,000 or less, and price drops haven't been as steep for those units.

Some still see promise in the Shanghai market. Incomes are rising and droves of people are relocating from the inner city to outlying areas, said Richard David, managing director at Macquarie Property Investment Banking China in Shanghai.

What's more, he says, the Shanghai government — which owns all the land — has auctioned off few lots in the last two years, which will limit the number of housing units in the future.

But that's little solace for homeowners who have seen inventories rise even as buyers show no hurry to come back into the market.

In Shanghai, people blame the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases.

Banks were ordered to raise their best rate on home loans to 5.5% from 5%. Home buyers were required to make down payments of at least 30%, up from 20%. A 5.5% capital gains tax on home sellers' profits was imposed. Beijing also levied a 5% tax on the sale price of homes sold before two years of ownership.

"It's killed the speculators," said David Pitcher, a Shanghai developer and former head of CB Richard Ellis' office here.

Before the market swooned, buses would bring investors from the southeastern coastal city of Wenzhou in Zhejiang Province on home-buying missions here. They no longer come.

Wang, the woman battling Da Hua, is one of tens of thousands of Shanghai home buyers from Wenzhou, known for its wealth and business prowess.

But it's not just speculators who have bailed out of the market. A lot of potential Shanghai buyers have been scared off by numerous reports of sinking home prices and desperate action by some owners.

Internet chat rooms recently were abuzz with a story that a Taiwanese man had jumped from the 33rd floor of an apartment tower about 15 miles northeast of downtown. Many people suspect that he killed himself because he was drowning in debt after his home investments went sour.

Managers at the complex refused to comment, but brokers indicated that the price of some units there have plummeted by more than 50% since March, when a home fetched as much as $250 a square foot, similar to housing prices in some Southern California communities.

Zhang Wei, an editor at Imagine China, a photography agency in Shanghai, was close to buying an apartment in the new Pudong development area last year.

The 25-year-old planned to use his $1,250 in savings, and his parents — a policeman and a doctor — agreed to contribute about $30,000. The family of three currently lives in a 550-square-foot apartment in an industrial district that was provided by his father's employer, the Police Bureau.

Zhang walked away from the deal after the central government stepped up its campaign to cool Shanghai's market. He noticed prices beginning to drop. "When two of the four real estate agencies near our home finally closed, I decided not to buy for at least two years," he said. "Even a 1% drop in prices is a lot of money for us."

For Shanghai, prolonged weakness in the housing market could be very painful. Like Los Angeles, Shanghai relies heavily on real estate to drive its economy. Morgan Stanley's Xie calculates that property sales directly accounted for about half of $31 billion of the growth in Shanghai's annual economic output from 2001 to 2004.

Construction cranes still fill the skyline of Shanghai, an area of about 2,200 square miles — a little more than half the size of Los Angeles County. But there's sparse development in the center of the city, where strong sales of high-end homes and luxury office suites, in large part by foreigners, belie the losses around it.

Shanghai's government is relocating inner-city residents to new suburban areas, where entire towns are going up as part of a plan to build distinct industries that ring the city.

It's unclear how many of these new homes are sitting empty. Sales and inventory figures aren't provided by the government. But analysts say they can see the surplus of housing when they drive past housing complexes and there are few lights on at night.

Few analysts are betting on a quick turnaround. Yin Zhongli, an economist at the Chinese Academy of Social Sciences in Beijing, says a housing crash takes time to clean up. He worries that the financial sector will be crippled by the real estate fallout. Last year, he said, 76% of all bank loans in Shanghai were in real estate.

"Now is the time to swallow a bitter pill," Yin said.

That's what Huang Xiaolei is doing. The 25-year-old Shanghai native nabbed a 1,700-square-foot apartment from Da Hua during the heady times last spring. The unit wouldn't be completed until the end of the year, but as is customary in China, Huang had to secure a loan and make the down payment right away.

She and her parents pooled their life savings of about $80,000 and put 30% down on the $270,000 home. In April, they began making monthly mortgage payments of $1,100 on a 30-year loan with a 5.5% interest rate.

In November, Huang decided to stop the monthly payment, and this month she filed a lawsuit against Da Hua, claiming her contract allowed her to rescind the purchase before the house was completed under special circumstances, with a 3% fee.

"We have over 40 cases like this at our firm," said Du Yuping, Huang's lawyer.

Huang regrets that she got caught up in the frenzied market, and says that even if she wins the lawsuit, she'll suffer a hard financial loss.

"I was cheated," she said.

THE NATION

Ameriquest Settles Claims

· Accused of misleading borrowers with credit problems, the mortgage company will overhaul its lending practices and pay $325 million.

By E. Scott Reckard, Times Staff Writer

In a deal that could change how millions of credit-strapped Americans get their home loans, Ameriquest Mortgage Co. has finalized a $325-million settlement of allegations that it deceived borrowers, falsified loan documents and pressured appraisers to overstate home values.

A task force of 49 states and the District of Columbia plans to announce Monday that the Orange-based company and two affiliates — all specialists in higher-cost mortgages to borrowers unable to qualify for bank loans — had agreed to overhaul their lending practices.

Industry experts say the deal could in effect force rival lenders in the higher-cost loan market to adopt similar standards to avoid legal challenges from both regulators and consumers. These loans have been the fastest-growing segment of the mortgage market and now account for an estimated 20% of all such lending.

Settling the case also is expected to clear the way for Ameriquest's founder, Los Angeles billionaire Roland E. Arnall, to become the U.S. ambassador to the Netherlands.

The settlement is expected to be disclosed by California Atty. Gen. Bill Lockyer, Iowa Atty. Gen. Tom Miller and others at a Los Angeles news conference Monday.

According to people familiar with the agreement, key provisions will include appointment of an independent monitor to ensure compliance, and new rules forcing loan agents to give better disclosure of mortgage terms to customers throughout the approval process.

Under the deal, hundreds of thousands of customers could be eligible for refunds.

The agreement would also:

• Prohibit Ameriquest from offering incentives that might encourage loan officers to unfairly impose higher fees, closing costs or early payoff penalties on customers.

• Ban "unreasonable" sales quotas for loan officers, and bar regional loan supervisors from setting quotas that exceed those set by corporate headquarters.

• Centralize property appraisals so that loan officers can't influence appraisers to inflate home values, and require the use of outside agents to close mortgages to ensure borrowers aren't pressured by their loan agent into signing final papers.

• Ban Ameriquest or its employees from colluding with debt collectors to pressure borrowers into refinancing.

The settlement would be the second-largest to date involving a mortgage loan company, after a $484-million pact signed by Household International and 50 states in 2002.

"This agreement is good for consumers and good for the company," Ameriquest said in a statement Friday. "We worked closely with the states to address their concerns. These improved business practices will enhance our ability to serve our customers."

The agreement is expected to apply to all states except for Virginia, where Ameriquest does not operate.

The settlement terms are designed to address a variety of improper lending practices detailed in a series of Los Angeles Times articles in the last year.

In those stories, former and current employees said that top-down pressure to boost loan sales created a "boiler room" atmosphere where workers forged documents, misled borrowers about rates and fees and inflated borrowers' incomes and home values to qualify them for loans they couldn't afford.

The company acknowledged there had been problems but denied they were systematic. They attributed misdeeds to rogue employees disregarding company policies.

The allegations against Ameriquest led Senate Democrats last fall to hold up a vote to confirm Arnall as the U.S. ambassador to the Netherlands.

Arnall, a major contributor to President Bush, Gov. Arnold Schwarzenegger and other politicians, told the Senate Foreign Relations Committee at his confirmation hearing that Ameriquest already was making key reforms. Those included steps to centralize appraisals and to use independent agents to close loans, both of which are expected to be part of the settlement.

Arnall, 66, founded Ameriquest in 1979 as Long Beach Savings. His Ameriquest Capital Corp., which includes several loan companies including Ameriquest Mortgage, has mushroomed into the nation's largest lender in the so-called sub-prime market. This is the market for borrowers who have credit problems, can't document their incomes, or want to borrow more money with less collateral than traditional lenders permit.

The draft settlement classifies borrowers in two camps — those who received loans from 1999 through the first quarter of 2003, and those who got loans after that period, when software designed to curb lending abuses was in effect.

The first group — about 235,000 borrowers, according to government mortgage data — would share restitution of $175 million, or more than $700 each on average if all eligible borrowers accepted the settlement. A national administrator would determine how those funds would be allocated.

An additional $120 million would be set aside so that states could devise formulas of their own to refund borrowers or refinance their loans. That group would include borrowers with loans from April 1, 2003, to the present — a larger group, reflecting three years in which Ameriquest rose to become the top sub-prime lender.

Borrowers would get letters informing them of the minimum amount to expect if they agreed to the settlement. To get the money, they would have to waive their right to sue Ameriquest. Borrowers forced into foreclosure proceedings because of alleged abuses would retain their right to sue.

In the case of Household, payments averaged about $1,500 for each eligible borrower who accepted the settlement, said Kathleen Rizzo Young, a spokeswoman for HSBC Group, Household's parent company.

The settlement applies to Ameriquest Mortgage, Town & Country Credit Corp. and AMC Mortgage Services Inc. (formerly known as Bedford Home Loans), all subsidiaries of Ameriquest Capital Corp. The three companies' immediate parent, ACC Capital Holdings Corp., is a party to the agreement as well. *

Ameriquest Settlement Is Due Next Week

By Kirstin Downey

Washington Post Staff Writer
Saturday, January 21, 2006; Page D01

State prosecutors and lending regulators next week plan to announce a $325 million settlement with Ameriquest Mortgage Co., the nation's largest home lender to people with bad credit, according to numerous sources involved in the negotiations.

The announcement will probably be on Monday.

The Orange, Calif.-based firm, which has specialized in making high-cost home loans to people who do not qualify for less expensive mortgages, has agreed to the settlement to resolve charges brought by a multi-state task force that has been investigating allegations that the company overcharged and defrauded consumers, according to the sources. Thousands of homeowners nationwide have alleged in lawsuits that they were financially injured, in some cases losing their homes, being forced into bankruptcy or seeing their credit destroyed, after they obtained Ameriquest loans they were unable to repay.

As part of the agreement, the company will also change business practices at ACC Capital Holdings, the holding company for three retail subsidiaries, Ameriquest Mortgage Co., Town and Country Credit Corp. and AMC Mortgage Services Inc., according to those sources. Outside monitors will observe the company's operations to ensure that it operates in accordance with the agreement, they said. In some cases, specific practices will be barred.

Members of the task force, which includes Maryland and the District, would not publicly confirm the reports. More than a half-dozen government officials confirmed the impending settlement. The sources spoke only on condition of anonymity because the states and the company had pledged to each other that they would maintain confidentiality until the agreement was publicly announced. No attorneys general were willing to comment on the record about what the settlement will entail.

Late Friday, Ameriquest officials acknowledged that an agreement is near.

"This agreement is good for consumers and good for the company," the company said in a written statement. "We worked closely with the states to address their concerns. These improved business practices will enhance our ability to serve our customers."

On Friday, the White House informed some members of the Senate Foreign Relations Committee that the settlement would be announced on Monday.

The Bush administration has watched the settlement negotiations carefully because billionaire Roland E. Arnall, Ameriquest's founder and principal shareholder, is President Bush's nominee to be ambassador to the Netherlands. The Foreign Relations Committee deadlocked 9 to 9 in November on Arnall's nomination after several senators expressed concern about the unresolved litigation with the states.

The vote was along party lines except for Sen. Chuck Hagel (R-Neb.), who voted against Arnall. He said at the time that he did not think the United States should send abroad as its representatives people who are under what he called a "cloud of investigation."

Arnall has been Bush's single largest campaign contributor since 2002. He has also been a prominent campaign contributor to many Democrats, including U.S. Rep. Tom Lantos (D-Calif.), who endorsed Arnall's nomination at the Senate hearing.

The task force has never specified the allegations made against Ameriquest in 33 states and the District, but Arnall disclosed the information in writing to the Senate committee as it considered his nomination.

According to Arnall, the attorneys general alleged that the company had pressured appraisers to inflate property values so borrowers could get bigger loans, charged upfront fees without reducing interest rates as promised and told borrowers to ignore written information about interest rates because they would give them lower rates later. The company is alleged to have given them the higher interest rates instead.

According to Arnall's written testimony, the company is also alleged to have assured borrowers their loans would have no prepayment penalties, then inserted such payments into the final loan documents; delayed the time period between the loan closing and the funding; and misrepresented fees and costs.

At the November Senate hearing, Arnall acknowledged that Ameriquest had not handled its dealings with customers "perfectly" and that some employees had been fired.

"Mistakes have been made," Arnall said at the hearing. "When mistakes are made, we take care of the problems. We fix the problems."

Connecticut Attorney General Richard Blumenthal said he could not discuss any specifics about the negotiations, but said that many consumers had been badly damaged in their dealings with Ameriquest.

"What we've seen in human terms is catastrophic damage for some individuals who were misled or deceived or who received loans greater than they could possibly afford because of inflated income levels or appraisals resulting from employee misconduct," Blumenthal said. "We're taking action that will be designed to stop these abuses and effectively scrutinize and monitor these systems going forward. The abuses are systemic in number and nature."

Ameriquest's recent announcement that they have set aside $325 million dollars to settle predatory lending and appraisal inflation charges, brought by 33 State Attorney Generals and the District of Columbia, is a sign of changing times within the mortgage loan industry.

This settlement will force lenders, real estate agents, mortgage brokers, title companies and appraisers to break old habits that have been breaking laws -- laws long on the Legislature's books of mortgage dos and don'ts.

Since the early 1990s, community groups, followed by federal regulators, have railed against lenders who have targeted mostly low-income, minority and elderly borrowers with misleading marketing and intense pressure to purchase high-interest loans. For the past three years, similar warnings against inflated appraisals have been issued from not just activists and regulators but also from the appraisers themselves.

By the year 2005 well over 8,000 appraisers signed a petition claiming that lenders and others involved in the mortgage loan process were pressing them to "hit the number" on properties sold in communities all across the country. In 2003, a leading provider of market intelligence to the real estate services industry, October Research, surveyed 500 appraisers who said over half of them had been pressured to inflate values by up to 10 percent, at the request of someone who stood to gain from the increased price -- everyone with the exception of the borrower and the appraiser, who receives a flat fee for services.

In 1994 the Agencies that regulate the housing industry, which includes the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) issued Interagency Appraisal and Evaluation Guidelines that provided guidance to both examiners and regulated institutions about prudent appraisal and evaluation programs.

In 2003 the same agencies and the National Credit Union Administration (NCUA) issued an Advisory Letter on the subject of Independent Appraisal Valuation and Functions. It stated that a key element of a bank's appraisal and real estate program must be that the appraisers selected are independent of the transaction, and not subject to internal or external influence.

In other words, the regulators told lenders: Ensure that the people setting the price are not influenced by those people who benefit from a higher-priced loan.

In response, Ameriquest, like many lenders, did little more than allow production to dictate valuation practices, and while many of those ill-gotten practices have been covered-up by a rapidly increasing real estate market, in a declining market they will lead to disaster.

Insulating appraisals from external pressure requires major structural and systematic changes. I have worked in the appraisal business for over three decades and strongly urge all of us in the mortgage, real estate and appraisal industries to do the following:

· Create appraisal processes that are managed and audited not by those who report to production executives; but to the Chief Financial Officer, or the Compliance Officer.

House prices are declining in many cities across the country. As a result, homeowners are losing equity in their homes. Given increasing concerns about rising defaults and foreclosures in 2006, especially on homes highly leveraged by home equity loans or financed with zero-down/interest only mortgages, it is time to finally take real action to stop improper valuation practices. Every Chief Financial Officer, Chief Compliance Officer, General Counsel and Auditor need take notice and action, using Ameriquest as their bellwether.

NEW YORK, Jan 23 (Reuters) - Ameriquest, which makes home loans to borrowers with poor credit, said on Monday it agreed to pay $325 million to settle an investigation into lending practices in 48 U.S. states.

The investigation found that salespeople at Ameriquest had concealed interest-rate and loan costs during the loan process, pressured appraisers to inflate the values of borrowers' homes, and engaged in other high-pressure tactics to close deals, a statement from New York Attorney General Eliot Spitzer's office said.

Ameriquest said it regretted occasions when its sales associates had not properly served customers.

Subprime lending, or lending to borrowers with damaged credit, has faced increased regulatory scrutiny in the last three to five years as the government has tried to prevent lenders from preying on borrowers.

The subprime lending industry mushroomed since the early 1990s, allowing many borrowers to get loans that would not have been possible 20 years ago, but also creating more opportunities for abusive lending practices.

As part of the settlement with attorneys general and banking regulators, Ameriquest agreed to overhaul its sales, appraisal and closing practices.

Of the $325 million, $295 million will go toward restitution for injured customers and $30 million to states involved in the investigation.