Hard Times/Part 2

An economy built on housing or a house of cards?

Now you can look it up. It’s official.

Last summer, Merriam-Webster added the word “subprime” to its new edition of the Collegiate Dictionary. The primary definition: Having or being an interest rate that is higher than a prime rate and is extended especially to low-income borrowers.

In other words, a form of predatory lending is at the heart of what ails us, a subprime mortgage crisis that has toppled the housing industry – and the world economy along with it.

“History will ultimately dissect this and, I think, the major issue that will emerge is the old greed factor,” says Jimmy Tallent, president and CEO of United Community Bank, Inc., Georgia’s third-largest holding company and one of many banks with a costly over-reliance on residential construction loans.

Last month we asked economists what happened and where we are headed. We’ll continue that quest in the second half of our series and we’ll meet homebuilders and other professionals who will help assess the damage and define the course of a tumbling economy.

Ricky Catrett is a jack-of-all-trades, but right now none of them seems to be paying off very well and he feels he’s on the verge of bad stuff, like he’s walking a tightrope made of waxed dental floss, to hear him tell it.

“I’m dangling in the wind, barely hanging on. Business isn’t going too good,” says the industrious Catrett, 53, whose company, Flat Rock Sand & Gravel, is on call seven days a week.

He does grading, bush hogging, trash hauling, landscaping, clearing, paving and asphalt patching, among other things, and delivers topsoil, mulch and various aggregates to businesses, residences and building sites in the Columbus area. He also owns and manages rental homes.

But since the housing bubble burst and the economy unraveled, his core business is barely treading water.

“Normally, we do about $2 million a year. Last year we did $1.25 million,” says Catrett, who would have a little peace of mind if he could unload a big piece of land just outside Columbus, 1,000 acres in Talbot County near Fort Benning.

It’s prime speculative real estate as the base embarks on a massive BRAC (base realignment and closure) expansion plan, bringing some 30,000 new residents to the area in the next several years, and billions of dollars in construction, on and off the base.

“The perfect scenario is to hang onto that land, but I’m paying $50,000 a month in bills, so I’m trying to sell what I can,” Catrett says. “Things are really tough. I wonder if Congress will bail me out.”

‘Bailout’ has become the national motto over the past year. It started last March as a murmur when the Federal Reserve lent $29 billion to JPMorgan Chase to purchase the troubled investment bank Bear Stearns. It became a mantra by the fall, when the federal government announced its $700 billion financial bailout program.

And as the presidential inauguration approached in January, the country sounded like a gigantic nest of screaming baby birds, pleading for a piece of an $800 billion (give or take a small country’s GDP) Obama economic stimulus plan.

In Georgia, where Gov. Sonny Perdue proposed a stimulus parlaying the state’s high credit rating into a stimulus plan, the economic landscape is as ravaged as the rest of the country’s and in some sectors, more so. Five Georgia banks failed last year – that’s 20 percent of all the nation’s bank closures. State bankers and regulators say that trend will continue this year as the historic recession, with its roots in residential real estate – one of Georgia’s economic vital organs – drags on.

“I wouldn’t be surprised if it’s the middle of 2010 before we come out of this,” says Albert Niemi, Jr., dean of the Cox School of Business at Southern Methodist University, and former longtime dean of the Terry College of Business at UGA.

Every year around Thanksgiving, Niemi comes back to Georgia to visit his youngest son and deliver a well-attended economic forecast in Cobb County sponsored by the Bank of North Georgia.

The last two visits have been particularly enlightening for Niemi.

“In 2007 I was driving around and saw whole subdivisions of very expensive houses being developed, million dollar houses, and none of them were selling. I saw dark clouds on the horizon,” Niemi says. “A few weeks ago I was in that same neighborhood, looking at houses I’d walked through a year earlier. Now they were asking $775,000 for a house that was listed for $995,000 in 2007, and my guess is if you made an offer of $700,000, it was yours.”

Niemi calls 2005 to 2006 the golden years for U.S. housing, when 2 million new homes were being built each year.

“We won’t see that kind of robust activity for a while,” he says, projecting about 900,000 housing starts this year. “This is a housing crisis. The financial markets are all messed up, and the credit squeeze is worse than we imagined. It’s going to take a long time to crawl out of this hole.”

Bank Shot

When Congress passed the $700 billion bailout plan (Troubled Asset Relief Program, or TARP), Niemi thought it was a pretty good idea.

“You bail out the financial sector because it’s the fabric that holds society together,” he says. “But it doesn’t have a positive impact if that money just sits in the coffers of banks. It went from the Department of Treasury to the banks [on] Main Street.

“I think it’s just a matter of time, and it will get better. But people are impatient because meanwhile we’re losing hundreds of thousands of jobs. People are suffering.”

Most of the first $350 billion was injected into banks with the goal of thawing credit, but the move has been criticized for having few if any strings attached and the perception grew that banks simply weren’t lending the money.

“The intent was to help banks continue lending money within their communities, and we have continued to do that, and would have with or without TARP,” insists Jimmy Tallent, president and CEO of United Community Banks, Inc. (UCBI), the third largest holding company in Georgia, and recipient of $180 million in bailout money.

But UCBI, with a hefty portion of its loans in the plummeting Atlanta residential real estate market, was hard hit by the housing crash and lost a combined $86.7 million in the third and fourth quarters last year, the first quarterly losses in the company’s 58-year history.

“This thing got so far out of line that when the day of reckoning came, it wasn’t a slowdown, it was a screeching halt,” says Tallent, whose bank had a residential loan portfolio of about $1.6 billion last fall.

The bailout money is helping to keep UCBI well capitalized; the bank has been writing down and selling distressed properties and placing a greater emphasis on small business and commercial lending. Tallent wants UCBI to be one of the first banks to escape crisis mode.

“Hope is not a strategy in this business,” he says. “We have to keep moving forward. We get through this thing and we’ll be a better company as a result of it.”

One of UCBI’s troubled customers is Steve Honea, a custom homebuilder in Gwinnett County who says he is in a big mess, with four completed, unsold homes in a subdivision called Heritage at Grayson. Two of them have been sitting there for more than two years. Strategic or not, he is hoping the bank is open to extending his loans.

“The banks I work with have been cooperative, more than I expected, but every day makes a difference,” Honea says. “I haven’t even considered asking for an additional loan for the past year, and now I’m just negotiating to keep what I have.”

He has three houses marked down to $529,000 – they were $569,000 a year ago. He had one that was going for $660,000, scheduled to close last year.

“Those people lost $60,000 on that house, so now it’s marked down to $599,000,” says Honea, whose father, J.C. Honea, built custom homes in the area for 35 years. “The people had cash on hand for the down-payment, but when it came to financing, well, that’s when the credit situation really started getting tough, and they simply had to walk away.

“I felt really sorry for them, but they left me holding the bag, too.”

To get back his construction loan, Honea says he has to get about 75 percent of the value of the home, “but we have people who only want to give 50 to 60 percent of the asking price. That won’t even cover my loan.”

Honea says his fellow builders are holding between 50 and 60 lots in the subdivision, and one builder has foreclosed on six homes in what has been designed as a subdivision for the upper middle class.

“I’m thinking that things won’t be that great this summer,” Honea says.

On the other hand, it’s been a great past couple of years for LaShawn Parker, a real estate agent in Fayette County who specializes in foreclosure listings. She’s seen the market come full circle, like a snake eating itself.

“A few years ago my primary clients were investors who saw that houses in Atlanta and Georgia cost a lot less than other markets,” she says. Some of these investors wanted to invest in rental properties. Others thought they could flip houses.

But a number of all-to-familiar worst-case scenarios unfolded. The rental market took a dip and new landlords couldn’t make a profit over their mortgages. Also, as the inflated values of their homes came back down to Earth, low initial rates in their adjust-able rate mortgages (ARMs) gave way to much higher, reset rates.

“Quite a few of the people who bought homes from me a few years ago lost them to foreclosure, or have come back to resell their houses, which we’ve had to do as short sales,” Parker says. About 90 percent of all her sales in 2008 were foreclosure listings, up from 50 percent in 2007.

Parker’s experience typified the times.

Some saw their best prospects on the marketing side. In 2003, there were 59,000 licensed agents and brokers/firms in Georgia. By 2007 there were 76,000. The number fell to 73,000 in 2008.

There was plenty of work for would-be agents. And, between 2004 and 2007, large numbers of inexperienced real estate investors lured by the prospect of overnight profits in flipping houses, dove into the pool. They were able to get easy financing, buy at a reasonable cost and sell higher. Also, many homebuyers bought beyond their means while builders took advantage of the profits to be made in higher price brackets.

In the end, a lot of people bit off more than they could swallow.

“We are not a culture that is characterized by being overly thrifty. True wealth is created over time, created by people who invest in their own skills, who work, and save and invest for the long haul,” says Roger Tutterow, professor of economics at Mercer University and former dean of Mercer’s Stetson School of Business.

“Unfortunately, for the past 10 years or so, there was this mentality of getting rich quick on financial transactions. We saw it with the dot-com bubble, and now with the housing bubble.

“We can’t all become multi-millionaires by selling houses to each other.”

Troubling Times

In 2007, almost 1.3 million U.S. housing properties went into foreclosure, a 79 percent increase from 2006. In 2008 the nation was on a pace to surpass 2.2 million foreclosures, which means home values will continue downward.

Georgia is among the top 10 states with the highest filing rates, which means the Consumer Credit Counseling Service (CCCS) of Greater Atlanta has been busier than ever. CCCS provided 12,000 foreclosure prevention sessions for Georgians last year, compared to 7,300 in 2007. Nationally, the increase was 132 percent, or 72,000 sessions just for clients facing foreclosure.

“The astounding thing is, as incredible as those increases are, it appears that in 2009 the need is even greater. We don’t see it slowing down at all,” says Suzanne Boas, president of CCCS, which has dramatically increased its staff from four housing counselors at the beginning of 2006 to about 185 today.

CCCS of Greater Atlanta serves clients in all 50 states via telephone and Internet, and in person at one of 18 offices in Georgia, Florida, Mississippi and Tennessee.

In typical times, the large percentage of clients going to CCCS for foreclosure prevention counseling were considered low-income, families who couldn’t pay their credit card bills. But for the first time, last year, the average gross household income of CCCS clients surpassed the $40,000 mark.

“This means the problem is working its way through the middle class. We’re seeing more people who are solidly in the middle class come to us,” Boas says. “There also have been a significant number of Spanish speaking clients.”

Hispanic people make up 23 percent of her bankruptcy pre-filing clients and 20 percent of her foreclosure prevention clients, Boas says.

“But these are really troubling times,” she adds, “for homeowners and consumers in general.”

Less troubling for some than others, perhaps. Craig Greenhaw, president of the Greater Columbus Homebuilders Association, says he is tired of the broad brushstrokes the media has used to present the economic picture, particularly in real estate.

“Real estate and housing are local conditions,” he says. “Obviously we’ve slowed some, but in this market most builders have made adjustments and cut back. Inventories have come down and houses are fairly priced.

“With the BRAC at Fort Benning, the addition of the Kia plant about 45 minutes away, and interest rates at an all-time low, we’re well positioned for things to start picking up and doing some serious building over the next few years.”

Meanwhile, his industry is reeling. Three million building-related jobs representing $145 billion in wages have been lost in the U.S. as a result of the housing production slowdown, says Bernard Markstein, economist for the National Association of Homebuilders (NAHB), which has asked the federal government for a stimulus package to address the hous-ing crisis.

“Deterioration in these jobs has now spilled over into virtually all sectors of the U.S. job market and the economies of states like Georgia,” Markstein says.

Housing is the key to turning the economy around, says Rick Porter, owner of Tucker-based Richport Properties and part of Fix Housing First, a national coalition pushing for the housing stimulus package.

“Housing,” he says, “is an engine of production that can lead us out of the recession. It is crucial for Congress to enact a major stimulus package to stop the decline in home values, stem the tide of foreclosures, stabilize financial markets and reignite consumer demand.”

As the new president prepared to take the oath of office, inheriting an economy built on housing, or a house of cards, the line outside his door kept growing and the big question seemed to be, can the new administration deal a winning hand, or will it become mired in a long game of 52-card pickup?