REAL ESTATE: Downturn has led to surge in bankruptcies
As major lenders tighten belts, small bankers are forced to declare insolvency
By ZACH FOX - Staff Writer | ∞
Business bankruptcies in San Diego County have doubled from a year ago as the housing downturn has depleted real estate companies' assets.
Major lenders tightened their underwriting toward the end of last year after defaults on risky loans jumped. These lenders issued fewer loans, more closely scrutinized their balance sheets and, after reviewing some loans, exercised their right to force the smaller bankers to take back some riskier loans.
If enough of these loans go bad, it can send the small lenders into bankruptcy.
"There's been a tremendous upswing in Chapter 11s," said John Smaha, a bankruptcy attorney in San Diego. "In the last 10 years, Chapter 11s were almost unheard of in San Diego."
Real estate-related companies appear to represent the majority of the bankruptcies in San Diego, according to court records.
Likewise, Chapter 7 filings, where all assets are liquidated, have jumped by 85 percent from a year ago.
Though a Chapter 7 filing is essentially a closing of the business, for many companies it is the only option. And often, a company will file for Chapter 11 bankruptcy protection in an attempt to stave off closure only to be forced into a Chapter 7 by the judge, who decides whether a company can fairly pay its debts.
Therefore, some of those Chapter 11 filings could turn from bad to worse.
"Sometimes people file Chapter 11 because they don't want to give up. That's a human response," said Michael T. O'Halloran, a bankruptcy attorney in San Diego. "But if you're on the Titanic, it's not going to be fun."
Smaha represents EquiPoint Financial Network, based in San Marcos. A month ago, the mortgage banking company filed for Chapter 11, a restructuring bankruptcy in which the company attempts to work out a plan to pay its bills and re-emerge as a successful company.
During the boom, the company expanded, doing business as far away as Charlotte, N.C., according to court filings.
Another mortgage company, Blueprint Financial in Carlsbad, filed for bankruptcy about two weeks ago.
The two bankruptcies offer examples of how the real estate bust is putting companies out of business and employees out of jobs.
At one point, Blueprint employed 20 brokers. EquiPoint's new president, Bruce Barnes, declined to comment.
Smaller lenders, known as mortgage bankers, relied on a free flow of money from large banks, such as Wells Fargo and Citibank, to buy their loans. But now, the large banks are not biting on new loans and they are kicking back some loans they already bought.
So instead of selling off loans for a profit, some small mortgage bankers are forced to buy back bad loans they already sold. Revenues plummet, debts rocket and soon bankruptcy is the only option.
Such was the case for several North County mortgage businesses, including EquiPoint and Blueprint.
Now, EquiPoint carries just $550,000 in assets while holding $5.3 million in liabilities, according to court records. And EquiPoint's potential debts could grow, as it carries 281 potential buybacks from larger lenders.
Most of the potential buybacks are listed at zero dollars in liabilities, meaning they are not included in the company's listed $5.3 million in liabilities. However, some of the 281 potential buybacks could add to the company's liabilities.
Also, a bad loan used to mean 15 percent to 20 percent in losses. Now, with home price declines reaching peaks, bad loans are causing banks across the country to eat a loss of 30 percent to 40 percent of the loan, Smaha said.
"It makes it impossible to operate. They can't absorb those losses," he said.
Even with its troubles, EquiPoint hopes to emerge from bankruptcy within five months and operate as a broker for reverse mortgages, Smaha said. In that role, it will not act as a banker.
Other lenders, such as Blueprint Financial, are struggling even more. Two weeks ago, the company filed for Chapter 7 bankruptcy, a liquidation of all its assets without possibility of the company returning to business. Its court filings reported holding just $2,300 in assets while owing $2 million in debt, including a $480,000 buyback from IndyMac Bank, the failed Pasadena-based lender.
Easy money during the housing boom through 2005 encouraged homeowners to buy houses they could not afford, securing loans by inflating their income.
As banks tightened their budget lines last year, they found some easy-money loans went to buyers who defaulted almost immediately, so the banks started to kick them back to smaller mortgage bankers, such as Blueprint Financial and EquiPoint.
Further, attorneys said the surplus of available loans spurred start-up developers, who attempted to acquire land, prepare the necessary permits and sell to large, national builders.
With the long permitting process, many of the developers got caught holding land no one wanted to buy after the county's real estate market started to dive in 2006.
Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com.
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Spend that wrote on Aug 2, 2008 6:46 PM:which you don't have and let those who have "played by the rules" pay their share and yours too. Greed, stupidity and criminal behavior are rewarded. Bring back the debtor prisons for the lenders and the borrowers.
Gerald wrote on Aug 2, 2008 8:33 PM:San Diego was one of 250 cities and 20 states that either debated and passed or debated and tabled Lyndon H. Larouche's Homeowners and Banking Protection Act which would have and still would if passed today, FREEZE ALL FORECLOSURES, write off the speculative part of the orgy of mortgage backed "insecurities" and restored a Constitutional Based low interest credit for production and high interest to starve the speculators. It's a year after he first proposed it in August, 2007, BUT IT IS STILL NOT TOO LATE, if YOU act now. Get YOUR U.S. Congressmen like Bob Filner moving on this NOW!!! It is an emergency for the whole nation NOW!
Old Timer wrote on Aug 2, 2008 10:01 PM:Buying RE in California is like buying stocks in the stock market. Up then down then up then down etc. A house is not a home but a way to get a Lexus or live beyond your means - then to everybodys surprise the market falls. In many other parts of the country a house is a home to live in and is dearly protected from this mentality of speculation. Until Californians stop speculating on the places they call "home" there will be continued foreclosures, bankrupcies and broken dreams. it is hard to see that happening though, because there will be another day in the future when Californians will believe that like earthquakes,a housing downturn will never happen, and when they do, everybody is so surprised.
Downturn wrote on Aug 3, 2008 4:55 AM:Ya let's go with Lyndon Larouches's "plan."
From Wikopedia:
"LaRouche was sentenced to fifteen years imprisonment in 1988 for conspiracy to commit mail fraud and tax code violations, but continued his political activities from behind bars until his release in 1994."
Shame on the big banks wrote on Aug 3, 2008 9:26 AM:The problem started when the big banks decided that it was okay to offer mortgages without requiring a 20% down payment. Zero and 5% down payment loans only work when real estate prices go up.
Speculating was never a problem when the buyer needed 20% to buy.
The problem isn't "playing by the rules". The problem is that the big bank CEOs decided to change the rules to allow zero or little down payment.
This decision has led to massive pain throughout the economy. The pain hasn't stopped spreading, it will get worse before it gets better. Racial tensions and crime will rise as a result. All because of a few powerful bankers making a very very bad decision.
Shame on the CEOs of america's biggest banks!
izzy wrote on Aug 3, 2008 10:40 AM:you made your bed now lie in it.......while everyone else is at the party....here i am paying inflated prices for everything!.....now the gamblers are losing everything creating opportunities for people like me with cheaper prices for everything now....life is good!
prof wrote on Aug 3, 2008 10:48 AM:Typical government ineptitude. Our Federal government failed to properly regulate the industry.
Crap loans are approved to people who can't afford them, by lenders who don't care if they can't, as long as they get their commission. While the easy money flowed, inflated appraisals and irrational house values create a bubble that had to burst.
The consequences? Loads of people overpaid on inflated homes by hundreds of thousands of dollars, others are now foreclosed. Those who bough before the huge price rise - and thought they were rich - now have to postpone retirement. Wall street is gagging on the bad debt.
Finally the government acts - as usual politically motivated and too late - to bail out both the irresponsible borrowers and lenders from the mess it allowed to happen.
And who ultimately pays the bill? Why the responsible taxpayer who did not really benefit from the government ineptitude in the first place.
We've seen this act before - i.e. the government failing to control US borders and allowing the chaos that is illegal immigration.
Running the country with a modicum of intelligence is a rare event in these United States of America.
BIG INVESTOR wrote on Aug 3, 2008 2:31 PM:You want to get rich?? Let this housing bust go for another 2 yrs and we will be at the bottom....Then buy as much realestate as you can and laugh all the way to the bank! Thanks to the dumb overspenders we will have another great day for investors! $$$$$$$$
Joseph wrote on Aug 3, 2008 4:43 PM:I hope San Diego suffers. There was so much fraud there. Everyone turned a blind eye. I am glad the realtors and mortgage brokers are suffering. They are really lowlife. They inflated incomes of so many people. Thousands should go to jail in CA. But that will not happen I guess.
Enjoy the party.
Fact is... wrote on Aug 3, 2008 9:51 PM:Banks opted for quantity of mortgages instead of quality mortgages. They got what they deserved by using their obscene power to change rules that generally worked well. They assisted crooked lenders and realtors, to enable unqualified buyers to get into a no win home loan situation. I sincerely hope that most of the bankruptcies are realtors.
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