reality-based educator

From a Businessweek article called "Bonfire of the Homebuilders":

Elizabeth and Armando Motto are living a real estate nightmare with a new breed of monster: the big homebuilder as lender. In November, 2005, the couple, who have four children, agreed to pay $540,000 for a newly built three-bedroom house in suburban Clarksburg, Md., near Washington, D.C. Rather than send them to a bank, the builder, Beazer Homes USA Inc., offered to provide a mortgage itself in an arrangement of the sort that helped fuel the long housing boom across the country.

But when it appeared that the Mottos might not qualify financially for the loan, things took a troubling turn. Beazer, according to the couple, inflated the pair's earnings in loan-application documents by incorrectly stating they were collecting rental income from the house they were leaving. "I don't want to misrepresent myself," Elizabeth said in e-mail correspondence with Beazer's outside mortgage service, dated July 14, 2006. But in the end, the couple signed the documents, and soon after they closed on the Clarksburg house.

They now regret it. The Mottos moved to Clarksburg, but they haven't succeeded in unloading their previous home in Rockville, Md. They have nearly $1 million in mortgage debt on the two dwellings. With $145,000 in family income, Elizabeth says, they are "on the brink of foreclosure" on both houses. "We are so broke."

Beazer, one of the dozen or so large publicly traded builders that have started or stepped up mortgage-lending businesses to put more buyers in freshly finished houses, declines to discuss specific customers. The Atlanta company has much more than the Mottos to worry about. On Aug. 1 its stock fell nearly 18 percent on rumors that it was preparing to file for Chapter 11 bankruptcy court protection — which Beazer swiftly denied, calling the Wall Street gossip "scurrilous and unfounded." Just five days earlier, Beazer revealed that the Securities & Exchange Commission had elevated an informal inquiry into its mortgage business to a formal investigation. The company warned that criminal penalties could follow. Earlier this year, Beazer received a subpoena from the Justice Dept. seeking documents related to its home loans, and the company is also under civil investigation by the North Carolina Attorney General's office.

Read the rest of the article - it's as scary as the above.

No wonder the market is imploding - it's been propped up with easy lending, rampant speculation, fraud and predatory lending.

And the banks, the homebuilders, the brokers, the buyers, the sellers, the investors, the Federal Reserve board members and the Congress that sat on the sidelines while all this was going on all bear responsibility.

And we don't have any idea yet just how bad the damage is going to be.

POSTSCRIPT: And how many companies will be following in the footsteps of American Home Mortgage?

NEW YORK (Reuters) - American Home Mortgage Investment Corp., a large home lender catering to people considered good credit risks, completed its rapid descent on Monday when it filed for Chapter 11 bankruptcy protection.

The Melville, New York-based real estate investment trust, one of the largest independent U.S. home loan providers, filed for protection from creditors with the U.S. Bankruptcy Court in Delaware.

The filing came after American Home closed most operations on Friday, laying off all but about 750 workers. The company said it had started the year with more than 7,400 employees.

American Home's bankruptcy reflects how worries about loan defaults fueled by slumping U.S. housing prices have spread beyond subprime lenders, which lend to people with weaker credit, to companies that make higher-quality loans.

American Home invested in home loans and mortgage securities, serviced mortgage accounts and originated loans from a network of branches.

The company offered "Alt-A" mortgages, loans that fall between prime and subprime in quality, as well as adjustable-rate loans. Founded in 1987, American Home said last year it grew to become the 10th-largest U.S. retail mortgage lender by originating $59 billion in loans.

Yet American Home's collapse was faster than that of New Century Financial Corp., a subprime specialist that filed for bankruptcy on April 2, less than two months after disclosing accounting problems and mounting losses.

New Century has since liquidated most of its assets.

American Home cut its dividend and warned in late June of rising losses from sour loans, but it wasn't until July 27 that it first revealed it was suffering a credit crunch and postponed paying a scheduled dividend.

Four days later, the company's own lenders cut off its access to credit lines. American Home hired advisers to help it evaluate options, including a liquidation of assets. Several states told it to stop making new loans.

The shit is really just starting to hit the fan.