Tucson’s economy slows but is strong
by Multiple Authors on Aug. 17, 2007, under Edge, Local, SpecialLender’s meltdown related to nationwide factors
Brandon Smith, 25, who worked at First Magnus, is among an estimated 800 people suddenly out of work. "It's a complete shock. There was no sign to prepare me for it. There was a lot of crying," Smith said.
The meltdown in the nation’s mortgage lending industry hit Tucson Thursday with shutdown of a large lending company.
Sudden closure of First Magnus Financial Corp. affects prospective borrowers, hundreds of Tucson employees and thousands more across the country.
But local experts say the shutdown of First Magnus, with national headquarters at 603 N. Wilmot Road, does not signal a drastic downturn in the southern Arizona housing market and will not send shockwaves through Tucson’s economy.
“This is not a panic situation,” said John Strobeck, a real estate analyst who publishes the monthly Tucson Housing Market Newsletter.
The nationwide lending crunch is making it harder to get home loans in Tucson and spurring caution in the construction business.
The economy locally and nationally is already slowing. The lending issue is part of that slowdown, which could be prolonged through 2009, said Marshall J. Vest, an economist with the University of Arizona’s Eller College of Management.
“It doesn’t necessarily mean recession,” he said, “but we’ll have much slower growth, the slowest since the last recession.”
Pima County Administrator Chuck Huckelberry said Thursday that the housing slowdown could mean less money for first-time homebuyers through the county’s affordable housing program, less revenue from construction impact fees and an increase in property tax rates within a few years.
Industry casualty
First Magnus, one of the country’s largest privately held mortgage bankers, with $30 billion in loans in 2006, stopped funding home loans Thursday and sent most of its employees home. Up to 800 here and 4,700 more across the country could be affected.
“There is not one person in this company that did not work their heart out to try to make it work out,” said Mary Helfrich, an underwriter with First Magnus for the past 5 1/2 years.
Company officials said the lender was caught in the credit liquidity crunch now causing a crisis in the mortgage industry, even though it was not engaged in selling subprime mortgages that sparked the trouble in recent months.
First Magnus sold its loans in the secondary loan market.
“The line of credit available to us became sparse, and also we had issues selling loans that we had already funded on the secondary market,” said Gary Baraff, the company’s senior vice president for marketing.
A bankruptcy filing is possible, Baraff said.
No one at First Magnus expected this turn of events, he said Thursday.
“It happened, literally, in the last 24 hours,” he said, connecting the company’s problems to a “ripple effect from Wall Street.”
Even Countrywide Financial Corp., the nation’s largest mortgage lender, announced Thursday it had to borrow $11.5 billion to continue to fund loans.
“First Magnus was a very well-run and -managed operation,” Vest said. “This is symptomatic as to what is going on in the mortgage lending industry right now. . . . I don’t think we know yet the depth of the subprime lending problem.”
First Magnus is still trying to determine what it will tell customers who have pending loan applications with the firm.
Baraff said executives are also trying to determine the status of employee pay and benefit issues.
“Everybody is due a paycheck on the 20th (of August),” he said.
Employment
Arizona’s 3.7 percent unemployment rate bodes well for First Magnus employees, said Vest and Don Wehbey, an economist with the Arizona Department of Economic Security.
“There are other jobs available; they just might not be in mortgage lending,” Vest said.
“Anytime someone loses a job, it is a problem,” Wehbey said. “Anyone looking for a job should within a reasonable period of time find a job. There is still opportunity out there.”
Subprime loans
First Magnus is not the only casualty of subprime lending.
The high-interest loans made to people with bad credit when the housing market was hot have led to increases in foreclosures as those homebuyers failed to make their payments.
Foreclosures in Pima County have increased by 76 percent over the past two years, from 1,078 new filings in the second quarter of 2005 to 1,896 filings in the second quarter of this year, according to data available from Realty Trac, which tracks foreclosures nationwide.
Among the top causes of foreclosures here are subprime loans, according to the Center for Responsible Lending.
The national organization predicts that more than 1 in 5 borrowers who took out a subprime loan here in 2005 and 2006 will lose their homes.
The center ranked Tucson 19th among more than 420 U.S. metro areas for subprime foreclosure rates.
People may hold investments tied to troubled housing loans.
Mortgage lenders package the loans they originate in the form of securities for investment, Vest said. They are sold to mutual funds, real estate investment trusts and insurance companies.
Retirees – who typically hold more bonds than stocks – could benefit as interest rates rise, Vest said.
Retirees could get more spending money, he said.
Tucson housing market
In the face of a rising number of loan defaults, lenders are taking a more critical look at applicants, said Ray Desmond, founder of Tucson-based NOVA Home Loans.
“It’s going to affect the high-risk loans. They’ll be harder to get,” Desmond said.
Gone are the days when people with credit scores under 600 could get NOVA loans based on their stated income.
Now NOVA requires documentation of income, and the company isn’t considering folks with sub-600 credit scores, Desmond said.
Real estate analyst Strobeck expects home prices to dip further this year, but the price drops – up to 10 percent – will adjust what has been price run-ups from 2004-06, Strobeck said.
“We’re now going to see that correct back down,” he said.
Any value reductions come on the tail of 15 years of steady increases.
If you paid $150,000 for your house 10 years ago, you might have sold it last year for $330,000 but this year you might get less than $300,000 – still a healthy increase from the purchase price, he said.
Builder KB Home is pulling back locally. The company expects to build about 5 percent fewer homes this year than last and has cut its Tucson work force from 180 last summer to about 140, said John Bremond, president of KB Home Tucson.
KB Home and the University of Arizona announced Thursday the completion of a land swap for the Arizona Bioscience Research Park and adjacent residential and commercial development. But Bremond was cautious about expansion now.
“I’m not overly eager to be bringing too many new projects online at this time,” he said.
Fewer houses are going up this year, though Pima County housing starts have risen steadily since January, according to the U.S. Census Bureau, which tracks construction permits.
There were 592 new home permits issued in Pima County in June, up from 329 in January but still fewer than last June’s 792, the Census Bureau reports.
“You can still drive anywhere and see homes being built, being remodeled, tons of infrastructure projects,” Wehbey of DES said. “The activity out there hasn’t been halted.”
Other parts of the local economy are relatively strong, said officials of several industries.
Consumer spending
Park Place and Tucson Mall continue to see increasing retail sales, and retailers are eager to set up shop at Tucson’s two largest malls, said Tami Ivy, spokeswoman for owner General Growth Properties.
“Retail sales have been strong all year,” Ivy said. “In general, the retail outlook is positive.”
Sales tax revenue generated in Tucson grew from $190 million in fiscal year 2006 to $202 million in 2007, and the city budgeted $212.8 million for the current fiscal year, said Silvia Amparano, the city’s deputy finance director.
“I expect the growth that we had in prior years to slow down but still should be positive,” Amparano said.
Auto dealer Jim Click said he is seeing a shift to used car sales and is ordering fewer new cars for the fall.
“If we’re down 10 to 15 percent in new vehicle sales, we can make that up with used cars, body shops and parts shops,” Click said in a phone interview from Trois-Rivieres, Quebec, where he’s racing a car.
Conventions and tourists still pack the Hilton El Conquistador Golf & Tennis Resort.
“In truth, we haven’t been able to detect any indication that individual or group business is going down,” said general manager Lynn Ericksen. Rather, convention business is rising.
Rick Vaughan, vice president of sales and marketing for the Metropolitan Tucson Convention & Visitors Bureau, said he believes “the future market remains strong for the tourism industry.”
Jose Torres of U.S. Carpentry works on a home under construction at Tres Pueblos, near South Campbell Avenue and East Drexel Road, on Thursday afternoon. Home permits have risen since January but are still below last year's level.
Nicole Dietrich and Nick Blanchard, former employees at First Magnus, carry their offfice belongings to their cars after finding out they no longer had job.
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By Garry Duffy, Konstantinos Kalaitzidis, B. William Poole, Alan Fischer, Teya Vitu, Eric Sagara
