The financial crisis cost Sonoma County a decade of new housing

Ten years ago this week, Lehman Brothers Holdings Inc., one of the world's largest investment banks, sought protection from its creditors in U.S. Bankruptcy Court in Lower Manhattan, just four blocks from the New York Stock Exchange and Wall Street.

That moment is generally viewed as the shock that inflamed the worst financial crisis in the United States since the bank panics of the early 1900s and the Great Depression.

“The American financial system was shaken to its core,” the Wall Street Journal said the next day.

In the ensuing years, millions of people in the U.S. and other industrialized nations lost their homes and their jobs. Small business owners were ruined, higher education dreams were destroyed and the divide between rich and poor widened.

In Sonoma County the effects were profound. More than 15,000 homeowners who thought they had achieved the American dream instead lost their homes to foreclosure, and those properties were then snapped up by people with money at recession-level prices. Business owners, in a county recognized as one of the most entrepreneurial in the nation, lost years of hard work. Community bankers, proud of their role serving their depositors, borrowers, shareholders and local nonprofits, suddenly feared for their survival and watched powerlessly as the commerce they had championed melted away.

The Great Recession scarred Sonoma County in ways that are still painful a decade later. The loss of middle-income jobs, homeowners forced to be renters, rising debt for college and cars, ever- longer commutes, underfunded and terminated pensions, the high cost and scarcity of credit, even drug addiction are all lasting impacts of the financial crisis of 2008.

One of the most damaging outcomes of all, especially after the October wildfires, may be the housing that didn't get built because developers couldn't get financing and homebuyers couldn't get home loans.

“It's the most unreported story of the whole recession,” said Sonoma County developer Orrin Thiessen. “It was a huge thing.”

Had construction continued unabated, more than 10,400 additional homes would have been built in Sonoma County between 2008 and 2017, a Press Democrat analysis found.

Builders were adding an average of 1,583 single-family homes a year in Sonoma County in the six years from 2003 to 2008, between the dot-com bust and Lehman's bankruptcy, according to the state Department of Finance, which collects housing data. But over the next three years, construction gradually ground to a halt as the financial meltdown upended the U.S. banking system. From 2011 to 2017, builders averaged only 283 homes annually, Department of Finance figures show.

As fire survivors prepare to mark the first anniversary of the October firestorm, which destroyed 5,300 homes in Sonoma County, some people are also taking note of the 10-year anniversary of a financial crisis that cost the region twice as much housing as the wildfires, bankrupted many local developers and left the county with a housing deficit it may never be able to repair.

The housing downturn 10 years ago actually unfolded in two phases: First came a real estate recession, essentially from 2005 to 2008, and then came the financial crisis.

The first phase: Housing

When Lehman filed bankruptcy on Sept. 15, 2008, the Sonoma County economy was already in a real estate downturn and it was hard to imagine things could get worse.

The early-2000s housing bubble that had driven home prices up 69 percent in three years, luring buyers into deals they could not afford, was long gone.

Values of mid-priced homes in Sonoma County crested in August 2005 at $619,000. By the time of the Lehman collapse, the median had tumbled to $382,500.

Lenders were seizing an average of 70 homes a week in foreclosure. The nation's largest mortgage companies were failing. Banks that had made or invested in home loans now in default were facing big losses. Unemployment in Sonoma County had climbed to 6.1 percent, the highest in 13 years.

Sonoma County housing developers, having borrowed money to build houses that were now too expensive to sell, were making the painful adjustments they knew from experience would have to be made in order to survive a real estate recession.

“In earlier recessions I saw that we could weather it. We cut expenses, we did more aggressive bidding. If we could cover our debt, we could go without profits for a year or two. That was my experience,” said second-generation Sonoma County developer Dick Dowd, president and CEO of Pinnacle Homes.

Dowd had been in the construction business in Sonoma County since 1970. During that time he'd maneuvered through three real estate downturns: the early 1980s when mortgage interest rates were 18 percent; the early 1990s after the savings and loan excesses; and the early 2000s after the dot.com bust.

Dowd and his partners thought they knew what to expect. But this downturn was dragging on and becoming severe.

“I never expected anything like that,” Dowd said.

Other developers said the same.

“Around 1980 and 1990 I went through two bad recessions. I've been in business 45 years. It never occurred to me that things could get so bad,” said developer Thiessen, who with his wife, Terri Thiessen, built Windsor's Town Green Village, Graton's downtown and Occidental's Harmony Village.

No doubt about it, by September 2008, the Sonoma County housing market was in crisis.

Second phase: Wall Street

But after Lehman failed, things were going to get a lot worse.

Five months later the value of mid-priced homes in Sonoma County sank to $305,000 and stayed in the $300,000s for almost five years. Unemployment in the county kept rising until it reached 10 percent in 2010 and 2011.

Ultimately more than 15,000 people in Sonoma County would lose their homes to foreclosure from 2009 to 2016, when foreclosures finally returned to pre-recession levels, according to First American CoreLogic.

The real estate downturn became vicious in the days after Lehman failed because many of the world's largest banks almost failed, too. Twelve of the 13 most important financial institutions in the United States were at risk of collapse within a week or two of the Lehman bankruptcy filing, Federal Reserve Chairman Ben Bernanke testified in 2009 to a commission investigating the roots of the global financial crisis.

What caused that apocalypse? It wasn't home loans.

Although the financial crisis has been widely blamed on home loans made to people who could not afford them, a decade after the crisis it's better understood as having been caused by loans that giant banks made to each other but could not afford.

Every day giant financial institutions like banks, money market funds and mortgage companies borrow and lend trillions of dollars among each other for one day. For collateral, they often use bundles of home loans. Each day, the borrowers promise to pay back their loans the next day. In their jargon they promise to “repurchase” the collateral.

That's why these loans are called repurchase or “repo” loans.

And what do the banks do with many of those trillions of dollars that they borrow? They make more home loans, which they can then bundle and use as collateral to get more repo loans.

Usually the repo lenders renew the one-day loans every morning. But in 2007 they started getting worried about the quality of the home loans in their collateral, and in September 2008 some panicked. They demanded immediate repayment. But many repo borrowers, like Lehman, didn't have enough cash. They faced insolvency within days.

The federal government was able to save most of the giant financial institutions, but when it didn't save Lehman, repo lenders didn't know who might fail next, and throughout much of the industrialized world they stopped lending.

“When the repurchase market froze after the failure of Lehman, the world's financial markets were thrust into turmoil. Eventually, governments around the world were forced to adopt costly policy interventions so that lending would resume in these markets,” said Puspa D. Amri, assistant professor of economics at Sonoma State University and an expert in finance, credit booms and banking crises.

Bankers clutch

In the U.S., alarmed bank regulators knew the panic could spread, and they jumped into action.

On Oct. 7 the FDIC raised insurance on bank deposits from $100,000 to $250,000 to prevent runs on banks. On Oct. 14 the Treasury Department said it would invest $250 billion of taxpayer money in the nation's banks to keep them from failing. Immediately federal and state regulators descended on banks big and small, and for several years they called the shots. Even the healthiest banks were closely watched.

Development loans got reappraised at least once a year. Inevitably, projects were worth a fraction of the bank's loan to the developer. That shortfall had to be promptly entered into the bank's books, forcing lenders to ask developers for additional cash or property to make up the difference.

If developers were unable to cough up additional assets, banks were left with few options. Many decided to get these loans off their books and cut their losses, seizing projects from developers and then selling them.

For community bankers, this was a tough time, said Deborah Meekins, a leading Sonoma County banker for 33 years.

“Bankers had worked with their developers for years. They were friends. And these friends were saying, ‘I don't have anything left. Is there any way you can work with me?' But we bankers were trying to maintain adequate loan reserves to cover losses and maintain our regulatory compliance and rating. There were many difficult conversations along the way. Borrowers with excellent character but no ability to repay left us with no choice. If our review of the collateral and any other repayment sources deteriorated, we had to write down, write off, or restructure.” Meekins said.

“Banks working with us had regulators all over them,” said Keith Christopherson, co-owner with his wife, Brenda, of Christopherson Homes, at that time the county's largest builder. “It was like being in a battle zone.”

It was tough inside the bank, too. Employees lost their jobs as banks shrank. Banks, which do not want to own real estate and aren't set up to deal with it, had to hire legal counsel and redirect lending officers to manage the foreclosed properties and try to sell them.

Developers struggle

Financing for homebuyers and homebuilders plummeted.

“We had property under construction that we had to stop building because we couldn't sell the houses. We would have been throwing good money after bad,” Thiessen said. “Almost all speculative building stopped.”

Some bankers were uncooperative, even mean, developers said. But many local bankers searched for solutions, sometimes restructuring loans, accepting as payoff whatever the developer could sell the project for, foreclosing without rancor.

While some developers were inexperienced, overextended and even duplicitous, many were skilled business people with integrity. They tried to negotiate with their bankers, looking for ways to share the pain through the downturn, trying to protect their workers, vendors, bankers and themselves as much as possible.

But by 2011 banks were going after any developers' assets they could find. Developers could no longer hold on.

“People had assumed it would last two to three years, but in four and five years property values were still declining,” said banker Meekins.

On June 11, 2011, Dowd was forced to file bankruptcy. A month later, on July 15, Thiessen followed. The Christophersons didn't file bankruptcy, but they lost almost everything to creditors. In 2011 Keith Christopherson “put my bags back on” and went to work on remodeling jobs.

“It was a shock to me. I never envisioned having to file bankruptcy. But we saw no evidence of a path to the other side,” Dowd said.

A cascade of well-known and experienced local builders failed during those years. Beyond heartbreaking, it was also frustrating and often made no sense to developers.

“That was one of the biggest tragedies of the whole recession. Banks wiped out Main Street America,” Thiessen said. “They foreclosed on our property, even when we had positive cash flow, and then they sold the property for a big loss, even though we were still making our payments. They worthlessly foreclosed and sold at a loss.”

Rebound begins

Not until 2014 did Sonoma County developers and bankers see a turnaround. Not until 2018 did local developers start building houses again.

Today, some community banks have cautiously begun lending again, but local developers often have to find private investors to finance their projects. Dowd, the Thiessens, the Christophersons and others who failed in the financial crisis have rebuilt their professional lives and are vital players in Sonoma County's efforts to recover after the October fires.

Dowd has been a director of AltaPacific Bank in Santa Rosa since 2005, and today he is chairman of the loan committee. Retired from real estate development, he's a founding member of the Rebuilding Sonoma County Working Group of volunteers who donate their expertise to help fire victims rebuild.

The Thiessens have design, construction, realty and interior decorating businesses, and they are developing Green Valley Village in Graton, which includes 10 homes, some with granny units, along a community creek and park.

The Christophersons, who built many of the homes destroyed by the October fires, started Christopherson Builders in December to help with the rebuild.

“On Monday morning of the fires we started getting calls from people saying, ‘Help us rebuild,' and it hasn't stopped since,” Brenda said. They've held community meetings at a church, focus groups in their office. “This rebuild effort is all-consuming, seven days a week. You are either all in or out. Helping our clients through this tragedy is more gratifying than words can express.”

And what about the repurchase market?

Giant financial institutions still prefer repos for their overnight borrowing and lending, although the volume of daily U.S. transactions is thought to be only about $1.5 trillion, half what it was 10 years ago.

Does that mean another financial crisis is coming someday, as memories fade of Sept. 15, 2008?

“Yes, the system is still vulnerable, and yes it is definitely going to happen again,” said Yale professor Gary Gorton, a leading repo expert.

Mary Fricker is a retired staff writer for The Press Democrat who covered Sonoma County's banking industry.