"There's so much uncertainty - can I pay for my home, will I still have a job in six months?" Hefner said. "As long as those nagging, but not irrational, fears are out there, it's going to be a drag on the local economy."
The role that mortgage-backed securities played in this nation's economic meltdown is well-documented, both in congressional hearings and on the best-seller list.
That meltdown has led to a landmark lawsuit filed last month by an investment group that claims banks knew the securities were worthless but, driven by greed, sold them anyway.
But the Myrtle Beach area's contribution to those toxic investments has largely been hidden in the minutiae of paperwork filed at Horry County's register of deeds office.
As more of the homes tied to those investments go through foreclosure, however, the path from here to Wall Street is be coming clearer.
And the abstract notion of a national mortgage crisis is being eclipsed by very real local consequences:
Mortgage loans - which at $1.7 billion accounted for nearly 20 percent of Horry County's economy during the height of the real estate boom in 2006 -accounted for just 7 percent in 2008, according to the latest federal data. That decline is magnified by corresponding losses in retail sales and wages tied to home sales and related services.
Median home values have tumbled 14 percent since 2007. Even so, Horry County remains one of the nation's most overvalued housing markets, according to research group IHS Global Insight. That Lexington, Mass.-based group estimates another 6.3 percent drop in home values is needed before this market reaches its fair value.
Horry County's gross metro product, the value of all goods and services produced here, fell an inflation-adjusted 4.3 percent in 2009, according to an IHS Global Insight study conducted for the U.S. Council of Mayors. That was the 26th biggest drop nationwide and followed a decade-long growth spurt in which the local economy had expanded by an average of 5.9 percent annually.
One out of every 365 Horry County homes now is in foreclosure, according to RealtyTrac, an Irvine, Calif.-based company that tracks foreclosures nationwide. That rate is the third-highest in South Carolina, behind Beaufort and Charleston counties, and compares to foreclosure rates of 1-in-543 homes statewide and 1-in-397 nationwide. The 489 foreclosure filings in July is nearly double this year's monthly average and brings Horry County's total to 1,998 foreclosures this year.
Horry County's unemployment rate, tied closely to the vagaries of tourists who both vacation and buy homes here, has been in double digits since December 2008 and hit a post-real estate boom high of 16.4 percent in January. The number of people who made their living as real estate agents or brokers dropped 23 percent from 2008-09, from 1,170 to 900 people, according to the federal Bureau of Labor Statistics.
Hefner said it's difficult to predict where the economic bottom will be and how long it will take to get there. That is because there still are thousands of distressed properties along the S.C. coast and millions nationwide that are tied to mortgage-backed securities.
"Nobody can say what percentage of those homes will be foreclosed on and what price they will get when that happens," Hefner said. "It's anybody's bet where this is going to unwind. It's still unwinding."
The potential for such economic calamity should have been easy to spot in the documents that Wall Street banks filed with the U.S. Securities and Exchange Commission every time they issued mortgage-backed securities.
For example, a prospectus for Ace Securities Corp. Home Equities Loan Trust 2007-HE2, the security that held the River Oaks condo loan, stated that the average Fair Isaac & Co., or FICO, score of its mortgage borrowers was 632.
That is a credit score so poor that at least one-third of the loans could be expected to go into default, according to TransUnion, which maintains credit histories on 500 million consumers worldwide.
That same Ace Securities investment included 69 mortgages that were given to borrowers with FICO scores in the 500-524 range. Nearly 75 percent of loans made to people in that range wind up in default, according to TransUnion.
For example, take a River Oaks condo bought for $154,000 in August 2006.
The loan for the condo had all of the hallmarks of a subprime mortgage - an adjustable interest rate that was to be reset every six months and could soar as high as 14.3 percent and penalties if the buyer wanted to repay the loan early.
The finance company also gave the buyer a "silent second" mortgage, a loan that is used to cover a down payment, leaving the buyer with no equity in the property from the start and no reason to stick around and pay if times get tough.
Irvine, Calif.-based Peoples Choice Home Loan Inc. originated the loan. Seven months later, Peoples Choice filed for bankruptcy protection tied to mortgage loan losses.
But before it went belly up, Peoples Choice sold the River Oaks loan to Deutsche Bank, and it was packaged into the Ace Securities investment as part of a $796.4 million Wall Street offering.
Despite the low FICO scores and risky terms of the loans that made up the security, nearly 80 percent of the mortgages received AAA ratings from the bond rating agencies, such as Moody's and Standard & Poor's, that were supposed to protect investors with objective and independent risk evaluations.
News reports since the real estate bust have shown that the bond rating agencies didn't fully understand the mortgage-backed securities they were evaluating. Those agencies also understated the risks involved, according to government testimony, because the banks that issued the securities were the same ones paying the bond raters for their services.
Investors who bought into the Ace Securities offering have lost millions. As of May, 35.7 percent of all the loans that comprise that security - including the River Oaks mortgage - are in default, according to court documents.
'Silent seconds'
A review of foreclosure filings shows the River Oaks loan is typical of the types of Horry County mortgages that were packaged into securities sold by Wall Street to investors.
In another example, a $163,920 loan for a condo at Ocean Forest Plaza in Myrtle Beach was packaged into a security called Fremont Home Loan Trust 2006-B, a Wall Street offering that included 4,765 mortgages totaling nearly $1.3 billion.
The Fremont security was divided into two pools of mortgages, with the largest belonging to buyers with FICO scores averaging 621.
Almost all of the loans had "silent seconds" and adjustable interest rates. Nearly 300 of them were interest-only loans, which meant buyers would not realize any equity in their homes until after five years, when their mortgage payments would soar with the addition of principal costs.
The Aug. 1, 2006, prospectus for the Fremont offering noted that about 130 of the loans already were 30 days delinquent before they had even been packaged and offered to investors.
Even so, the bond rating agencies gave the Fremont offering an overwhelming AAA rating.
Within about two years, 55 percent of the loans in the Fremont security were in default, including the loan for unit 911 at Ocean Forest Plaza.
The owner who bought the 20-year-old condo in the midst of this area's boom is marketing the unit as a "short sell" for less than half the amount paid for it four years ago. HSBC Bank, trustee for the Fremont security, continues to foreclose on the condo while the owner searches for a buyer.
In a third case, a $559,200 loan for a North Myrtle Beach condo in December 2006 was packaged into a security called HSI Asset Securitization Corp. Trust 2007-NC1.
That security included $1 billion worth of loans originated by New Century Mortgage Corp., a now-defunct company with underwriting standards so loose that John Dugan -who, as comptroller of the currency, is the chief administrator of national banks - put it at the top of a list of the nation's worst mortgage originators.
The average FICO score for the HSI offering was a dismal 623, and the security's overwhelming number of adjustable-rate loans carried interest levels as high as 19.8 percent.
Moreover, 10.5 percent of the HSI security was composed of mortgages that were either low-doc or no-doc loans - so-called "liar loans" in which the buyer is required to provide little or no documentation of his or her income, employment or savings.
In at least 331 loans, according to the security's prospectus, the originator simply took the buyer's word when it came to verifying important financial information that could predict whether a default would occur.
Even so, the HSI security was a hit with the ratings agencies, which gave nearly three-fourths of its loans AAA ratings.
Within two years, nearly half of those mortgages were in default, including the $559,200 loan on the North Myrtle Beach condo. The unit at Ocean Breeze Cottages on 27th Avenue South went into foreclosure and was resold this year for less than half what the previous owners paid.
All told, there are 65 Horry County homes in foreclosure where the mortgages had been packaged into securities either by Ace, Fremont or HSI.
While the dollar value of those mortgages tops $14.3 million, it is just a tiny fraction of the local loans that dozens of similar financers packaged into hundreds of security offerings during the boom.
By 2009, there was $9.2 trillion of outstanding mortgage-backed securities debt nationwide, according to the Securities Industry and Financial Markets Association, a Washington, D.C.-based trade group.
Wall Street blamed
Many of the loans that make up those securities never should have been granted in the first place, according to a lawsuit filed last month by Boston-based Cambridge Place Investment Management Inc.
Cambridge Place said it has lost half of its $2.4 billion investment in mortgage-backed securities, including those composed in part of Myrtle Beach-area loans.
The group blames 15 Wall Street banks, claiming they participated in fraud by falsely stating that the mortgages making up those securities met strict underwriting guidelines.
The lawsuit has drawn national attention and could spawn copycats if Cambridge is successful in holding the banks financially accountable.
Hefner, for one, is skeptical of Cambridge's chances.
"The people buying mortgage-backed securities were supposedly sophisticated investors," he said. "Now they're looking for somebody to blame. Any time you lose money, it must be someone else's fault."
Cambridge hinges much of its case on 63 confidential witnesses who testified in court documents about the reckless lending practices that dominated the subprime market during the real estate boom.
Fremont, for example, regularly approved loans with unrealistic stated incomes - such as pizza delivery workers making $6,000 a month, according to the lawsuit.
Other Fremont witnesses said in court documents that loan officers spotted and ignored fraudulent information, such as falsified pay stubs, every day.
A host of other lenders regularly used appraisals with inflated property values and allowed borrowers to illegally claim investment property as a primary or secondary home, according to the allegations.
One loan program let borrowers qualify if they provided three letters of reference from anyone for whom they had supposedly worked. Those letters - which were never verified, according to court documents - included statements such as, "so-and-so cuts my lawn and does a good job," one witness stated.
Many of the allegations mirror those leveled against Myrtle Beach area mortgage brokers, real estate agents and bankers in ongoing FBI investigations of bank fraud here. Three area residents have pleaded guilty to fraud charges and are awaiting sentencing, while four others have been indicted. Bill Day, the assistant U.S. attorney who is prosecuting the cases, said more indictments are imminent.
"If you were alive, they would give you a loan," U.S. Sen. Ted Kaufman, D-Delaware, said during an April congressional hearing on the nationwide mortgage crisis. "If you were dead, they would still give you a loan."
The reason was simple: Investors had an insatiable appetite for securities backed by mortgages that seemed to be a sure bet while real estate prices were rising. By purchasing the securitized packages of loans, investors provided money to banks, which then made more loans to put into new securities.
That process fed on itself until traditionally prudent lending standards eroded and the house of cards collapsed.
Timothy Koch, a professor of banking and finance at the University of South Carolina, said he thinks Cambridge stands a good chance at recouping some of its losses in court.
He points to recent moves by government-backed mortgage buyers Fannie Mae and Freddie Mac as precedent. Those agencies are forcing banks to buy back thousands of loans that were made with faulty underwriting.
"They are being quite aggressive about it, and banks are now having to eat a lot of the mortgages they sold to Fannie and Freddie," Koch said.
"You can be sure that if Fannie and Freddie are doing it, others are going to follow their lead. Their precedent carries a lot of weight."
Legal action aside, Bill Harrison - one of Koch's colleagues at USC - said the failure of mortgage-backed securities has forever changed the nation's real estate landscape.
"We're not going to return to the level of appreciation of real estate that we have seen over the last 15 years," said Harrison, a former developer who teaches real estate classes at the university.
"We've been burned by the bubble, and that's a lesson that will be remembered for generations.
"A lot of things that have been building for an entire generation are now colliding," Harrison said. "And what's going to come out of the smoke and debris? That's for the really smart people to think about."
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