Bush Plan Leaves Out Borrowers With Option Arms

Wall Street Journal Online, December 25, 2007
By Ruth Simon

• The Issue: The Bush administration's program to help homeowners with subprime adjustable-rate mortgages doesn't include borrowers with good credit who took out an unusually complex type of loan known as an option adjustable-rate mortgage.

• What's at Stake: Loan balances on many option ARMs are rising, even as home values are falling, a scenario that economists say is likely to lead to another spike in foreclosures. Because option ARMs are so complicated, the attorneys general of several states are starting to focus on option ARMs, which they believe were an inappropriate mortgage product for many borrowers.

• What's Next: Some economists call option ARMs "ticking time bombs" that could result in losses of $100 billion, on top of an estimated $400 billion in expected losses on subprime and other mortgages




The Bush administration is pushing its plan to help subprime borrowers whose loans are due to reset to higher interest rates next year. But left out of the mix are hundreds of thousands of borrowers with good credit who could face sharp increases in their payments.

These homeowners could be the next wave of trouble for the mortgage industry. They took out what are known as option adjustable-rate mortgages, or option ARMs, which give borrowers a choice about how much to pay back each month. If they choose to make only the minimum payment on a regular basis, their loan balance can actually rise.

That is particularly a problem when home prices are falling. Borrowers who get in too far over their heads may not be able to refinance their loans or sell their houses for enough money to pay the loans back. The result, some economists say, may be another spike in foreclosures.

In a report issued last week, Merrill Lynch economists called option ARMs "ticking time bombs" that will start "ticking louder next year." Merrill estimates that losses on option ARMs could total $100 billion, on top of an estimated $400 billion in losses on subprime and other mortgages.

Option ARMs generally carry a low introductory rate -- in some cases as low as 1% -- and often have high prepayment penalties that make it expensive to refinance. With lending standards getting tighter, refinancing may be impossible in any case.

Sheila Bair, the chairman of the Federal Deposit Insurance Corp. who has been outspoken about the need for banks to modify large numbers of loans, says option ARMs don't lend themselves to the kind of streamlined modification program recently announced for subprime loans -- yet many of these borrowers also are in financial distress. "We're seeing problems now, and there are going to be more problems," Ms. Bair says.

The attorneys general of several states are also starting to focus on option ARMs. "It is a fundamentally unfair product for most borrowers," says Iowa Attorney General Tom Miller.

Option ARMs exploded in popularity during the housing boom as borrowers were attracted to the flexible terms and low teaser rates. Some $255 billion of option ARMs were originated in 2006, according to Inside Mortgage Finance, up from $145 billion two years earlier.

A small number of borrowers with option ARMs are already facing resets that require them to make payments covering interest as well as some principal. The numbers are set to rise sharply: Nearly $156 billion in option ARMs will face payment resets between 2008 and the second quarter of 2012, according to Lehman Brothers estimates, with resets peaking in 2010 and 2011. For more than $90 billion of those loans, borrowers would owe as much as their home is worth or more, according to Lehman, which assumed that home prices will fall 6% both in 2008 and 2009.

Of course, pressure on borrowers could decrease if the housing market rebounds. The Lehman analysis looked at loans packaged into securities and held in bank portfolios.

At Consumer Credit Counseling Service of San Francisco, about 25% of calls involving adjustable-rate mortgages are from borrowers with option ARMs. About half of the callers, says Erica Sandberg, a spokeswoman for the group, "went into this situation with their eyes wide open," but thought they would be able to refinance before their monthly payments became unaffordable. "The other half are claiming that they did not understand at all what they were getting into," she says.

Jirina Koy, a data operator, and her husband, Savane, who is disabled, took out an option ARM in 2005 when they refinanced the mortgage on their 1,200-square-foot home in Stockton, Calif., pulling out about $60,000 in cash. Ms. Koy says she didn't understand the terms of the loan, which carried a prepayment penalty of more than $12,000.

Refinancing is no longer an option. The balance on the Koys' loan has climbed to $357,000 from $336,000, while the value of their home has dropped to $250,000 or less. The minimum payment on the loan has also climbed, to $1,690 from $1,460.

Countrywide Financial Corp., Ms. Koy's lender, has offered to freeze the interest rate on her loan at 5.25%, down from its current 8.5%, while requiring her to make payments of principal and interest. That would boost the Koys' monthly payment by about $375. Acorn Housing Inc., a nonprofit housing counselor working with Ms. Koy, has asked Countrywide to reduce the loan balance to the original amount to make payments more manageable.

Countrywide says it won't waive the increase in the loan balance. "Based on the financial information we received from the Koys, we believe that the monthly payment would be affordable," a Countrywide spokeswoman says.

Steve Bailey, a senior managing director at Countrywide, said the lender will often modify loans or consider waiving prepayment penalties for people experiencing financial hardship, and for those who discover soon after taking out the loan that it wasn't what they expected.

Acorn Housing says it is seeing calls from borrowers with option ARMs who are from "all walks of life," says Michael Shea, the group's executive director. "What breaks our heart is to see the seniors put in these things [who are] on fixed incomes."

Clifton C. Matthews Sr., a 65-year-old semiretired architect who lives in Fort Washington, Md., was shopping in a local grocery store this year when a mortgage broker approached him about refinancing. Mr. Matthews, who says he was rushed through the closing, wound up with a $300,000 option ARM with a prepayment penalty. "I had a better loan before the refinance," Mr. Matthews says.

He says he is making his monthly payments, but those payments don't even cover the full interest owed. It's like the money "is going into a bag with a hole in it," he says. "I'm extremely nervous." He is working with the National Community Reinvestment Coalition, a nonprofit that works on fair-housing issues, to modify his loan. NCRC has asked the lender, IndyMac Bancorp Inc., to put Mr. Matthews into an interest-only loan that carries a fixed rate for the first five years.

An IndyMac spokesman says the company can't comment on individual customer situations, but adds that the company is working with Mr. Matthews. When customers call the company, "we are very willing to talk with them and work with them to come up with a satisfactory solution for all," he says.

The complaints about option ARMs have drawn the attention of government officials, who believe that borrowers may have been misled about the terms of these loans. Colorado Attorney General John Suthers this year subpoenaed 13 mortgage companies as part of an investigation of option ARM sales practices. He says he will soon sign consent decrees with a number of these firms and take civil-enforcement actions against others. "What was advertised was a lot different from the deal people actually signed up for," Mr. Suthers says.

Illinois Attorney General Lisa Madigan has subpoenaed Countrywide Financial's mortgage-lending arm as part of an investigation that started with a look into a local mortgage broker that had put many borrowers into option ARMs. Option ARMs are "a key focus" of the office's scrutiny of the mortgage industry, says Deborah Hagan, chief of the Consumer Protection Division. Countrywide says it is cooperating with the attorney general.

Taxes Are Reassessed in Housing Slump as Prices Drop

New York Times, December 23, 2007
By JENNIFER STEINHAUER

LOS ANGELES — Home owners across the nation are looking to county governments to reassess the values of their homes in the face of flattening and falling prices that have befallen scores of markets. Downward assessments, done at the request of homeowners or pre-emptively by government, appear to be most pronounced in areas where the housing market was exploding just a few years ago, or where economic conditions are poorest.

In Maricopa County, the largest in Arizona, a “large percentage” of the one million single-family home owners will see their houses reassessed at lower rates in February, said Keith Russell, the county assessor. In Phoenix, the largest city in the county, housing prices fell 8.8 percent over the last year, according to the S&P/Case-Shiller index, which monitors the residential housing market.

Among the roughly 200,000 parcels in Lucas County, Ohio, 7,083 owners requested reassessments in 2007, about 10 times the yearly average, said Anita Lopez, the assessor, who ran for office on a campaign to adjust assessments.

“Citizens know the market is slow if not declining,” Ms. Lopez said, “and they are informed and feel comfortable in challenging their county values. People here can’t sell their homes, they have less money, and they don’t understand why the government is asking for more money in a declining housing market.”

Local governments, which rely heavily on property taxes, will have to find ways to replace lost revenue or face having to cut services, lay off staff members or delay projects. The possibility of those losses has alarmed officials in areas already facing large numbers of foreclosures and slumping sales, products, in part, of the mortgage credit crisis that has rippled through the country. [Sunday Business.]

“Government has been the beneficiary of increasing home prices,” said Relmond Van Daniker, the executive director of the Association of Government Accountants. “And now they are on the other side of that, and they will have to reduce expenses.”

While every state and local government has its own methods for assessing home values for tax purposes — some do it annually, some every five years, and everything in between — many counties are hearing from residents that they would like their homes reassessed, or have taken steps to bring the taxes down of their own volition.

While in some areas, a county or city is required to make whole any loss in revenues to schools, public education is a frequent beneficiary of property tax revenues. “They are obviously concerned,” Ms. Lopez said about her county’s school systems.

No one has aggregated the total number of counties reassessing home values, and many counties take at least a year to catch up to the marketplace. In some places where reassessments are rising, the numbers have yet to approach historical heights.

For example, in 2007 roughly 1,800 homeowners asked for reassessments in Los Angeles County, far above the average of about 500, yet far below the tens of thousands of homeowners in Los Angeles who looked for tax adjustments during some years of the downturn in the 1990s. But elected officials and property tax experts said that the numbers were notable and that they expected them to grow in 2008.

In San Bernardino County near Los Angeles, tens of thousands of owners of the 860,000 homes will have their assessments lowered in the coming year, said Bill Postmus, the assessor, rivaling the numbers during the California real estate crash of the 1990s.

“You should see more of this activity,” said Chris Hoene, director of policy and research at the National League of Cities. “It is mostly in areas most likely to be seeing some decline, like Southern California, Florida, and big cities in the Midwest,” rapid growth areas that are now seeing the other side of the curve.

The United States Conference of Mayors recently released a report showing that the value of taxable residential land had declined by $2.9 billion in California from 2005 to 2008 based on current tax rates, and by hundreds of millions of dollars in other major cities. “We are hearing a lot about this housing market change and its effect on city revenues every day,” Mr. Hoene said

Cities where home values have fallen the most are the obvious first place to look for residents clamoring for reassessments, but that is not always the case. Some states, like California, Michigan and Nevada, have statutory caps in property tax increases, which mean the market value of single family homes almost always exceeds the assessed tax values, except in a major downturn.

However, even in California, if a home buyer made his purchase during a market top in the last several years, he might be in the position of qualifying for lower assessed values. For instance, in Santa Clara County, where pricey Palo Alto and San Jose are located, 17,758 properties were reassessed downward for the 2007-2008 tax period, compared with the same period from 2000 to 2001, when the number was closer to 300.

“Obviously 2001 was the dot-com boom,” said Larry Stone, the Santa Clara assessor. “And the whole assessment role in my county was carried by a very hot residential market,” which has substantially cooled.

In his area, prices, and therefore values, remain strong in high end residential areas with great schools, Mr. Stone said. The coming reassessments are driven in large part in the lower and middle markets, especially the condo market, where the greatest part of the subprime lending problems have occurred.

Indeed, areas with high levels of foreclosures, vacant housing and a reduction in prices expect to see adjustments to the property taxes continue, which is bad news for local governments.

“Rising tax values are not usually a popular thing,” Mr. Hoene said , but homeowners tend to accept it, even begrudgingly, when they know the market value of their home is on the rise. “But the minute you think that your local government assessment practices are out of whack with what is happening in the market,” he said, “you will not accept it.”

Realtors Looking to Mid-2008 for Local Rebound

Arlington Sun Gazette, December 12, 2007
By BRIAN TROMPETER, Staff Writer

Despite stagnant home sales and a subprime mortgage crisis that won't go away, area real estate officials said they expect regional home sales to rebound beginning next summer.

“I remain optimistic about our region's future,” said Luis Lama, 2007 board chairman of the Northern Virginia Association of Realtors (NVAR). “It's a great time to buy, especially in Northern Virginia.”

Lama and other officials gave their views at a Dec. 11 luncheon at the National Press Club.

Northern Virginia housing sales are down 11.5 percent this year, and there is a nine-month supply of houses, Lama said.

While homes in McLean saw higher prices and fewer days on the market compared with last year, houses in Herndon had the opposite results, he said.

“Like politics, real estate is local,” said Mary Beth Coya, NVAR's vice president of public and government affairs. “Each neighborhood has its own DNA.”

The Washington area's economy, buoyed as always by spending of the federal government and its contractors, continues to outperform other regions nationwide, said John McClain, a senior fellow at George Mason University's Center for Regional Analysis.

Because Washington-area economic fundamentals are so sound, 2008 will be moderately better than this year, McClain said.

Housing sales will stay below historic, long-term levels, and inventories will remain above those averages, McClain said. Housing prices will remain flat at least through the spring, he said.

Foreclosures are up in the Washington area, but still below the national average, officials said. While foreclosures in Prince William and Loudoun counties are above the national rate of 84 per 10,000 housing units sold, rates in close-in areas such as Arlington, Fairfax and Alexandria are considerably lower.

Foreclosures in Detroit and Miami are more than three times the national average, McClain said.

McClain introduced a new statistic, the “kick-out rate,” to his presentation this year. While only 4 percent of home buyers in 2004 and 2005 left their deposits and walked away from a deal, that rate peaked at nearly 66 percent this August, he said.

President Bush's plan to freeze some adjustable-rate mortgages for five years is not a cure-all for the subprime lending crisis, but it's a step in the right direction, they said.

Real estate association leaders defended Realtors' actions during the heyday of subprime loans, saying many professionals - especially lenders are involved in real estate transactions. Buyers also must share in the blame, they said.

“Consumers knew what they were doing,” Lama said. “They're claiming ignorance at this point.”

Home Prices Rise in D.C., Fall in One-Third of U.S. Cities

Bloomberg News, November 22, 2007
By Kathleen M. Howley

Home prices fell in one-third of U.S. cities last quarter as tighter lending standards caused a 14 percent decline in sales nationwide.

Prices declined in 54 of 150 areas in the third quarter, with the median sales price falling 2 percent nationwide, the National Association of Realtors said yesterday. Home sales, including single-family properties and condominiums, fell to an annualized 5.42 million units from 6.29 million units a year ago.

In the Washington area, the median price in the quarter was $438,000, up 1.3 percent from $432,200 a year earlier.

Declines in sales and prices signal that the slump that began in 2006 may extend into a third year, matching the slowdown 18 years ago that ended in the 1991 recession.

"Prices have to continue to fall to deplete a bloated inventory," said Richard Yamarone, chief economist at Argus Research in New York. "The only surprise in housing would be if we didn't see the slump extend into 2008."

Ninety-three U.S. cities had price gains, and three were unchanged from a year ago, the report said.

The U.S. median home price, which is the point at which half the homes sold for more and half for less, was $220,800, down from $225,300, the association said. In the second quarter, prices fell in 50 of 149 cities and the national median dipped 1.5 percent.

Palm Bay, Fla., had the biggest decline, falling 12.4 percent. Prices fell in Sacramento by 10.5 percent, and Sarasota, Fla., dropped 10.4 percent.

The largest price increase was in Bismarck, N.D., up 15.1 percent, followed by Salt Lake City, 14.1 percent, and Yakima, Wash., 13.6 percent.

Home sales fell in all the states covered by the report and the District. Data were not available for New Hampshire and Idaho.

Nevada led the sales drop, at 35 percent. Florida was second, at 32 percent and Arizona, 31 percent.

The U.S. residential market is faltering as rising foreclosures among subprime borrowers have pushed down prices and led to a record supply of unsold homes. Foreclosures among homeowners with subprime adjustable-rate mortgages have reached a five-year high.

What Really Happened ??

I thought this graphic from the NYT last month was spot-on in providing lucid and sober explication of the subprime mortgage market issue.





This graphical image below corresponds to the NYT article from September 23rd:

They Cried Wolf. They Were Right.

New York Times, September 23, 2007
The Nation - Week in Review
By VIKAS BAJAJ

In May of 2004, Dean Baker, an economist in Washington who had been warning about excesses in the housing market, sold his two-bedroom condo after concluding that the market had lost its moorings from reality.

In a way, he was two years too early. Had he waited until May 2006 when home prices in the Washington area peaked, his home would likely have appreciated by roughly 38 percent from its 2004 value, according to an index that tracks home prices in the metropolitan region.

The case of Mr. Baker, who now happily rents a similar condominium a few blocks away, serves as a useful illustration about the perils of calling and timing financial bubbles. It may be easy to spot an out-of-control market, as Mr. Baker and others did, but quite another to predict when one has truly gotten out of hand.

In a replay of the years before the tech-stock bubble burst in 2000, housing market skeptics have spent much of this decade being tarred as the boys who cried wolf. Their predictions were proved wrong year after year as people continued to bid up the price of condos in Miami and new houses in suburban Phoenix.

Academics and economists like Mr. Baker came across as gloomy sourpusses who did not want Americans to have fun and grow rich by flipping second homes on the New Jersey or Florida coasts.

“The naysayers simply look silly at the end of the bubble,” said Mark Zandi, chief economist for Moody’s Economy.com who was among the experts raising questions about the underpinnings of the housing boom. “They are completely discounted and discredited because they have been saying things are askew for a year or two. It’s when the naysayers’ views have been completely discarded and discredited that the bubble inflates to its apex.”

Mr. Baker said he knew he would never be able to call the top of the real estate market precisely, either as a home seller or an economist. He noted that he was also too early in calling the tech bubble in 1997. “Sure it could go somewhat higher,” he said of the real estate market. But, he added, “I felt the need to talk about it, and do anything I could to bring attention to it.”

Some in the real estate industry say the early cries of bubble should be called to account on the grounds of intellectual fairness. If the boosters have to acknowledge they were wrong when they provided justifications for prices that were, well, unjustifiable, then the doubters should also own up to the fact that they were too negative, too early.

“Even the people that were talking about booms busting, my goodness they were talking about it in 2001 and 2002,” said David Lereah, the former chief economist with the National Association of Realtors. “And they were wrong for four years and they only became right at the end of 2004.” He and his former employer had been criticized for the optimistic forecasts they made during the boom.

Economists, even the famous ones, mostly see the to and fro between the housing bulls and bears as an academic debate. Their influence over markets and the behavior of consumers, they say, was and is at best marginal.

Robert J. Shiller, the Yale economist whose book “Irrational Exuberance” became required reading for bubble watchers, has said that there is a long tradition of naysaying in the face of soaring markets to little effect.

Newspapers during the boom in the 1990s and in the early years of this decade expressed warnings about the housing market, along with more upbeat sentiments. But the critical voices often did not register above the din of the frenzied market.

“You got some of us sitting there in a distance saying that this is a bubble, we don’t know when its going to end,” said Christopher F. Thornberg, an independent economist who is based in Los Angeles. “And then you have mortgage brokers and real estate agents who are much closer to the buyer who are whispering in their ear that, well, yeah, there are some markets that are out of line but not this neighborhood.”

Almost everyone would agree that of far greater import to the timing and performance of bubbles are interest rates and the availability of credit. Both are set by the market, but regulators at the Federal Reserve exert significant influence over them. The main discussion now, with the benefit of hindsight, is whether the central bank should have taken a more muscular approach in regulating mortgage lending and raised interest rates sooner. (After the tech bubble burst, the Fed cut its benchmark rate sharply and left it at 1 percent from the summer of 2003 to the summer of 2004.)

In recent interviews, Alan Greenspan, the former Fed chairman, has argued he did not realize the extent of reckless lending practices in 2005 and 2006. He also defended the central bank’s decision to keep short-term interest rates low early in this decade to avert the risk of deflation.

Last week, the Fed cut rates sharply to ease conditions in the credit market, kindling some fears of inflation.

“We have had two bubbles in the last 10 years,” noted Allen L. Sinai, the president and chief economist at Decision Economics, a consulting firm based in New York. “The only way I would say it won’t happen — and this is arguable — is for the central bank to do something about it before it gets too far, and right now the central bank’s religion is not to interfere.”

Fair Game - Home Loans: A Nightmare Grows Darker

New York Times, April 8, 2007
By GRETCHEN MORGENSON

Snazzy and newfangled mortgage loans, like those with low initial rates of interest or extended terms of 40 or 50 years, helped to drive homeownership rates in the United States from around 64 percent two decades ago to a peak of almost 70 percent in recent years. Called “affordability loans,” these new kinds of mortgages have gone mostly to first-time home buyers and borrowers with tarnished credit or spotty employment histories.

Now, however, with home foreclosures and mortgage delinquencies soaring, it is becoming clear that the innovative loans that lenders championed — in what the industry called the “democratization of credit” — are turning the American dream of homeownership into a nightmare for many borrowers.

Even though these subprime mortgages account for only one-eighth of total mortgages outstanding, they represent 60 percent of foreclosures, according to the Center for Responsible Lending, a nonprofit and nonpartisan research organization in Durham, N.C. This is not surprising, since the features common to subprime mortgages actually increase the risk of foreclosure, mortgage experts say.

“The subprime market should be an additional and welcome opening of the credit markets for borrowers who have previously been shut out,” said Michael D. Calhoun, president of the center. “But it has been allowed and even encouraged to develop in a way that we think will result in a net loss of homeownership.”

For years, the homeownership rate in the United States ranged from 60 to 65 percent of the total population. But in 1995, President Bill Clinton directed Henry G. Cisneros, then the secretary of the Department of Housing and Urban Development, to work with the housing industry, nonprofit groups and other government officials to develop the National Homeownership Strategy, “an unprecedented public-private partnership to increase homeownership to a record-high level over the next six years,” as described in an Urban Policy Brief in August of that year.

Citing studies showing that high rates of homeownership generate financial wealth for borrowers, reduce crime and stimulate economic growth, the group agreed to a list of initiatives. One was to make financing arrangements for borrowers more affordable and flexible.

Lenders were off to the races. They created slick new mortgage products with low “teaser” interest rates that ratcheted up significantly after two years or so. They devised loans that required only the payment of interest, not principal as well. They extended mortgages to 50-year terms to reduce monthly payments.

The partnership succeeded. In 2004, the homeownership rate reached 69.2 percent, a record.

As recently as January, even as delinquencies among subprime mortgages had risen, the Mortgage Bankers Association, a lobbying group, praised the role that the loans played in bolstering homeownership. “The availability of nontraditional mortgage products is a positive development because these products increase the financing choices available to borrowers,” the group said in a report.

But according to experts on lending practices, the products devised to propel homeownership did so only as long as housing prices kept rising. Now that prices have started to fall, these products look instead like a transfer of wealth to mortgage lenders from those who can least afford it: subprime borrowers.

“It’s not good to put somebody into a home if they can only afford it when home prices go up,” said Thomas A. Lawler, founder of Lawler Economic and Housing Consulting Daily, a newsletter. “Now that prices are falling, the folks who made enormous amounts of money lending in 2003, 2004 and 2005 are giving some of it back. But they aren’t giving it back to the poor borrowers.”

Comparing prime and subprime loans shows how different the two types can be, Mr. Lawler said.

Loans made to borrowers with good credit histories, for example, rarely generate prepayment penalties when the loans are refinanced. But 70 percent of subprime loans have such penalties, he said. And they are hefty — typically involving six months’ worth of interest.

On a $250,000 loan with a current interest rate of around 8 percent, a prepayment penalty would be $10,000. Because many subprime borrowers do not have that kind of money lying around, lenders typically offer to roll the amount into the new loan offered in a refinancing. Tacking on such penalties to new loans makes it even harder for borrowers to pay them off.

Another characteristic of subprime loans, Mr. Lawler said, is that they rarely have escrow accounts. These accounts are established to collect money over long periods to cover real estate taxes and insurance.

“For the riskiest borrowers you take away a feature of a mortgage that is designed to force savings — why?” he asked.

CRITICS point to two possible reasons: without property taxes added to the mix, the mortgage payments look lower than they otherwise would. In addition, the absence of an escrow account in a subprime loan often means a big tax bill that cannot be paid unless the borrower undergoes another expensive financing, with all those fees attached.

Finally, subprime loans with low initial rates that reset at much higher rates almost force refinancings, generating fees for lenders but often putting borrowers in a hole. Now, for instance, subprime loans that reset after two years have interest rates based on the London Interbank Offered Rate of interest, or Libor, which now stands at about 5 percent, plus 6 percentage points.

It is almost impossible for subprime borrowers to get lower rates on their mortgages given such reset rates, Mr. Lawler said. “A subprime A.R.M. borrower,” he said, one with an adjustable-rate mortgage “with an initial rate of 8 percent for the first two years would face an upward adjustment on her mortgage unless the Fed cut its short-term rate target to 2 percent.

“These loans are designed to make borrowers refinance and keep the loan production mill churning,” Mr. Lawler said.

Mr. Calhoun of the Center for Responsible Lending said that few borrowers, subprime or not, would be able to survive a reset shock that increased their monthly payments by as much as 50 percent. Ditto for serial refinancing deals that generate fees of 6 to 10 percent of the total loan value each time.

“Probably the majority of homeowners who have been in their house for a while could not afford payments on those loans,” he said.

While subprime borrowers try to climb out of the holes they fell into, those who sold and packaged the loans are laughing all the way to the bank. “Folks who ran these companies are going to walk away not just unscathed but extraordinarily well rewarded,” Mr. Calhoun said.

Josh Rosner, a managing director at Graham Fisher, an investment research firm in New York and an expert on mortgage securities, says he has watched with interest and exasperation as the same groups of people who pushed for higher homeownership rates now recommend ill-conceived bailouts. He also believes that the current system creates incentives for people to strip equity from their homes rather than use their mortgages as a forced savings device.

“If you’re trying to do social engineering, it should be to put people in homes so they can build up equity as a cushion for economic shock,” Mr. Rosner said. “But unless they have significant equity, they are not homeowners; they are renters. We’ve created a society where we love the term homeownership, yet we can’t allow people to understand that they are being taken advantage of by the term.”

High-Risk Loans Enable Buyers to Obtain, Not Afford Homes

Guest perspective: An insider's view on the subprime mess
Inman News, March 29, 2007
By Steven Krystofiak

Since the turn of the century we have seen a dramatic rise in use of neo-affordability products. Do these products really make homes more affordable? They without a doubt make the monthly payments temporarily lower, but affordable? Let's take a closer look.

I want to take a step back and explain the products that I am talking about. They are the often-used interest-only, negatively amortized, no-money-down and extremely short-termed fixed loans, i.e., the 2/28s and 3/27s. The last products on the previous list are usually associated with equally long stiff prepayment penalties. The close cousin of the 2/28s is the 5-year fixed mortgage that I choose not to include on this list in the interest of narrowing today's article.

If people want to buy a home or condo with the intent of living in it and then sell it just two or three years later then maybe a 3-year fixed mortgage is right for them. Before making that purchase, the potential home buyer should be guided to plug in the numbers for their situation with the hardly used and dusty old "rent vs. buy calculator." With the large gap between current rents and PITI payments coupled with expected appreciation rates for the upcoming years, buying does not make sense in most markets if the holding period is less than five years. Blasphemy, I know, but it is what the calculator says.

It is easy to throw out rent vs. buy calculators when home prices are appreciating 10-20 percent a year. With normal market conditions appearing throughout the U.S., and possible depreciation around the corner, a crash course for this old hardware should be a must for anyone in the industry specifically for any potential home buyer.

Interest-only loans have become the new standard in many real estate markets. If you want to compete in the home-buying process with equally qualified peers then you must use an interest-only loan. This mentality creates more debt and is bad for local markets. It has both caused and allowed people to purchase higher priced homes.

At first, this sounds great but you must realize that a home buyer's main focus is the monthly payment. This equates to people buying the home down the street for a monthly price tag, not a $400,000 lump sum. If interest-only loans never reared their dirty heads into the market, the same home down the street would still be a $2,200-a-month home, but what would be nice is that the balance of the loan would be going down and Americans would be much less in debt.

The above example's principles can be brought over to the newer and, in some markets, more popular negatively amortized loans. Hopefully in the future, negatively amortized loans do not become the standard as their counterpart, the interest-only loan, did. Otherwise American debt levels will never stop growing.

The expression, "Don't hate the player, hate the game," can be used to describe interest-only loans and negatively amortized loans. You might not like that you are using it, but to compete with others playing the game of real estate you must take on the risk. This practice will keep your mortgage balance unchanged, or in some cases cause it to grow higher, month after month, leaving the answer to "How long can we keep this up?" very uncertain.

One-hundred-percent financing puts the financial risk of the unknown future of home-price appreciation on the shoulders of the bank. Not the consumer. This is a trait I look for when trying to label something as an "affordability" and "consumer-friendly" product.

If home prices decline, we can see a newly informed consumer simply give up his home to foreclosure -- this option is great for the individual consumer. This would put less of a financial risk on a home buyer who would otherwise have needed to come up with $100,000 of his own money to purchase a $500,000 home. For many consumers, simply damaging their credit scores instead of losing years of savings could be an easier weight to bear. But if everyone's neighbor begins to do the same thing, it could take down the local economy. This causes me to think that 100 percent financing as a whole for the economy is a very dangerous thing.

Answering the original question: Are these affordability products? I don't think so. A proper name for these products is obtain-ability products. That is what the loan is allowing the borrower to do -- obtain a home. These products depend on and almost require large increases in household income along with home-price appreciation. These obscure guesses and assumptions should not be given so much weight when contemplating such important life-altering purchases.

Homes should stay homes. If they go up in value or down in value they remain a place to rest your head and raise a family. With a proper loan for a home the average household should be able to weather any downturn in the market. As recent history is showing us these proper loans were not adopted by many home buyers. This leaves future predictions for the real estate market dependant upon the success of the guesses and assumptions that recent home buyers blindly believed when obtaining loans.

Steven Krystofiak is a mortgage broker based in California. He is president of the Mortgage Broker Association for Responsible Lending, an advocacy group.

The Coming Mortgage Bailout

San Francisco Chronicle, March 20, 2007
By Sean Olender

Daily reports for a month now inform us of the "surprise" that subprime borrowers are delinquent on payments. But everyone in the business has expected it since 2004. What happened from 2004 to 2006 in the mortgage markets can be fairly described as a scam. And you are about to pay for it.

Here's how it worked.

In late 2003, Wall Street investment banks realized that with interest rates so low they could make a bundle selling shares in baskets of mortgage loans. Investors craved higher returns in a low-interest-rate environment and welcomed this investment vehicle. Then-Federal Reserve Chief Alan Greenspan encouraged this scenario by keeping the federal funds rate at a 45-year-low of 1 percent. In a Feb. 23, 2004, speech to the Mortgage Bankers Association, he noted that the common man had long suffered under his fixed-rate mortgage and needed help to something a bit more exotic. This unusual advice is a clear example of a tacit promise that if investors are reckless and things go bad, the Federal Reserve will bail them out.

As a result, mortgage banks no longer worried about a borrower's ability to repay because they didn't hold the note. Instead, you own it. You own it because Wall Street sliced and diced these loans into "tranches" of mortgage bonds containing different risk classes and then sold them to your pension fund, retirement investments -- even your insurance company.

Investors priced risk based on recent experience. As home prices rose rapidly, delinquencies were unknown. A hot market rescues everyone because investors seeking deals buy lists of delinquent borrowers, and then stop by their homes to explain how they'll be rescued, for a small profit, of course.

Bankers, real estate agents, appraisers and mortgage brokers had an incentive to keep the game going. Out-of-work computer programmers, waiters, even a security guard in my old office building, became real estate agents or mortgage brokers. Some went from $10-an-hour jobs to a $200,000-a-year gig of giving away money to anyone with a pulse.

I've read the mortgage documents of illegal immigrants. One I knew worked as a restaurant-delivery driver making $42,000 a year and held a $650,000 interest-only mortgage on a home bought with zero down. Bankers call such loans "Alt A" -- alternative documentation and a grade "A" borrower. This driver might have good credit because he paid his $300 car payment on time, but that doesn't mean he will pay his $4,000 mortgage payment when his rate resets. For his "alternative" documentation, he could have written on his loan application that he makes $200,000 a year.

What made home prices rise so fast? If credit liquidity defines the market because few people write a check for a house, then loose lending drives up prices. Lenders and Congress complain, "We need these loans so people can afford the high prices." But the truth is the reverse -- it is loose lending that drives up prices. The purpose is to have homeowners take on big debts so that we become an income-generating investment. Rising home prices benefited banks, not ordinary Americans. When your home's price rises, other homes rose in price, too. The capital gains still make you unable to buy a house without a risky loan. Thus, you continue to live in the same house, too poor to buy a larger one without risky financing..

All but a handful of subprime and "Alt A" borrowers made no down payment. A few put down 5 percent to secure the loan. The law may protect many of these borrowers in California. If they walk away, the law bars lenders from going after their other assets.

There are two ways out of this: inflation or deflation. Either home prices drop until they return to their historical relationship to wages, or the price of everything except houses goes up as the Federal Reserve and Congress bail out "homeowners." The Federal Reserve can do it with its current chief's money-dropping helicopters, or Congress can do it by using our tax money to pay off the bad debts of investment banks while pretending to "bail out homeowners who will lose their homes!" Either way, we taxpayers lose and banks win.

U.S. Sen. Christopher Dodd, D-Conn., suggested that just less than $200 billion could rescue these poor "homeowners." But a bail out will amount to at least five times that when the Alt A market fails.

When your congressional representative says, "but we have to help him with your tax money because he's going to lose his house," remember: He doesn't own his house, the bank does. He didn't put any money down and if he walks away, he doesn't lose anything because he never had anything. He only had the obligation to make a monthly payment and the hope that in 30 or 40 or 50 years, he would "own" a home. For most of these borrowers, their house is worth less than when they bought it and they'd be better off walking away.

Would you like to teach investment bankers that they shouldn't package $650,000 zero down loans for people making $42,000 a year? Then let's tell the Federal Reserve and Congress that they cannot give them our tax money for a bailout.

On the Homefront: Pop Psychology

New York Times Magazine, March 18, 2007
By ROGER LOWENSTEIN

It has become common to refer to sharp escalations in asset prices as “bubbles,” and we know what bubbles do — they pop. There are people who think we have a bubble in real estate going, and no wonder. Prices have been going through the roof. Forget (for the moment) home prices. An office building in Allentown, Pa., just went for the kind of change you could formerly expect for Midtown Manhattan, and in Gotham itself, where $400 a square foot was until recently a kingly price, the $1,000 threshold has been broken. While this is interesting to anyone who owns an office building, I personally do not know any such people, although I am certain they must be very rich. I do, however, know a goodly number of homeowners, and every one of them seems to be wondering the same thing: Are we going over a cliff?

Since last year, when new home construction stopped in its tracks and the rate of home sales (in hot markets) dropped by a third, the experts, the real estate writers, the listing agents, have been listening very hard for that popping sound. Prices have eased — by a point or two in many markets, by as much as 5 percent in Boston. Prognosticators have forecast a recession, with banks up to their eyeballs in foreclosed mortgages and ordinary folk bailing out of their center-hall colonials.

Such alarmist sentiment is at odds with the conventional, and comforting, view: that real estate is “different” from other, purely financial markets, and that a house, in particular, is a more reliable investment than a dot-com stock. But is it?

The notion that we are on the cusp of a crash in housing in fact has its roots in the Nasdaq bust. Early in 2001, as the tech slide deepened, Alan Greenspan began to furiously lower short-term interest rates, eventually taking them to 1 percent. Presumably, that helped ease the recession. But housing prices began to surge. Robert Shiller, a Yale economist and critical observer of the housing market, says that home prices doubled between 2000 and 2006. On the coasts and in certain ostensibly desirable places to live (like Las Vegas), they did much better. Cheap money, courtesy of the Fed, was deemed responsible — even culpable. In many quarters, Greenspan was essentially accused of cheating the country out of the depression we deserved: instead of allowing the swooning Nasdaq to bring down the United States economy and punish us for our sins, he had rolled the tech bubble into a housing bubble and allowed the party to go on.

The causality is by no means proven (mortgage rates, after all, are influenced mostly by long-term interest rates, over which the Fed has no control). But we are getting ahead of ourselves. Just which factors determine housing prices — interest rates or psychology or maybe the price of aluminum siding — is a matter for debate. What is certain is that in 2006, housing prices topped and began heading south.

Many experts believe that prices will continue to fall but not “too much.” This is no reason for relief: economists generally do not predict crashes until they have happened. On the other side, the most forceful proponent of the bubble analogy is Shiller, who made his name by predicting that the stock market would crack. Shiller has been writing and speechifying that housing prices are due for a “huge” fall, possibly on the order of 50 percent. He and Karl Case, an economist at Wellesley College, have constructed indices of housing in 20 United States markets for the purpose of letting people bet on housing futures just as they do on soybeans or, as he put it, to “protect” themselves — presumably against the approaching apocalypse. (These housing futures began trading last May on the Chicago Mercantile Exchange.)

Shiller’s gloominess has been widely noted. He thinks we are under the spell of that familiar goblin, mass psychology. Lemming-like, people are buying homes merely because they expect that prices will rise. This certainly holds for speculators, like the manager of a rental-car agency at the Tampa airport who confessed to a customer (an economist) that he owned no fewer than 20 condominiums. And it explains some of the impulse to buy second homes, which are closer to being tradable assets than a primary residence is.

Shiller has been surveying ordinary homeowners, however, and he says that they, too, have fallen victim to irrationality, much as Internet investors did. He suggests that once reality sets in, prices could drop in a hurry, instead of slowly unwinding.

There is no doubt that most homeowners think they are living in an appreciating asset. The fact that people buy homes even though rentals are relatively cheap (in Boston, for example, rents have scarcely risen at all in the last decade) implies that buyers willingly pay for the privilege of ownership. But does this mean they are behaving irrationally?

Home prices do go up, although most people would be surprised at how slow the appreciation has been. According to the National Association of Realtors, housing prices traditionally rise two points faster than inflation, a relatively modest rate. And even in the past two decades, a period that includes the recent boom, anyone who owned a diversified portfolio of stocks handily outperformed American housing, even in markets like New York.

So how have so many Americans been able to convert their nests into (sizable) nest eggs? Most people who buy homes would not be able to tell you — but they have profited from it all the same.

The dirty little secret of home ownership is that it lets you play with other people’s money.

Say you want to purchase the median home (in California the cost would be about $565,000, but let’s take the United States median, which would run you $220,000). Typically, you would take perhaps $50,000 from savings as a down payment, borrow the balance and pay the monthly mortgage from your income.

But wait! Just before you close, a friendly real estate bear points out that you could rent the same house, or a similar one. Your monthly payment would go to the landlord, not the bank. And you could invest the $50,000 in stocks, which, with dividends, might appreciate at close to 10 percent a year, rather than the 5 percent or so you could expect from your house.

That would be a very dumb move. Suppose the stock market did rise 10 percent; after a year you would be up $5,000. Whereas the gain on your home would be 5 percent over the entire purchase price — or $11,000. Over 10 years the gap becomes huge — not to mention over 20 or 30 years.

This is the little guy’s (and also Donald Trump’s) trick for accumulating equity: leverage. In theory, there is no reason why you couldn’t also borrow to invest in stocks. The Federal Reserve puts limits on this sort of thing, however, and so do brokerages. If you borrow up to the max on your stock portfolio, you have to pay back losses as they occur, day by day. That makes leverage in stocks rather risky, as some folks discovered in 1929. Indeed, imagine what would happen if similar rules applied to mortgage holders: on any day that housing prices fell you would have to ante up more capital or forfeit your home. I would still be paying rent and so would you. But the home market evolved with fixed long-term financing (mortgages), and not
ill-advisedly. Real estate, for most people, is a long-term asset. Banks can lend you the money, within reasonable limits, and not have to sweat the nightly news.

This is the problem I have with the real-estate-equals-dot-com argument. Most homeowners buy to have a place to live. If prices fall, they react precisely unlike stock traders; rather than bail out, they stay put longer. Every share of Cisco may be for sale every day, but every house is not. Case, Shiller’s partner, tracked 628 home listings in the Boston area during 2006, as prices began to fall. After four months, the majority remained unsold, but the sellers lowered their asking prices by only 3 to 4 percent. While Case says this demonstrates that real estate is “stickier” than financial assets, Shiller says it proves that owners are delusional — unwilling to admit that real estate goes down as well as up.

And for sure, it does. The declines can be protracted, though usually not as steep as in financial markets. In the ’90s, for instance, the United States suffered a rolling housing recession from California to New England to the Mid-Atlantic. Los Angeles, which was hit the hardest, slumped for four years running, during which prices fell 25 percent.

Those serial recessions were caused by a string of economic problems, like defense industry closures, layoffs in the oil patch, a slump on Wall Street. The pullback that began in 2006 is different, and rather unusual. High prices stimulated a spree of home building and, ultimately, too much supply. That put pressure on prices.

A potentially alarming feature of this cycle is that more people stretched the the limits of what they could afford by taking out mortgages with adjustable rates. If interest rates were to rise, they could be in trouble. Even with rates having stayed, thus far, mercifully low, the rate of foreclosures is up slightly. And there is particular concern about the mortgages held by distressed buyers, so-called subprime loans.

But here’s an interesting fact: Foreclosures (and delinquencies) are lower in expensive markets, like Washington, D.C., and San Francisco, than they are elsewhere. Foreclosures are higher in Ohio and Michigan, where housing is cheaper but the economy has been hurting. By and large, people forfeit their homes not because they paid too much for them, but because they lost a job or suffered a similar setback, such as an illness. The bursting of the housing bubble thus seems less painful than would a good old-fashioned recession.

And how much of a bubble has it been?

It is hard to give a precise answer because, unlike the intrinsic value of a stock, or even an apartment building, that of a house is somewhat obscure. For a commercial property, the guiding metric is the income (rent) the property produces. So we can know whether the market for office buildings is zany. Equity Office Properties, the biggest publicly held office landlord in the United States, just agreed to a $39 billion buyout in which, tellingly, the buyer immediately (that day) resold $7 billion of its new trophies to a third party. This buy-and-flip has the whiff of speculation. And sure enough, over the last few years the price of prime office space has vaulted from roughly 12 times underlying rental incomes to 20 times.

Actually, the same sort of math holds for home markets. If you buy in Chevy Chase, Md., to rent out at a profit, forget it. Rental rates have not kept up. So if home prices were driven simply by their potential for income, everyone would sell right now.

But most people think of their house as living space, not rental property. As to what does drive home prices, the evidence is mixed. One answer is interest rates, and the drop in rates explains a lot of the recent boom. Another idea is incomes — what people can afford. Shiller’s theory is that, in a rational world, the price of a house would reflect the cost of replacing it — the cost of the raw materials and the labor. This was undoubtedly true when people lived in log cabins. But as choice developable land becomes scarcer, people become willing to pay more.

Anyway, you would think that home markets, being disconnected from fundamentals like rent, would be riskier than investment markets. And maybe they are. But the average public real estate investment trust (the stocks that own office buildings and such) has nearly tripled in five years. Among residential markets, not even Las Vegas has grown that fast.

In fact, people are always bolder in a market that is liquid — they figure they can get out — than with an asset for which selling requires a listing, a broker, a title search. Which is why the new Web sites like Zillow.com, on which people can check their home values as often as the price of Yahoo!, and even Shiller’s dream of an active futures market, may not be the welcome innovations they might seem. The stickiness of home markets, the lack of continuous liquidity and information, makes them different from stocks. Come the day when they are broadcasting your home value on CNBC, look out.

The Psychology of Pricing

New York Times, February 18, 2007
By TERI KARUSH ROGERS

In a market where buyers and sellers circle one another warily — each certain that he or she is being taken advantage of, no matter what the conclusion of a deal — the asking price of a property is rarely a straightforward reflection of comparable values. While comparables may be a starting point, the price at which a seller offers a property is often also based on wishful thinking, propaganda and ploy.

Buyers, in turn, parry by deconstructing the price. They aim not merely to assess a dwelling’s fair value but also to plumb a seller’s bottom line and vulnerabilities. How a price tracks with similar properties, how large and hasty any reduction is, and even how parsed or rounded a number is — all these are grist for concluding, rightly or not, whether a price is firm, desperate or a sign of painful dealings to come.

Or even a sign of delusion.

Despite whispering advice like courtiers into the ear of a monarch, brokers say some sellers have delusions of grandeur, stemming from a failure to grasp that what they want for their home has nothing to do with what it’s worth.

“Most of the time a seller will start to talk about what they want, and I will say, ‘I don’t care — don’t tell me,’ ” said Andrew M. Phillips, a senior vice president of Halstead Property, who teaches classes on pricing to Halstead agents. “I will do my analysis and come back to you with quantitative information.”

Even when the seller and broker reach an agreement on a home’s value, it is often wise to adjust the asking price downward, and not just because buyers like bargains.

An equally compelling reason to fly low is to adhere to psychological “break points.” These are dollar thresholds that buyers are most likely to select as the top amounts they are initially willing to spend or to use in Internet searches.

(“Initially” is the key. Once buyers set foot in a house or apartment and make an emotional connection to it, they are more vulnerable to budget creep, by which a $25,000 increase can be rationalized as a little bump of $30 or $40 a month in the mortgage.)

Major break points occur at $500,000, $1 million, $1.5 million and so forth. Smaller ones occur every $100,000 and then at every $20,000 or $25,000. So, for example, if the market value of an apartment is around $610,000, brokers generally advise sellers to round down to $600,000 so that the property lands within a buyer’s budgetarily myopic field of vision.

(For each type of apartment, there are other contextual break points. For example, Mr. Phillips noted, many studio buyers say they won’t look at anything over $300,000, while buyers of small one-bedrooms often hover below $500,000 and, for larger one-bedrooms, below $750,000.)

Many brokers tweak break points even further, counseling their clients to name a price just under a break point — for example, choosing $599,000 rather than $600,000. While buyers intellectually recognize the lack of meaningful difference, the lower amount is said to appeal on a less conscious level. (It works in reverse, too: buyers in a bidding war are often counseled to offer an amount just above the next break point.)

“I always joke with people that I’m a department store pricer, because I think that psychologically the first number has an impact,” said Frederick W. Peters, the president of Warburg Realty. “Even though it may seem cheesy, it actually works.”

As an example, Mr. Peters said that it’s wiser to price a property at $4.995 million if it’s worth $5 million. “People are influenced by the first number,” he said, adding, “It’s the 4 that influences the way they perceive the price. Also, if you stay under a threshold, you are going to be found by more computer searches.”

Barbara Fox, the president of Fox Residential Group, suggests pricing a property slightly below a threshold but a little higher — say, 5 percent — than its market value. “Everybody likes to be able to negotiate a little bit,” she said.

Some brokers reject the relatively common $99 or even 99-cent endings. They argue that marching to a more distinctive rhythm — like $487,500 instead of $499,000 — may not only sweep aside listing clutter but also telegraph that the asking price has been so carefully calculated as to be nonnegotiable, assuming that is the desired message.

Theoretically, with a carefully calculated figure, “the power would be much more on the seller’s side in terms of a negotiating position,” said Joan Sacks, an associate broker at Stribling & Associates, “whereas when you get to the more typical type of pricing, rounded numbers, like $995,000 or whatever, the instant perception is that this is just the first asking price.”

A highly specific price reduction that follows a rounded original listing price may lead some buyers to more strongly infer nonnegotiability, which may or may not be the seller’s intention. But affixing a truly oddball number can also send that message.

“I’ve seen prices like $433,779,” said James Lake, a vice president of Bellmarc Realty. “It indicates it’s going to be a difficult transaction from beginning to end.”

Ms. Sacks agreed. “That would be a real turnoff,” she said. “Then, you’re talking about someone who’s going to be arguing about leaving a curtain rod.”

Even if round numbers invite negotiation, proponents say, they are more effective than fractional ones because soliciting bids of any amount is exactly the point, leading to snowballing and competing interest. (An exception: dwellings valued around $1 million. In New York and other states where buyers of properties priced at $1 million and higher pay a “mansion tax” of 1 percent of the purchase price, a listing of $999,999 is a better choice than $1 million.)

Using round numbers that catapult a listing to the top of a break point may confer an additional, subtle psychological advantage merely by being the first to trot onto the stage after an online search.

“The higher up you show up in the search engines, the better off you seem,” said Ravi Dhar, a professor of marketing and management at Yale and the director of the Yale Center for Customer Insights. He pointed to studies of voting habits that demonstrate a slight advantage to the candidate listed highest on the ballot. “The first few options you see are a reference point, a starting point, and all of the advantages of that apartment loom larger.”

Still, sellers are almost certainly at a disadvantage if their price towers over comparable properties’. Prices of more than 5 percent over the market will probably have a chilling effect on buyers, said Confidence Stimpson, a senior vice president at Stribling.

Sellers who think that buyers will simply show up and make their best offer do not understand how the market works. “The challenge is getting buyers to see it in the first place, because their broker is doing the search at $5 million, and you’re at $5.2 million,” Mr. Peters said.

The buyers who do see it, meanwhile, will be disposed to make negative comparisons with better endowed dwellings in the same price range. Even apartment hunters who like the place may shy away from making an offer at what they believe is a fair, but lower, amount.

“They feel like they’ll be rejected,” said Mr. Lake, “and they don’t want to be financially embarrassed.”

Sellers who have priced too high can still salvage the situation. Brokers say they must act quickly — ideally within a few weeks — and make sure there are buyers around to take notice. (“In July, a one-bedroom price drop will get activity, but a Classic 6 probably won’t because families are away,” Mr. Phillips said.)

Second, to be effective, the lower price must tempt a whole new group of buyers, which means slimming down to at least the next break point.

“Something dropping from $949,000 to $899,000 will suddenly show up on someone’s radar,” said Lisa Strobing, a Bellmarc executive vice president who teaches classes on pricing to agents.

For sellers already hovering just above a break point, the reduction can be small though psychologically significant, like going from $2.01 million to $1.95 million. But in general, Ms. Fox said, “small reductions are a waste of time.” She recommended whittling down by 5 to 10 percent, or more depending on the situation.

Of course, Mr. Phillips said: “A good broker will interpret certain things if a property’s been around for a month at $1.5 million, and then dropped by $100,000. If another couple of weeks go by and there’s no action, you will know a little bit of negotiation is possible there.”

Still, proper pruning can elicit a swift reaction.

Last February, Wendy Maitland, a vice president at the Corcoran Group, listed a client’s SoHo loft for $1.695 million, because her client “really wanted room to negotiate it.” The one-bedroom, two-bathroom co-op, which was newly renovated, languished for six months until the seller, motivated by a job transfer to London, dropped the price by $200,000, to $1.495 million. It went into contract for $1.48 million in October, less than two weeks after the reduction.

“In that case, it was a dramatic price drop because I didn’t want to drop it little by little,” Ms. Maitland explained. “It’s much more effective to do a one-time significant price correction than to drop something in dribs and drabs. It ends up staying on the market for too long and can become somewhat of a white elephant even if there’s nothing wrong with it at all.”

But problems can’t always be cured by price cuts alone.

Charlie Summers, a senior associate broker at Bellmarc, had a one-bedroom co-op in the Gramercy Park area listed last May at $499,000. “People looked at it as an overgrown studio, and we just couldn’t sell it,” he explained. Over the next six months, the sellers, Stacy Jessup, a 33-year-old accountant, and her husband, Cooper, a 33-year-old business analyst, dropped the price to $479,000 and then to $450,000, their bottom line all along. But they worried that buyers would bide their time waiting for further reductions. They knew from looking that that could happen.

“Sometimes you watch a place, and you see the price drop, and you think, ‘I’m not even going to look at it yet,’ ” Mrs. Jessup said.

Their concern seemed justified. “We still were getting nothing but nonserious offers,” Mr. Summers said. “People would smell blood, a stale listing and a desperate seller, and put in lowball offers like $360,000, $370,000.”

By December, with their first baby expected any day, the Jessups dropped the price to $399,000 and issued a public ultimatum with their listing: if their apartment didn’t sell by Dec. 20, they would take it off the market altogether.

“We were serious,” Mr. Jessup said. “We weren’t going to risk bringing all sorts of strange germs into an apartment with our baby there.”

The final two open houses, spaced two days apart, drew a total of 55 people, versus the meager turnout of 5 or 10 the previous showings had drawn.

“People could see it was obviously attracting a lot of attention, and their brokers were telling them it was underpriced so they should come in over the ask,” Mr. Summers said. “By that Wednesday I had collected six prequalified offers.” The apartment is in contract for substantially over the $399,000 asking price, and the Jessups, now the parents of a son, are house hunting on Long Island.

Like the Jessups, other sellers agonize that rather than whipping up buyers’ interest, cutting the price will dim a property’s luster and make them look desperate.

Professor Dhar suggested that some anxiety may be warranted.

“If we start getting a good deal on something, we always think, ‘Is there something wrong there?’ ” he explained. “It makes you look at the apartment through a more critical eye and notice the deficiencies, like buying products on sale in the marketplace.”

On the other hand, he said, “if you give people a reason why you’re dropping a price, then psychologically they interpret it differently.” Sellers could neutralize a buyer’s negative reaction, he suggested, by explaining that they were moving to another state.

As for brokers, many argue that seeming eager to sell — even if you aren’t — is a canny strategy.

“There’s always new infusions of people into the market, and it’s not like you’re soiled goods,” said Neil Binder, a principal in Bellmarc. “It would be good to let buyers perceive that you’re desperate so that they say, ‘Let’s run in and make a bid.’ I want to get a lot of people in there to develop a crescendo of activity and create a bidding war.”

Price reductions also work by making buyers feel more in control.

If, for example, an apartment is not drawing offers at $450,000, Mr. Summers said, then as a buyer, “you’re afraid to put in an offer for $410,000, possibly because you don’t see anyone else making offers, and you’re afraid you’re overpaying even at that price.”

Mortgage Defaults Spread, Snagging More Borrowers

The Wall Street Journal Online
By Ruth Simon and James R. Hagerty

The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.

The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.

Refinancing Adjustable-Rate Loans Becomes Harder for Borrowers

Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble. Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. "Our assessment is that there's not much indication that subprime issues have spread into the broader mortgage market," Mr. Bernanke said. To be sure, defaults have remained very low in the prime market -- and despite the uptick in bad loans, the problems in the Alt-A sector aren't as severe as those that have roiled the subprime market.

Some 2.4% of Alt-A loans are at least 60 days past due, according to UBS, which looked at mortgages that were packaged into securities and sold to investors. That is well below the 10.5% delinquency rate for subprime mortgages. (During the housing boom, delinquencies were low for all types of loans because borrowers who wound up in trouble could refinance or sell.)

Some borrowers who took out Alt-A loans in recent years are starting to feel the strain. Johnny and Shirley Johnson, retirees in Cleveland, took out an option ARM when they refinanced their $92,700 mortgage in July 2005. The loan carried a 3.5% introductory rate that began moving upward a few months later. The couple, who live on a fixed income, are currently making the minimum payment on their loan. But they are afraid they won't be able to keep up with their loan and other debts once their monthly mortgage payment adjusts upward later this year. "We don't want to lose our home," says Ms. Johnson. The couple is working with Acorn Housing Corp., a nonprofit group that provides housing counseling, in an effort to refinance into a 30-year fixed-rate mortgage. Though the monthly payment would be higher, the new loan would protect them against future increases.

Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. "We have clients with 720-plus credit scores, and they are in awful products," says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says.

Thomas Gorman, a bankruptcy attorney in Alexandria, Va., says he is seeing more financially strapped borrowers who "probably bought more house than they could afford and then took on more credit-card debt" to furnish the house and pay for the move. When the housing market cooled, they were "caught in the middle," unable to sell their home or refinance and make their debt load more manageable. Lenders are also tightening their standards. At a meeting with investors last week, IndyMac Bancorp Inc., the nation's largest Alt-A lender, said it had raised the minimum credit score at which borrowers could finance 100% of a home's value and took a number of other steps to tighten lending guidelines.

This week Lehman Brothers Holdings Inc.'s Aurora Loan Services unit raised the minimum credit score and reduced the maximum amount homeowners could borrower without documenting their income and assets. Impac Mortgage Holdings Inc., which specializes in Alt-A loans, said recently that it had tightened its lending standards 17 times last year. The company cut back on riskier loans and began relying more on analytical tools to verify a borrower's income and creditworthiness.

Other lenders were quick to scoop up many of those loans, but now they are also pulling back, says Impac President Bill Ashmore. Lou Barnes, a mortgage banker in Boulder, Colo., says a client with a good credit score was turned down this week for a mortgage to buy an investment property with a small down payment and no documentation. That same borrower was approved for a "nearly identical" loan in August and November, he says. Still, Mr. Barnes calls the tightening "modest." Alt-A lenders are "nibbling at the edges," he says.

The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan's early years, with 3.71% of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets. As delinquencies rise, some investors who bought lower-rated securities backed by these mortgages are likely to face losses, according to Mr. Liu of UBS. While defaults are expected to be lower than in the subprime sector, so are the reserves set aside to cushion bond investors against such losses. Defaults are much lower for option ARMs. But the problems with these loans could be "backloaded," says Mr. Liu, because borrowers with these loans are still making the minimum payment.

Glenn Costello, a managing director at Fitch Ratings Inc. in New York, expects the foreclosure rate for Alt-A loans to ultimately be only 10% to 20% of the rate for subprime borrowers. Yet investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.

Refinance to Cover Card Debt?

Washington Times, January 26, 2007
By Henry Savage

Q: I have a $275,000 mortgage with a fixed rate of 6 percent. I also have about $35,000 in credit card debt that I used to purchase a time share. Our home is worth at least $400,000. Although I won't be paying any interest on the credit card debt for another two months, I'm wondering if I should refinance and roll the credit card debt into the loan. Is it wise to eat up home equity to pay off credit cards? Thanks in advance for your comments.

A: As with almost anything in this world, there are good ways and not so good ways to do things. Let's use your dilemma to illustrate what I mean. I believe that no matter how much juggling one may do to remain in the oft-seen "introductory teaser" rates offered by many credit card companies, they usually stick you eventually with some pretty high rates. You are far more likely to find lower mortgage rates for your $35,000. Also, remember that mortgage interest is tax deductible in most cases, while credit card interest is not.

Having said that, it would appear that I am endorsing a refinance to eliminate the credit card debt. Well, I am. Sort of. Financial responsibility must come into play. The biggest problem I see with folks transferring high credit card debt to their mortgage is the tendency to jack their credit cards back up after the refinance. The last thing you would want to do is give up $35,000 of equity in order to bring the consumer debt to zero, just to charge up the cards again. Be disciplined. A $35,000 credit card balance may require a minimum payment of $1,000. A new mortgage with an extra $35,000 might increase the payment by only $200. This $800 in extra
cash flow should help ensure that all credit cards are paid in full every month.

Another thing to remember is that if you refinance to a 30-year fixed rate, the $35,000 is amortized over 360 months. Without making extra principal payments, you will be paying a lot
more interest over the life of the loan. This issue comes up from time to time from folks who ask me if it makes sense to roll an auto loan into a mortgage. The overall monthly obligations will be considerably lower because most auto loans carry terms of five years or less. Spreading it out over 30 years means that the vehicle will be long gone well before the debt that financed it is retired.

The bottom line is this: If you convert $35,000 into long-term mortgage debt, the extra cash should be used in a positive way. Invest it, add it to a retirement fund or make extra payments to the principal balance of the mortgage. Any of these options is good. What you don't want to do is squander it.

If you are, indeed, financially disciplined, the next issue to tackle in deciding whether to refinance is to look at the current interest rates and compare them with your existing rate. A 30-year fixed-rate loan is hovering around 6 percent with no points. Typical closing costs might fall in the range of $3,000.

Taking this deal would keep your rate the same and convert what eventually will be high-interest credit card debt to 6 percent tax-deductible money. This sounds good, but paying $3,000 in closing costs makes the deal questionable.

Another option might be to take out a fixed-rate second trust. You might find a rate in the mid-7s with little or no closing costs. This is probably a better option. If interest rates fall just a little bit in the coming months, you can consolidate the first and second trust at 6 percent or lower with little or no closing costs. If rates don't fall, the $35,000 is locked at a tax-deductible rate that is sure to be lower than the typical rates charged by credit card companies. A good loan officer should be able to get some more details and outline a recommended plan.

APR a Poor Indicator of Interest Rate

Washington Times, January 12, 2007
By Henry Savage

The slight drop in long-term mortgage rates over the last few weeks has raised my hopes that rates will continue to ease throughout 2007. If this happens, the savvy-minded American homeowners are sure to line up for refinancing deals that will lower their interest rate.

I want to warn folks who are considering shopping for interest rates by comparing the Annual Percentage Rate (APR). I've written about this subject many times before, as the subject warrants plenty of attention. The bottom line is simple. The assumptions that go into calculating the APR are wrong in almost every instance.

The APR is supposed to give the consumer an idea of the true cost of the mortgage,
expressed as an interest rate, after closing costs, points and other transactional fees are considered.

For example, my often-touted "zero-cost" refinancing might carry an interest rate of 6.25 percent for a 30-year fixed rate. With zero-cost refinancing, there are no fees or points charged to the borrower. Instead, the rate is slightly higher. Since there are no costs associated with obtaining the loan, the APR on a zero-cost refinancing loan is equal to the note rate -- 6.25 percent.

Let's look at a "bought down" rate of 5.50 percent. As of this writing, one might be
charged 2 points, plus the typical transaction fees. Since 1 point is equal to 1 percent of the loan amount, the points alone would total $6,000 on a typical $300,000 loan balance. Other closing costs, such as appraisal fees, title insurance, recording fees, and attorney settlement charges might total an additional $3,400, making the total nonrefundable costs for a 5.50 percent rate $9,400.

Which is better -- the 6.25 percent rate with no fees or the 5.50 percent rate with $9,400 in sunken costs? Most would agree that the answer depends upon how long you hold the loan, which is exactly correct.

I pulled up my mortgage software and calculated the APR on both loans. As expected, the APR came out at 6.25 percent on the no-cost deal. The APR on the 5.50 percent loan came out at 5.703 percent.

Does this mean you should take the low-rate, high-cost deal? Sure, as long as you are certain you will hold the loan for the entire 30-year term. This is where the APR should be thrown out the window. The APR makes the terrible assumption that the borrower will hold the loan until it is paid off in 30 years. It just doesn't happen very often. People either sell their home or, more likely, take advantage of a drop in rates and refinance sometime within 30 years. Early payoff points and fees jack up the APR.

My mortgage software let me use the same fees and the same rate of 5.50 percent, but change the term from 30 years to 10 years. The APR bounced up to 5.990 percent. When I changed the term to five years, which is much closer to the average time a loan is
held, the APR shot up to almost 6.50 percent.

The bottom line: Paying fees and points to the bank in order to obtain a lower interest rate is akin to a layaway plan. If you still have the same loan in about 10 years, then perhaps you will have recouped the upfront fees in the form of a lower payment. But if, for whatever reason, you pay the loan off any earlier than the recoup point, you've lost money. Stick with a refinancing loan that carries little or no costs.

Regional Analysis Promising for Market

Washington Times, January 12, 2007
By Chris Sicks

A reader wrote to me last week, challenging some of my recent columns. I have written several times about the 2007 Washington real estate market, quoting sources who believe it will be a good year. It surely won't be anything like the incredible seller's market of 2000-2005, but there are indications that this could be a healthy year for real estate.

This reader disagrees: "What things are pointing to a decent or strong 2007? What has changed that makes 2007 look better? Please report the facts and not a Realtor agenda -- do you profit for writing this inaccurate column?" Ouch.

Let's look at some data from the George Mason University Center for Regional analysis . These folks have studied the region's economy for years. They are good at it. And they are the ones who predict that sales volume will fall back to the level of 1998-1999, yet home prices will rise 2 to 5 percent this year.

What gives them the confidence to make such a prediction, considering how prices have fallen in recent months? Well, they know this economy, that's what. They know that employment is one of the most significant factors in any regional economy, and this region leads the nation in that category.

Take a look at the chart at left showing how many jobs have been added to the nation's 15 largest metropolitan areas. Who's at the top? The Washington area. Those 359,000 new jobs from 2000-2005 had a lot to do with the hot real estate market during those years.

Then, take a look at the unemployment rates for those 15 markets in October 2006. Which metropolitan area has the lowest unemployment? The Washington area. So, not only are we adding tons of jobs to our local economy, we aren't attracting workers
fast enough to fill those jobs.

Finally, I should point out that the kind of new jobs this region is generating are largely in the area of professional and business services. Of the 65,100 new jobs created between October 2005 and October 2006, 30,000 were in this sector, where workers are well-paid. Many of those workers can afford this area's expensive homes.

Taken together, all these bits of data tell me that we have one of the nation's healthiest local economies. Although it will be quite a while before we see the kind of seller's market that ended in 2005, the strength of this region's economy means that we are likely to see an active, profitable real estate market in 2007 and beyond.

N.Va. Real Estate Prices Hold Steady in 2006

Arlington Sun-Gazette, January 11, 2007
by SCOTT McCAFFREY

The Northern Virginia real estate market in 2006 suffered through its second-worst decline in sales in the past 30 years, yet still managed to post an average sales price that was higher - if only marginally so - that the year before.

The Northern Virginia Association of Realtors on Jan. 10 reported that sales for the year totaled 20,753, down 29.1 percent from the 29,235 sales recorded a year before and off more than 36 percent from the all-time record sales pace reported in 2004.

Total yearly sales in 2006 were the lowest since 1997, when the region was emerging from its last real estate slump. And 2006's percentage drop from the year before was the worst since 1991, when sales dropped 32.3 percent from 1990 figures.

(The reported total includes sales from the inner suburbs of Arlington and Fairfax counties and the cities of Alexandria, Fairfax and Falls Church.)

While the average sales prices of homes ebbed and flowed throughout 2006, the final figure was up ever so slightly from a year before, setting an all-time record of $537,741. That increase of 0.12 percent breaks a five-year string of double-digit growth in average sales prices, and is the lowest since the market recorded a decline in average prices in 1992.

All told, the sales volume across the inner suburbs totaled $11.16 billion, down from a record $15.7 billion recorded in 2005. But - and it's an important one - that 2006 volume was nearly identical to the volume recorded in 2003, in the heat of the Northern Virginia real estate bull market.

Margaret Ireland, president of the Northern Virginia Association of Realtors, said the market sluggishness that descended in 2006 was inevitable, since Northern Virginia's real estate sales had been roaring along for more than six years.

“Buyers in Northern Virginia had been in sprint-mode for a long time - they had to hit the wall eventually, and they did,” Ireland said at a December forum on the state of the market.

Homeowner in it for the long haul have made out all right. At the December forum, NVAR officials pointed to the case of a typical home, purchased in January 2001 for $269,819. That home's potential sales price peaked last summer at $578,689, then slid down more than $55,000 over the last six months of the year - but the homeowner could still likely sell the home for nearly double what it was purchased for.

“Buyers must focus on the long-term appreciation,” Ireland said. “They can be confident that if they plan to stay in their homes for three or more years, their home's value will build and grow.”

At the end of the 2006, there were 7,205 homes on the market across the inner suburbs, up 27.3 percent from a year before. That's a significantly higher number of homes, it appears that the big build-up in inventory that occurred in 2006 is beginning to ebb.

In the broader Northern Virginia market, trends were roughly the same as in the inner suburbs.

Home sales totaled 35,487 for the year, down 33.8 percent. But the average sales price rose 1.2 percent, to $503,855.

Total sales volume for the year across the broader market was $17.88 billion, down from $26.69 billion a year before.

(The broader market includes all of the inner suburbs, plus Prince William and Loudoun counties and other jurisdictions deeper out in the rapidly populating Virginia countryside.)

In the broader market, there were 16,111 active listings at the end of December, up 28.3 percent from a year before.

Sales figures include most, but not all, homes sold during the period. All figures are preliminary, and are subject to revision.

The Tide Is Turning

Washington Post, January 6, 2007
By Kenneth R. Harney

What's the shape of a post-bubble, post-correction real estate market? And more to the point: What does that mean for you?

Those questions are becoming increasingly relevant as the latest sales data show a small but unmistakable uptick in activity and declining unsold inventories. In late December, the National Association of Realtors reported that existing home sales were up by a hair in November, 0.6 percent, the second straight month of modest increases off the cyclical trough in September.

That same week, the Commerce Department reported that sales of new houses rose 3.4 percent in November over the prior month, while builders' unsold inventories dropped.

All of which suggests that the 18-month market correction that followed the four-year housing boom has just about run its course. From a national statistical perspective, we're somewhere near slack tide -- but no one's looking for another frothy high tide anytime soon.

Some local markets are moving contrary to the relatively flat national trend. Three dozen metropolitan areas -- primarily markets with moderate prices and solid employment growth -- were still racking up low double-digit house price inflation at the end of the third quarter of 2006, according to federal data. Dozens of others, primarily where unemployment has been a persistent and increasing economic drag, showed continued signs of modest deflation in home values, according to the same data.

In the main, however, the housing market appears to have weathered the correction phase of the cycle without the blood running in the streets that some bubble-bust bears had forecast. Median prices of resale houses have fallen 3.6 percent nationally year to year, and anecdotal reports of 10 percent to 20 percent asking-price reductions in formerly hyperinflated markets are commonplace. But that's what corrections are all about, as opposed to outright busts.

Moderate price cuts also eventually stimulate buyers who had been sitting on the sidelines wondering when the market might bottom out to wade back in and start shopping. That's where we appear to be at the moment, and where we are headed in 2007, absent unexpected economic jolts to the global capital markets that could send mortgage rates spiking. In that event, all bets are off.

So what are smart strategies in a slowly recovering real estate environment?

One good rule: Think baby steps instead of big leaps. Sellers shouldn't assume that with the trend turning positive they can suddenly price their house for what they might have commanded in early 2005. Forget about it. In most places, buyers still have the upper hand. There's plenty of inventory to choose from; shoppers are picky; and unrealistic pricing is a guaranteed route to sitting dead in the water for months, unvisited and unsold. Be real on pricing. And be happy there are buyers out there again.

On the other hand, smart shoppers should recognize that the game is changing, the spring buying season is just on the horizon and lobbing lowball offers at already marked-down properties isn't a winning strategy. If you are seriously in the market, be prepared to pay a price that may not be as low as you had hoped, but that just might be your last shot at a particular house before it sells for closer to the asking price a few weeks from now.

Shoppers also need to understand that today's prevailing mortgage rates -- a little above 6 percent for 30-year money, and the high-5 percent range for 15-year loans -- are less than a point above 40-year lows. They won't be around indefinitely, so a fairly priced house combined with a low-cost mortgage adds up to a potentially great deal.

A second essential for the emerging market: Smart buyers and sellers need to be well-informed. They need to plug themselves into all the key local information that shapes pricing and dealmaking: time on the market, inventory declines and increases, the overall pace of sales, and the average gap between asking prices and closing prices. Be in command of these numbers and you will be well equipped to play heads-up ball, whether as buyer or seller.

A lot of these numbers are available online and offline from real estate Web sites, regional or local multiple listing services, Realtor associations, and mortgage lenders and brokers. It's also available person-to-person from the front-line experts on any given micro-market: the real estate agents who work in specific neighborhoods or market segments. They make their living, in up cycles and down, by listing, selling and thoroughly knowing what's happening inside their target areas.

Better yet: There are no commissions for information from these specialists. All you need to do is show that you're serious and you can compile a lot of valuable market intelligence for free.

Trend Spotting for 2007

Washington Post, December 30, 2006
By Benny L. Kass

At the end of each year, some people look back, while others look to the future. There's nothing we can do to change 2006, so let's look forward.

What will 2007 hold for American home buyers?

Interest rates: Last December, along with most economic forecasters, I predicted mortgage interest rates would be at least 7 percent by the end of the year. We were wrong. However, I am confident that interest rates will rise as we move into the new year. The state of our economy is still fuzzy, which in my opinion means rates will start rising in the months to come.

Home sales: If you read the newspapers, you know that real estate sales are down, especially for condominium units. Developers who are faced with many unsold units are offering such things as free plasma television sets or free car rentals to lure buyers. However, there are anomalies, especially here in the Washington area. I recently learned of one cooperative apartment that generated five contract offers. That may be unusual in today's marketplace, but it's not unique.

More important, a bunch of new members of Congress (and their staffs) are coming to Washington. That will clearly generate some sales. We all know that when members lose an election, they often stick around to become lobbyists. Thus the new people will be looking for good places to live, and that's good news for this area.

Foreclosures: Unfortunately, too many Americans did not listen when former Fed chairman Alan Greenspan warned against no-money-down, interest-free mortgages. According to the Mortgage Bankers Association, about 4.7 percent of homeowners were late on their mortgage payments in July through September of 2006. This was up slightly from 4.4 percent in the same period for 2005.

If you have an old adjustable-rate mortgage that will adjust soon, you should seriously consider refinancing while rates are still hovering around 6 percent. Furthermore, if you have an "interest free" loan, you should carefully read your mortgage papers. You will learn that your loan includes a variable rate that can adjust on a daily or monthly basis. It also may turn into a fixed-rate loan within the next year or two -- and the rate will be based on the then-current mortgage rate. Be warned and act before it is too late.

Predatory lending: Everyone talks about this problem, but little if any real action has taken place. Low-income consumers are vulnerable to the tactics of some mortgage lenders, especially because they often are unable to get loans from legitimate companies.

Recently, for example, the Montgomery County Council passed a law that would have gone a long way toward assisting consumers, but the Circuit Court ruled the council exceeded its authority and that the law was unconstitutional and unenforceable.

The judge held that only the Maryland legislature was able to enact such a law. So, when will that body tackle a problem faced throughout the state -- in Baltimore City as well as Prince George's and Montgomery counties?

And when will Virginia and the District address predatory lending? While hopes are high, expectations are low. Consumers do not have the same legislative muscle that mortgage lenders have.

RESPA violations: The Real Estate Settlement Procedures Act prohibits kickbacks between service providers, including mortgage lenders, title companies and lawyers. Recently, it appears there has been a growing trend toward enforcing this law. Consumers pay good money to purchase their houses; kickbacks add to these costs. Prospective home buyers shouldn't just go to a lender or a title company recommended by their real estate agent without shopping around. Often, selecting your own lender or title company will save you money.


New-home sales contracts: If you decide to buy a newly constructed house, the builder will present you with a form contract. In the past few years, when sales were strong, it was take it or leave it. Unfortunately, too many of these contracts are one-sided in favor of the seller. Now that the market has cooled, you should carefully read the contract and consult your legal and financial advisers before purchasing. Builders want to sell, which means their form contracts now can -- and should -- be negotiated so that you get the best terms possible.

For example, many such contracts do not have a fixed time as to when settlement will take place. In recent years, many potential home buyers have been faced with extraordinary delays, because the builder was unable to deliver the house on a timely basis.

This can be a problem, especially when interest rates may rise. You may have thought you could get a low 6 percent loan, but by the time the house is ready for settlement, interest rates might be much higher -- and obviously even if you can afford the new loan, it will crimp your finances.

Insist on a specific time for delivery with a penalty in case the builder cannot produce on a timely basis.

Loan documents: I repeat my long-standing plea: Lenders, please consolidate your loan documents. Home buyers should not have to sign multiple truth-in-lending statements, affidavits of residency and a host of other documents. In the good old days, we had to sign only three papers -- the settlement statement (called a HUD-1), the promissory note and the deed of trust (the mortgage). Although I may want to look forward, in the case of loan documents, the past was the better course.