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.