John Kozyn's Northern Virginia and D.C. Real Estate Connection

'Hope for Homeowners,' Still Long in Coming

2008-09-28T17:16:00.000-04:00

Washington Post, September 28, 2008
By Elizabeth Razzi

We interrupt this financial crisis with a word from its sponsor: the families who are losing homes to foreclosure.

They're still circling the drain, to pick up on Federal Reserve Chairman Ben S. Bernanke's colorful metaphor describing credit markets as the economy's plumbing. Right now, the plumbing is clogged with bad securities backed by bad home mortgages. The federal bailout is designed to free up the system.

A separate bailout for troubled homeowners is supposed to launch this week. The new "Hope for Homeowners" program, passed in late July, is scheduled to go into effect Wednesday. (That's lightning speed by government standards.) It's designed to allow refinancing for people who cannot pay their mortgage and who can't refinance into something better because their home value is now too low to pay off the unaffordable old loan.

Under the program, those borrowers may qualify for a new, 30-year, fixed-rate mortgage insured by the Federal Housing Administration if (and it's a huge if) their current lender agrees to forgive enough of their debt so that they would have at least 10 percent equity, right now.

These FHA loans are not available to people who could afford to keep paying their current loans but who don't want to because the home has lost value. Nor are they available to investors, flippers or to anyone who owns a second home.

Lender participation is voluntary, and writing off principal is the last technique most will employ when trying to save borrowers from foreclosure. At a hearing before the House Financial Services Committee on Sept. 17, Molly Sheehan, senior vice president of Chase Home Lending, said, "The investor community still disfavors principal reduction."

In other words, the investors who own the bonds backed by these bad mortgages don't like to write off part of the debt owed so the homeowner can avoid foreclosure. They would rather try something else first, such as reducing the interest rate or stretching out the repayment period, which causes smaller losses to them. Or they might even prefer that the home goes into foreclosure.

Bank of America, which earlier this year bought big mortgage lender Countrywide, seems more accommodating than some other lenders. Michael Gross, managing director for loss mitigation, said BofA postponed all 1,650 foreclosures that were scheduled from Sept. 8 to Sep. 22 until at least Oct. 15 and is evaluating whether those borrowers might benefit from the new Hope refinance. "We will use this program where it is needed," he said. An estimated 30,000 to 40,000 of the bank's customers may qualify.

Relief will probably not arrive on the Wednesday start date. The final details of the program hadn't been published as of last week. And the folks on the front lines of the housing crisis -- housing and debt counselors -- certainly don't have the details.

Those counselors are overwhelmed right now. In Prince George's County, for example, it can take weeks to schedule an appointment with a counselor certified by the Housing and Urban Development Department. It's even tough to get a live person to answer the phone at many agencies.

Mary Dade, the housing counseling program manager for United Communities Against Poverty, a nonprofit community-action agency in Capitol Heights, said many of the people coming in for help simply have too much debt -- of all types -- to enable them to keep their homes. "We do have a problem with the economy right now," she said. "Just the amount of debt you see is overwhelming."

She has heard about the new Hope refinance program but isn't prepared to field questions from borrowers. "I don't think the housing-counseling agencies have been given a detailed briefing on that," she said. She added that she doesn't tend to get too excited about new programs because in the past they have helped relatively few borrowers.

Dade said she was trying to back away from focusing so much on foreclosures so that her program can still meet its other missions, such as providing pre-purchase counseling, assisting troubled renters and educating consumers about how to manage debt. "We can't spend 80 percent of our time on foreclosures," she said, noting that each foreclosure-prevention client requires about 20 hours of work.

She stressed that she's "not a mean person." It's just that many of the people who come through the door simply don't have the income to handle the debts, even with help. "This is my heart here," she said. "I want these people to come back into homeownership another time when they know what they are doing. . . . Homeownership is not for beginners."

Dade added that there's as big a problem with struggling renters in Prince George's County as with foreclosures. The number of evictions this year is on pace to match last year's 4,600, she said. Dade estimates that her organization is able to help about 56 percent of its cases. About 30 percent have other social issues or mental-health problems that they can't address. And the rest never follow up beyond the initial contact.

Sometimes the best help her office can provide is toward getting together the two or three months' worth of rent a person with bad credit needs for a security deposit on a rental.

William Johnson, executive director of Roots of Mankind, a nonprofit agency in Temple Hills, also said there are some owners they cannot help. "Most of them, we can," he said.

He said some lenders are already writing off some of the debt to make mortgages more affordable. But too many are still offering workouts that try to make up for missed payments by raising the amount owed each month. "If you can't pay $1,000, how are you going to pay $1,800? They're ridiculous," he said.

Johnson said it's all up to the lenders whether they offer "a decent workout." Chase and GMAC, he noted, have been excellent about creating workouts that actually work.

If you're in danger of losing your home, and you think you might qualify for one of the new Hope refinances -- or for other assistance, for that matter -- take the initiative. Call your loan servicer and ask about the Hope for Homeowners program. And, by all means, if your lender tries to reach you by mail, e-mail or phone, respond to the outreach. They may have good news about your eligibility for a refinanced loan you can afford.

How the Rescue Affects Homeowners

2008-09-28T17:15:00.000-04:00

Washington Post, Saturday, September 27, 2008
By Kenneth R. Harney

Whether you see it as an exorbitantly costly taxpayer bailout of Wall Street and the banks or you're cheering from the sidelines, you can agree: The new federal moves to rescue the mortgage system could have huge effects on consumers in the months ahead.

The chief architect of the plans, Treasury Secretary Henry M. Paulson Jr., says the costs could run into the "hundreds of billions" of dollars -- and that probably means higher taxes somewhere down the line.

On the other hand, Paulson argued persuasively to Congress that the costs to taxpayers of not acting, and allowing the global financial system to unravel day by day, would ultimately be much higher.

The jury will be out on that issue for years. But for consumers, especially those looking for a new mortgage or who are deep in trouble on their house payments, the plan could have more immediate, life-changing effects. Here's why:

A key part of the Treasury's plan requires no approval from Congress -- pumping billions of dollars of fresh capital into the home loan market through purchases of mortgage-backed securities. The Treasury already is committed to inject $10 billion this month, and it is expected to announce substantial purchases for an extended period.

Fannie Mae and Freddie Mac, now under conservatorship by the federal government, also have been directed to accelerate their investments in mortgage securities. The effect should be to supply additional dollars for home buyers and refinancers, and to keep a damper on interest rates. So far, so good: Rates for 30-year, fixed-rate loans have remained near 6 percent.

A second key impact of the rescue plan addresses the dire situations faced by the estimated 5 million homeowners who are behind on their mortgage payments, many of whom own houses that are worth less than the principal balances owed.

The new government-controlled entity that will buy portfolios of troubled mortgage assets from lenders and bond investors is likely to take a different approach to delinquent borrowers than does the private sector. Rather than the slow, loan-by-loan modification typical of banks -- what are known as "workouts" to lower rates, payments and even loan balances -- the new government entity is likely to adopt a fix-the-problem-in-bulk approach advocated by the Federal Deposit Insurance Corporation, the regulator and insurer of federally chartered banks.

The FDIC has decades of experience handling the acquired assets of failed banks, including, recently, the giant IndyMac Bank, which went under in July. IndyMac had 742,000 mortgages in its portfolio,
60,000 of which were 60 days delinquent or at some stage of foreclosure. One of the first actions the FDIC took after stepping in to pick up IndyMac's pieces was to declare an immediate halt to all foreclosure actions, pending a portfolio-wide review.

The idea, according to FDIC Chairman Sheila C. Bair, was to whistle a time out to "evaluate the problems and identify the best ways to maximize the value of the institution." Simply pushing through scheduled foreclosures on the bank's delinquent customers would not achieve that goal because foreclosures are extremely costly to lenders -- and catastrophic financially for borrowers.

A smarter strategy, Bair said, is to work out better terms for as many borrowers as possible, turning unaffordable, delinquent mortgages into affordable loans at current income levels. The best way to do that in a large portfolio is not on a retail, loan-by-loan basis, she argued, but rather by using a "systematic" approach where all delinquent borrowers who fit pre-set criteria could automatically qualify for a modification of terms.

After an initial review of the 60,000 late borrowers in the IndyMac portfolio, the FDIC deemed about 40,000 customers eligible for the loan-modification program. Modification terms include rate reductions, lengthening of payback timetables, rescheduling unpaid principal and interest, rate caps, and other techniques. In some cases, rates are reduced to 3 percent for five years, with increases of 1 percent a year until the note rate reaches a ceiling tied to current 30-year rates.

Unlike private-sector servicers, the FDIC charges no fees for its modifications. In the two months since taking over IndyMac, Bair said, more than 7,400 modification proposals have been sent to delinquent borrowers, and "thousands more" have received calls attempting to prevent "unnecessary foreclosures."

That sort of wholesale remedial strategy -- including a halt to potentially hundreds of thousands of foreclosures -- is what probably awaits financially distressed homeowners when the new federal rescue program kicks in and acquires their mortgages.

Call it what you want. But if you're one of those troubled borrowers, two words are likely to come to mind: home saver.

Behind Insurer’s Crisis, Blind Eye to a Web of Risk

2008-09-28T17:10:00.000-04:00

New York Times, September 28, 2008
By GRETCHEN MORGENSON

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

The only Wall Street chief executive participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.

A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.

Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

“It is beyond shocking that this small operation could blow up the holding company,” said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. “They found a quick way to make a fast buck on derivatives based on A.I.G.’s solid credit rating and strong balance sheet. But it all got out of control.”

The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.

But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Mr. Cassano, 53, lives in a handsome, three-story town house in the Knightsbridge neighborhood of London, just around the corner from Harrods department store on a quiet square with a private garden.

He did not respond to interview requests left at his home and with his lawyer. An A.I.G. spokesman also declined to comment.

At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had a long and storied history of deftly juggling risks. It insured people and properties against natural disasters and death, offered sophisticated asset management services and did so reliably and with bravado on many continents. Even now, its insurance subsidiaries are financially strong.

When Mr. Cassano first waded into the derivatives market, his biggest business was selling so-called plain vanilla products like interest rate swaps. Such swaps allow participants to bet on the direction of interest rates and, in theory, insulate themselves from unforeseen financial events.

Ten years ago, a “watershed” moment changed the profile of the derivatives that Mr. Cassano traded, according to a transcript of comments he made at an industry event last year. Derivatives specialists from J. P. Morgan, a leading bank that had many dealings with Mr. Cassano’s unit, came calling with a novel idea.

Morgan proposed the following: A.I.G. should try writing insurance on packages of debt known as “collateralized debt obligations.” C.D.O.’s. were pools of loans sliced into tranches and sold to investors based on the credit quality of the underlying securities.

The proposal meant that the London unit was essentially agreeing to provide insurance to financial institutions holding C.D.O.’s and other debts in case they defaulted — in much the same way some homeowners are required to buy mortgage insurance to protect lenders in case the borrowers cannot pay back their loans.

Under the terms of the insurance derivatives that the London unit underwrote, customers paid a premium to insure their debt for a period of time, usually four or five years, according to the company. Many European banks, for instance, paid A.I.G. to insure bonds that they held in their portfolios.

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Since A.I.G. itself was a highly rated company, it did not have to post collateral on the insurance it wrote, analysts said. That made the contracts all the more profitable.

These insurance products were known as “credit default swaps,” or C.D.S.’s in Wall Street argot, and the London unit used them to turn itself into a cash register.

The unit’s revenue rose to $3.26 billion in 2005 from $737 million in 1999. Operating income at the unit also grew, rising to 17.5 percent of A.I.G.’s overall operating income in 2005, compared with 4.2 percent in 1999.

Profit margins on the business were enormous. In 2002, operating income was 44 percent of revenue; in 2005, it reached 83 percent.

Mr. Cassano and his colleagues minted tidy fortunes during these high-cotton years. Since 2001, compensation at the small unit ranged from $423 million to $616 million each year, according to corporate filings. That meant that on average each person in the unit made more than $1 million a year.

In fact, compensation expenses took a large percentage of the unit’s revenue. In lean years it was 33 percent; in fatter ones 46 percent. Over all, A.I.G. Financial Products paid its employees $3.56 billion during the last seven years.

The London unit’s reach was also vast. While clients and counterparties remain closely guarded secrets in the derivatives trade, Mr. Cassano talked publicly about how proud he was of his customer list.

At the 2007 conference he noted that his company worked with a “global swath” of top-notch entities that included “banks and investment banks, pension funds, endowments, foundations, insurance companies, hedge funds, money managers, high-net-worth individuals, municipalities and sovereigns and supranationals.”

Of course, as this intricate skein expanded over the years, it meant that the participants were linked to one another by contracts that existed for the most part inside the financial world’s version of a black box.

Goldman Sachs was a member of A.I.G.’s derivatives club, according to people familiar with the operation. It was a customer of A.I.G.’s credit insurance and also acted as an intermediary for trades between A.I.G. and its other clients.

Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout became public, David A. Viniar, Goldman’s chief financial officer, assured analysts on Sept. 16 that his firm’s exposure was “immaterial,” a view that the company reiterated in an interview.

Later that same day, the government announced its two-year, $85 billion loan to A.I.G., offering it a chance to sell its assets in an orderly fashion and theoretically repay taxpayers for their trouble. The plan saved the insurer’s trading partners but decimated its shareholders.

Lucas van Praag, a Goldman spokesman, declined to detail how badly hurt his firm might have been had A.I.G. collapsed two weeks ago. He disputed the calculation that Goldman had $20 billion worth of risk tied to A.I.G., saying the figure failed to account for collateral and hedges that Goldman deployed to reduce its risk.

Regarding Mr. Blankfein’s presence at the Fed during talks about an A.I.G. bailout, he said: “I think it would be a mistake to read into it that he was there because of our own interests. We were engaged because of the implications to the entire system.”

Mr. van Praag declined to comment on what communications, if any, took place between Mr. Blankfein and the Treasury secretary, Mr. Paulson, during the bailout discussions.

A Treasury spokeswoman declined to comment about the A.I.G. rescue and Goldman’s role. The government recently allowed Goldman to change its regulatory status to help bolster its finances amid the market turmoil.

An Executive’s Optimism

Regardless of Goldman’s exposure, by last year, A.I.G. Financial Products’ portfolio of credit default swaps stood at roughly $500 billion. It was generating as much as $250 million a year in income on insurance premiums, Mr. Cassano told investors.

Because it was not an insurance company, A.I.G. Financial Products did not have to report to state insurance regulators. But for the last four years, the London-based unit’s operations, whose trades were routed through Banque A.I.G., a French institution, were reviewed routinely by an American regulator, the Office of Thrift Supervision.

A handful of the agency’s officials were always on the scene at an A.I.G. Financial Products branch office in Connecticut, but it is unclear whether they raised any red flags. Their reports are not made public and a spokeswoman would not provide details.

For his part, Mr. Cassano apparently was not worried that his unit had taken on more than it could handle. In an August 2007 conference call with analysts, he described the credit default swaps as almost a sure thing.

“It is hard to get this message across, but these are very much handpicked,” he assured those on the phone.

Just a few months later, however, the credit crisis deepened. A.I.G. Financial Products began to choke on losses — though they were only on paper.

In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap portfolio.

Because the London unit was set up as a bank and not an insurer, and because of the way its derivatives contracts were written, it had to put up collateral to its trading partners when the value of the underlying securities they had insured declined. Any obligations that the unit could not pay had to be met by its corporate parent.

So began A.I.G.’s downward spiral as it, its clients, its trading partners and other companies were swept into the drowning pool set in motion by the housing downturn.

Mortgage foreclosures set off questions about the quality of debts across the entire credit spectrum. When the value of other debts sagged, calls for collateral on the securities issued by the credit default swaps sideswiped A.I.G. Financial Products and its legendary, sprawling parent.

Yet throughout much of 2007, the unit maintained that its risk assessments were reliable and its portfolios conservative. Last fall, however, the methods that A.I.G. used to value its derivatives portfolio began to come under fire from trading partners.

In February, A.I.G.’s auditors identified problems in the firm’s swaps accounting. Then, three months ago, regulators and federal prosecutors said they were investigating the insurer’s accounting.

This was not the first time A.I.G. Financial Products had run afoul of authorities. In 2004, without admitting or denying accusations that it helped clients improperly burnish their financial statements, A.I.G. paid $126 million and entered into a deferred prosecution agreement to settle federal civil and criminal investigations.

The settlement was a black mark on A.I.G.’s reputation and, according to analysts, distressed Mr. Greenberg, who still ran the company at the time. Still, as Mr. Cassano later told investors, the case caused A.I.G. to improve its risk management and establish a committee to maintain quality control.

“That’s a committee that I sit on, along with many of the senior managers at A.I.G., and we look at a whole variety of transactions that come in to make sure that they are maintaining the quality that we need to,” Mr. Cassano told them. “And so I think the things that have been put in at our level and the things that have been put in at the parent level will ensure that there won’t be any of those kinds of mistakes again.”

At the end of A.I.G.’s most recent quarter, the London unit’s losses reached $25 billion.

As those losses mounted, and A.I.G.’s once formidable stock price plunged, it became harder for the insurer to survive — imperiling other companies that did business with it and leading it to stun the Federal Reserve gathering two weeks ago with a plea for help.

Mr. Greenberg, who has seen the value of his personal A.I.G. holdings decline by more than $5 billion this year, dumped five million shares late last week. A lawyer for Mr. Greenberg did not return a phone call seeking comment.

For his part, Mr. Cassano has departed from a company that is a far cry from what it was a year ago when he spoke confidently at the analyst conference.

“We’re sitting on a great balance sheet, a strong investment portfolio and a global trading platform where we can take advantage of the market in any variety of places,” he said then. “The question for us is, where in the capital markets can we gain the best opportunity, the best execution for the business acumen that sits in our shop?”

Everybody’s Business: In Financial Food Chains, Little Guys Can’t Win

2008-09-28T17:08:00.000-04:00

New York Times, September 28, 2008
By BEN STEIN

Imagine, if you will, that a man who had much to do with creating the present credit crisis now says he is the man to fix this giant problem, and that his work is so important that he will need a trillion dollars or so of your money. Then add that this man thinks he is so indispensable that he wants Congress to forbid any judicial or administrative questioning of anything he does with your dollars.

You might think of a latter-day Lenin or Fidel Castro, but you would be far afield. Instead, you should be thinking of Treasury Secretary Henry M. Paulson Jr. and the rapidly disintegrating United States of America, right here and now.

But I am getting ahead of myself. First, I am furious at what the traders, speculators, hedge funds and the government have done to everyone who is saving and investing for retirement and future security. Millions of us did nothing wrong, according to the accepted wisdom of the age. We saved. We put a large part of our money into the stock market, as we were urged to do. Because the market wasn’t at ridiculously high levels, it seemed prudent to invest in broad indexes, foreign indexes and small- and large-cap indexes.

Now we have had the rug pulled out from under us. Our retirements have been put into severe jeopardy. The “earnings” part of those price-to-earnings ratios turns out to have been fiction for some financial companies, which normally account for a big part of total corporate earnings. In fact, earnings of giant finance players were often wildly negative, creating a situation rarely seen since the Great Depression, when the aggregate earnings of the Dow 30 were negative.

The current negativity occurred because of wild, casino-type operations of big finance players, creating liabilities way beyond anything we could have reasonably expected. This looks a lot like theft on a spectacular scale — of our wallets, our peace of mind, our futures.

Second, according to what I hear from my betters in the world of finance, the most serious problems are not with the bundles of subprime mortgages themselves — a large but not lethal quantum as far as I can tell — but with derivatives contracts tied to subprime and other dicey debt. These contracts are superficially an attempt to “insure” against risks of default, hence the name “credit-default swaps.” In fact, they are an immense wager — which anyone with lots of money or borrowing ability can enter — about how mortgage-backed bonds, leveraged loan bonds, student loan bonds, credit card bonds and the like will perform.

These wagers entail amounts many times larger than the total of subprime loans. In fact, there are roughly $62 trillion in credit-default swap derivatives out there, compared with about $1 trillion of subprime mortgages. These derivatives are “weapons of financial mass destruction,” in the prophetic words of Warren E. Buffett. (Apparently believing that the worst is over, at least for one big investment bank, Mr. Buffett is now investing in Goldman Sachs.)

The swaps market has been unregulated. It has been just a lot of people making bets with one another. Some of them made incredibly fortunate payoff wagers against the mortgage bonds, using credit-default swaps as their wagering vehicle. I am not sure who the big winners are, but they are out there, and the gains were big enough to cripple the part of Wall Street on the losing side of the bets.

Almost no one (except Mr. Buffett) saw this coming, at least not on this scale. But let’s get back to the man of the hour. Why didn’t Mr. Paulson, the Treasury secretary, see it? He was once the head of Goldman Sachs, an immense player in the swaps world. Didn’t people at Treasury have a clue? If they didn’t, what was going on in their heads? If they did, why didn’t they do something about it a year ago, when saving the world would have been a lot cheaper?

If Mr. Paulson and Ben S. Bernanke, the chairman of the Federal Reserve, didn’t see this train coming, what else have they missed? What other freight train is barreling down the track at us?

All of this would be bad enough. But by far the most terrifying item I read in my morning paper last week was this: Mr. Paulson demanded that Congress forbid judicial review of his decisions on use of the money in the mortgage bailout. This would amount to an abrogation of the Constitution. Not only would his decisions be sacrosanct and above the law, but so would the actions of his pals in the banking world in connection with this bailout.

The people whose conduct got us into this catastrophe have not only taken our money, hopes and peace of mind, but they apparently also want a trillion or so more dollars to put into their Wall Street Buddy System Fund. This may be the most dangerous attack on the law in my lifetime. What anarchists even dared consider this plan? Thank heaven that minds more devoted to the Constitution on Capitol Hill are questioning this shocking request.

By the way, if we are actually thinking about tossing the Constitution out the window, why not simply annul these credit-default swap contracts? With that done, the incomprehensibly large liability of the banks would cease, and we wouldn’t need this staggering bailout. Shouldn’t we consider making the speculators pay some of the price?

WE have survived housing-price corrections before. Why is this one causing so much anguish? It must be the side bets, the credit-default swap bets, multiplying the effect of the housing downturn many times over. Maybe we should just get rid of these exotic bets and start again without them. “Insurance” on market moves is always a bad idea, because it does not tamp down market disruptions but instead greatly magnifies them — as in the disastrous effect of “portfolio insurance” in the 1987 crash.

Then there was Mr. Paulson’s insistence that there be no compensation caps for executives of companies being bailed out by the factory workers, the farmers, the schoolteachers and the medical doctors. He told a skeptical Congress on Tuesday that if these caps were put into place, bank executives simply wouldn’t participate in the bailout or sell us suckers their debts. Fine with me. If the banks are in good enough shape so that petulant executives can simply opt out rather than live on a few million a year, maybe we don’t need the bailout at all. Maybe we would be better off if those executives simply bailed out and were replaced by people with more sense and more patriotism.

One final little thought bubbles into my mind: Maybe the bailout should not be of the banks at all, but of homeowners themselves. Maybe if we make the government the buyer of last resort of homes, we will stabilize the markets, stabilize the debt associated with the markets and take the gain out of the credit-default swaps for the speculators. Yes, price would be a huge issue, but so it is for Mr. Paulson’s plan for buying debt from banks.

Why not? We do it for farmers. Why not for the individual homeowner? Oh, right. Because Treasury secretaries don’t know any of those people.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

Fair Game: Your Money at Work, Fixing Others’ Mistakes

2008-09-28T17:02:00.000-04:00

New York Times, September 21, 2008
By GRETCHEN MORGENSON

It looks as if we may get through this weekend without another scramble to save a troubled financial firm with a trillion-dollar balance sheet.

But that doesn’t mean taxpayers are out of danger. No, sir. No, ma’am. Because lawmakers are at work on a bailout fund that would buy the kind of distressed assets (defaulted mortgages, for example) that have ignited this firestorm.

Treasury Secretary Henry M. Paulson Jr. has called the fund the “troubled asset relief program.” I’ll just call it TARP for short (you know, the kind of thing they spread over muddy fields so you don’t soil your Guccis).

And depending on how TARP is operated, and how the assets are valued before taxpayers are forced to buy them, it could bloat our final bill for this mess while benefiting the very institutions that got us into it.

Yes, we need a smart plan and a concerted effort to get the frozen credit markets up and running. But we also have to be certain that the types of conflicts of interest that riddle Wall Street aren’t visited upon TARP.

Consider: A bank wants to sell the TARPistas (also known as TAXPAYERS) a pile of stinky mortgage securities that it currently values at 60 cents on the dollar. Let’s assume that the most recent actual trade between market participants for similar assets was struck at 30 cents on the dollar.

So what’s a fair price that we TARPistas should pay for the assets?

If we bought at 60 cents, a price that the bank would argue is appropriate, we would most likely face a loss. The bank, however, would be much better off than if it had to dump at 30 cents.

Conversely, if the assets were sold at 30 cents, taxpayers could wind up making a profit on the purchase if the assets performed better than expected over time. But the bank would have to write down the value of the assets as a result of the sale, possibly threatening its financial standing yet again.

Do you think, perchance, that financial services lobbyists might be working their Hill contacts right this very minute to ensure that the TARP valuations are rigged in their favor?

You know the answer to that.

And you also know that we should steel ourselves for heavy losses as the TARP gets pulled over our eyes. Never mind that it was the banks, with their reckless lending and monumental leverage, that drove us into this ditch.

Such is our lot today: They break it. We own it.

Taxpayers deserve better than this, of course. But we have no lobbyists, so we get skinned.

IF federal regulators and political leaders want to earn back some trust, they could do two things. First, they could provide us with some transparency about whom precisely we are backing in the recent bailouts.

Take, for example, the rescue on Tuesday of the American International Group, once the world’s largest insurance company. It was pretty breathtaking. Since when do insurance companies, whose business models seem to consist of taking in premiums and stonewalling claims, deserve rescues from beleaguered taxpayers?

Answer: Ever since the world became so intertwined that the failure of one company can topple a host of others. And ever since credit default swaps, those unregulated derivative contracts that allow investors to bet on a debt issuer’s financial prospects, loomed so big on balance sheets that they now drive every bailout decision.

The deal to save A.I.G. involves a two-year, $85 billion loan from taxpayers. In exchange, the new owners — us — get 80 percent of the company. If enough of A.I.G.’s assets are sold for good prices, we may get our money back.

Credit default swaps, which operate like insurance policies against the possibility that an issuer of debt will not pay on its obligations, were the single biggest motivator behind the A.I.G. deal.

A.I.G. had written $441 billion in credit insurance on mortgage-related securities whose values have declined; if A.I.G. were to fail, all the institutions that bought the insurance would have been subject to enormous losses. The ripple effect could have turned into a tsunami.

So, the $85 billion loan to A.I.G. was really a bailout of the company’s counterparties or trading partners.

Now, inquiring minds want to know, whom did we rescue? Which large, wealthy financial institutions — counterparties to A.I.G.’s derivatives contracts — benefited from the taxpayers’ $85 billion loan? Were their representatives involved in the talks that resulted in the last-minute loan?

And did Lehman Brothers not get bailed out because those favored institutions were not on the hook if it failed?

We’ll probably never know the answers to these troubling questions. But by keeping taxpayers in the dark, regulators continue to earn our mistrust. As long as we are not told whom we have bailed out, we will be justified in suspecting that a favored few are making gains on our dimes.

A.I.G.’s financial statements provided a clue to the identities of some of its credit default swap counterparties. The company said that almost three-quarters of the $441 billion it had written on soured mortgage securities was bought by European banks. The banks bought the insurance to reduce the amounts of capital they were required by regulators to set aside to cover future losses.

Enjoy the absurdity: Billions in unregulated derivatives that were about to take down the insurance company that sold them were bought by banks to get around their regulatory capital requirements intended to rein in risk.

Got that?

Which brings us to Item 2 for policy makers. Stop pretending that the $62 trillion market for credit default swaps does not need regulatory oversight. Warren E. Buffett was not engaging in hyperbole when he called these things financial weapons of mass destruction.

“The last eight years have been about permitting derivatives to explode, knowing they were unregulated,” said Eric R. Dinallo, New York’s superintendent of insurance. “It’s about what the government chose not to regulate, measured in dollars. And that is what shook the world.”

And it will continue.

Worst Crisis Since '30s, With No End Yet in Sight

2008-09-28T17:00:00.000-04:00

Wall Street Journal, September 18, 2008
By JON HILSENRATH, SERENA NG and DAMIAN PALETTA

The financial crisis that began 13 months ago has entered a new, far more serious phase.

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.

The consequences for companies and chief executives who tarry -- hoping for better times in which to raise capital, sell assets or acknowledge losses -- are now clear and brutal, as falling share prices and fearful lenders send troubled companies into ever-deeper holes. This weekend, such a realization led John Thain to sell the century-old Merrill Lynch & Co. to Bank of America Corp. Each episode seems to bring government intervention that is more extensive and expensive than the previous one, and carries greater risk of unintended consequences.

Expectations for a quick end to the crisis are fading fast. "I think it's going to last a lot longer than perhaps we would have anticipated," Anne Mulcahy, chief executive of Xerox Corp., said Wednesday.

"This has been the worst financial crisis since the Great Depression. There is no question about it," said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. "But at the same time we have the policy mechanisms in place fighting it, which is something we didn't have during the Great Depression."
Spreading Disease

The U.S. financial system resembles a patient in intensive care. The body is trying to fight off a disease that is spreading, and as it does so, the body convulses, settles for a time and then convulses again. The illness seems to be overwhelming the self-healing tendencies of markets. The doctors in charge are resorting to ever-more invasive treatment, and are now experimenting with remedies that have never before been applied. Fed Chairman Bernanke and Treasury Secretary Henry Paulson, walking into a hastily arranged meeting with congressional leaders Tuesday night to brief them on the government's unprecedented rescue of AIG, looked like exhausted surgeons delivering grim news to the family.

In the wake of this past week's market meltdown, WSJ's economics editor David Wessel looks at the shakeup and sees one of two outcomes: the crisis as catharsis or a drawn-out mess.

Fed and Treasury officials have identified the disease. It's called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can't pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

At least three things need to happen to bring the deleveraging process to an end, and they're hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.

But many of the distressed assets are hard to value and there are few if any buyers. Deleveraging also feeds on itself in a way that can create a downward spiral: Trying to sell assets pushes down the assets' prices, which makes them harder to sell and leads firms to try to sell more assets. That, in turn, suppresses these firms' share prices and makes it harder for them to sell new shares to raise capital. Mr. Bernanke, as an academic, dubbed this self-feeding loop a "financial accelerator."
[annualized yield on the 3 month Treasury bill]

"Many of the CEO types weren't willing...to take these losses, and say, 'I accept the fact that I'm selling these way below fundamental value,'" said Anil Kashyap, a University of Chicago Business School economics professor. "The ones that had the biggest exposure, they've all died."

Deleveraging started with securities tied to subprime mortgages, where defaults started rising rapidly in 2006. But the deleveraging process has now spread well beyond, to commercial real estate and auto loans to the short-term commitments on which investment banks rely to fund themselves. In the first quarter, financial-sector borrowing slowed to a 5.1% growth rate, about half of the average from 2002 to 2007. Household borrowing has slowed even more, to a 3.5% pace.

Goldman Sachs Group Inc. economist Jan Hatzius estimates that in the past year, financial institutions around the world have already written down $408 billion worth of assets and raised $367 billion worth of capital.

But that doesn't appear to be enough. Every time financial firms and investors suggest that they've written assets down enough and raised enough new capital, a new wave of selling triggers a reevaluation, propelling the crisis into new territory. Residential mortgage losses alone could hit $636 billion by 2012, Goldman estimates, triggering widespread retrenchment in bank lending. That could shave 1.8 percentage points a year off economic growth in 2008 and 2009 -- the equivalent of $250 billion in lost goods and services each year.

"This is a deleveraging like nothing we've ever seen before," said Robert Glauber, now a professor of Harvard's government and law schools who came to Washington in 1989 to help organize the savings and loan cleanup of the early 1990s. "The S&L losses to the government were small compared to this."

Hedge funds could be among the next problem areas. Many rely on borrowed money to amplify their returns. With banks under pressure, many hedge funds are less able to borrow this money now, pressuring returns. Meanwhile, there are growing indications that fewer investors are shifting into hedge funds while others are pulling out. Fund investors are dealing with their own problems: Many have taken out loans to make their investments and are finding it more difficult now to borrow.

That all makes it likely that more hedge funds will shutter in the months ahead, forcing them to sell their investments, further weighing on the market.

Debt-driven financial traumas have a long history, from the Great Depression to the S&L crisis to the Asian financial crisis of the late 1990s. Neither economists nor policymakers have easy solutions. Cutting interest rates and writing stimulus checks to families can help -- and may have prevented or delayed a deep recession. But, at least in this instance, they don't suffice.

In such circumstances, governments almost invariably experiment with solutions with varying degrees of success. President Franklin Delano Roosevelt unleashed an alphabet soup of new agencies and a host of new regulations in the aftermath of the market crash of 1929. In the 1990s, Japan embarked on a decade of often-wasteful government spending to counter the aftereffects of a bursting bubble. President George H.W. Bush and Congress created the Resolution Trust Corp. to take and sell the assets of failed thrifts. Hong Kong's free-market government went on a massive stock-buying spree in 1998, buying up shares of every company listed in the benchmark Hang Seng index. It ended up packaging them into an exchange-traded fund and making money.

Today, Mr. Bernanke is taking out his playbook, said NYU economist Mr. Gertler, "and rewriting it as we go."

Merrill Lynch & Co.'s emergency sale to Bank of America Corp. last weekend was an example of the perniciousness and unpredictability of deleveraging. In the past year, Merrill had hired a new chief executive, written off $41.4 billion in assets and raised $21 billion in equity capital.

But Merrill couldn't keep up. The more it raised, the more it was forced to write off. When Merrill CEO John Thain attended a meeting with the New York Fed and other Wall Street executives last week, he saw that Merrill was the next most vulnerable brokerage firm. "We watched Bear and Lehman. We knew we could be next," said one Merrill executive. Fearful that its lenders would shut the firm off, he sold to Bank of America.

Traders on the floor of the New York Stock Exchange Wednesday. Expectations for a quick end to the crisis are fading fast.

This crisis is complicated by innovative financial instruments that Wall Street created and distributed. They're making it harder for officials and Wall Street executives to know where the next set of risks is hiding and also contributing to the crisis's spreading impact.
Swaps Game

The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won't be able to honor its obligations. Firms use these instruments both as insurance -- to hedge their exposures to risk -- and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.

One of the big new players in the swaps game was AIG, the world's largest insurer and a major seller of credit-default swaps to financial institutions and companies. When the credit markets were booming, many firms bought these instruments from AIG, believing the insurance giant's strong credit ratings and large balance sheet could provide a shield against bond and loan defaults. AIG believed the risk of default was low on many securities it insured.

As of June 30, an AIG unit had written credit-default swaps on more than $446 billion in credit assets, including mortgage securities, corporate loans and complex structured products. Last year, when rising subprime-mortgage delinquencies damaged the value of many securities AIG had insured, the firm was forced to book large write-downs on its derivative positions. That spooked investors, who reacted by dumping its shares, making it harder for AIG to raise the capital it increasingly needed.

Credit default swaps "didn't cause the problem, but they certainly exacerbated the financial crisis," said Leslie Rahl, president of Capital Market Risk Advisors, a consulting firm in New York. The sheer volume of CDS contracts outstanding -- and the fact that they trade directly between institutions, without centralized clearing -- intertwined the fates of many large banks and brokerages.

Few financial crises have been sorted out in modern times without massive government intervention. Increasingly, officials are coming to the conclusion that even more might be needed. A big problem: The Fed can and has provided short-term money to sound, but struggling, institutions that are out of favor. It can, and has, reduced the interest rates it influences to attempt to reduce borrowing costs through the economy and encourage investment and spending.

But it is ill-equipped to provide the capital that financial institutions now desperately need to shore up their finances and expand lending.
Resolution Trust Scenario

In normal times, capital-starved companies usually can raise money on their own. In the current crisis, a number of big Wall Street firms, including Citigroup Inc., have turned to sovereign-wealth funds, the government-controlled pools of money.

But both on Wall Street and in Washington, there is increasing expectation that U.S. taxpayers will either take the bad assets off the hands of financial institutions so they can raise capital, or put taxpayer capital into the companies, as the Treasury has agreed to do with mortgage giants Fannie Mae and Freddie Mac.

One proposal was raised by Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee. Rep. Frank is looking at whether to create an analog to the Resolution Trust Corp., which took assets from failed banks and thrifts and found buyers over several years.

"When you have a big loss in the marketplace, there are only three people that can take the loss -- the bondholders, the shareholders and the government," said William Seidman, who led the RTC from 1989 to 1991. "That's the dance we're seeing right now. Are we going to shove this loss into the hands of the taxpayers?"

The RTC seemed controversial and ambitious at the time. Any version today would be even more complex. The RTC dispensed mostly of commercial real estate. Today's troubled assets are complex debt securities -- many of which include pieces of other instruments, which in turn include pieces of others, many steps removed from the actual mortgages or consumer loans on which they are based. Unraveling these strands will be tedious and getting at the underlying collateral, difficult.

In the early stages of this crisis, regulators saw that their rules didn't fit the rapidly changing financial system they were asked to oversee. Investment banks, at the core of the crisis, weren't as closely monitored by the Securities and Exchange Commission as commercial banks were by their regulators.

The government has a system to close failed banks, created after the Great Depression in part to avoid sudden runs by depositors. Now, runs happen in spheres regulators may not fully understand, such as the repurchase agreement, or repo, market, in which investment banks fund their day-to-day operations. And regulators have no process for handling the failure of an investment bank like Lehman Brothers Holdings Inc. Insurers like AIG aren't even federally regulated.

Regulators have all but promised that more banks will fail in the coming months. The Federal Deposit Insurance Corp. is drawing up a plan to raise the premiums it charges banks so that it can rebuild the fund it uses to back deposits. Examiners are tightening their leash on banks across the country.
Pleasant Mystery

One pleasant mystery is why the crisis hasn't hit the economy harder -- at least so far. "This financial crisis hasn't yet translated into fewer...companies starting up, less research and development, less marketing," Ivan Seidenberg, chief executive of Verizon Communications, said Wednesday. "We haven't seen that yet. I'm sure every company is keeping their eyes on it."

At 6.1%, the unemployment rate remains well below the peak of 7.8% in 1992, amid the S&L crisis.

In part, that's because government has reacted aggressively. The Fed's classic mistake that led to the Great Depression was that it tightened monetary policy when it should have eased. Mr. Bernanke didn't repeat that error. And Congress moved more swiftly to approve fiscal stimulus than most Washington veterans thought possible.

In part, the broader economy has held mostly steady because exports have been so strong at just the right moment, a reminder of the global economy's importance to the U.S. And in part, it's because the U.S. economy is demonstrating impressive resilience, as information technology allows executives to react more quickly to emerging problems and -- to the discomfort of workers -- companies are quicker to adjust wages, hiring and work hours when the economy softens.

But the risk remains that Wall Street's woes will spread to Main Street, as credit tightens for consumers and business. Already, U.S. auto makers have been forced to tighten the terms on their leasing programs, or abandon writing leases themselves altogether, because of problems in their finance units. Goldman Sachs economists' optimistic scenario is a couple years of mild recession or painfully slow economy growth.

Realtors Aiming for Full Rebound in 2009

2008-09-28T15:56:00.000-04:00

Arlington Sun-Gazette, September 15, 2008
By BRIAN TROMPETER

The U.S. economy will continue struggling through the fourth quarter of this year, but rebound steadily next year, George Mason University economics professor Stephen Fuller predicted on Sept. 11 at the Northern Virginia Association of Realtors' 12th Annual Economic Summit.

The heavily government-supported Washington-area economy likely will not suffer as much as other parts of the country, he said.

“We won't get any whiplash,” said Fuller, who also is director of the university's Center for Regional Analysis.

The Washington region gradually is slimming down its excess housing inventory and will pass the peak of its foreclosure difficulties around Halloween, Fuller said.

The housing market downturn - especially in the reduced rate of new housing construction - has been a key factor in the nation's ongoing economic problems, he said.

Real estate in recent years was treated as a commodity, rather than a long-term investment, and this led to overbuilding and price inflation, Fuller said.

“We changed how we thought,” he said. “This is like going to a banquet and overeating. The next morning, or sometimes even the same night, I regret it. It takes a long while to work off the consequences.”

The Washington area added 35,400 new jobs between July 2007 and July 2008. This figure is lower than the average 45,000-job increase and is due to a loss of retail, construction and financial-services positions, Fuller said.

National unemployment numbers have not been encouraging. About 400,000 fewer people are employed at full-time jobs now than at this time last year, he said.

While consumer expectations have been lower ever since the last presidential election, those numbers have ticked slightly upward of late, he said.

“There is an increase in optimism among the pessimists,” Fuller said.

John Mason, executive director of the Northern Virginia Transportation Authority, also addressed the summit, which was held at George Mason University.

Mason told the Realtors that Virginia must finance new transportation projects if it is to avoid miserable gridlock in the future.

“You can't make all your sales on Sunday morning,” Mason said.

When analyzing the area's traffic congestion, authority members decided the A-through-F rating scale just didn't cut it. They then created a new low rating of G to categorize Northern Virginia's mess, he said.

The transportation authority, made up of officials from nine participating jurisdictions, last year received permission from the Virginia General Assembly to raise about $300 million per year for transportation projects.

But the Virginia Supreme Court in late February ruled the General Assembly, constitutionally, could not delegate taxing authority to an unelected body. The transportation authority has returned most of the taxes it collected and is now reducing the scope of its operations.

Mason showed a slide of projected traffic gridlock if the General Assembly does not resolve the transportation financing question.

“I am here to tell you that without that additional dedicated funding for Northern Virginia transportation, you are going to be severely challenged as you move around Northern Virginia in the process of selling homes,” he said.

Christine Todd, CEO of the Northern Virginia Association of Realtors, said the economic summit added a “great dose of optimism” about the real estate market, which is still in the midst of a recovery.

“We can now understand that there is light at the end of the tunnel - and it's not a train,” she said. “What was especially important to me was it was documented that our economy in Northern Virginia is in really good shape. No one is going to lose any money if they buy a house in this area and hold it for several years. The economy is just too strong.”

Luis Lama, the association's immediate past chairman, said Northern Virginia's economy remains strong and its real estate market will be helped by the recent federal takeover of Fannie Mae and Freddie Mac.

“We expect a very good year next year,” Lama said. “We need the news media to reflect that to the consumer.”

Mortgage Q&A: Federal Bailout Results

2008-09-28T15:49:00.000-04:00

Washington Times, September 12, 2008
By Henry Savage

Most readers undoubtedly have heard about the federal government's takeover of mortgage giants Freddie Mac and Fannie Mae. While many in the media are lamenting the decision as another costly government bailout, I thought I would take this opportunity to explain what it all means and how it could affect the average American.

First, let me explain what Fannie Mae and Freddie Mac do, as many folks have no idea. They are nicknames for the Federal National Mortgage Corp. and the Federal Home Loan Mortgage Corp. Both of these companies were chartered by the federal government with a design to provide mortgage money to as many Americans as possible. Here's how these companies work.

Before the establishment of Fannie and Freddie, Americans would obtain their mortgages from local banks and so-called building and loan associations. These banks would take savings deposits, pay out an interest rate and then turn around and lend mortgage money to homeowners at a higher interest rate.

The problem is that a bank would run out of money to lend because it had a limited amount of savings deposits from its customers. Enter Fannie Mae and Freddie Mac.

Fannie and Freddie would purchase the loans from the bank, freeing up cash so the bank could make new loans. Fannie and Freddie then would package their loans into mortgage-backed-securities and sell them to investors. Investors would enjoy a nice return on an asset that was collateralized by residential real estate.

Fannie and Freddie established underwriting standards that each loan applicant must meet. It is the lender's responsibility to ensure that each loan applicant meets Fannie's and Freddie's criteria or risk having the loan be rejected for purchase.

This arrangement worked quite well for many years. As interest rates dropped and property values rose beginning in the 1990s, Fannie and Freddie relaxed their guidelines and began to offer so-called Alt-A mortgages. Those programs carried slightly higher rates and were offered to folks who didn't quite fit the conventional guidelines.

Meanwhile, direct lenders and Wall Street investors teamed up to offer subprime loans. Those carried far higher rates and were offered to folks with no down payment and poor credit. Lenders and mortgage investors didn't worry because property values kept rising. If the borrower got into trouble, he simply could sell his house, pay back the mortgage and take a profit.

Am I painting the picture of a train wreck waiting to happen?

Here's the perfect storm: Property values fall, subprime loan holders owe more than the properties are worth, teaser interest rates expire, and balloon payments come due. Delinquencies and foreclosures rise, and mortgage investors get stuck with the hot potato.

Once Wall Street got burned, it lost its appetite for mortgage-backed securities, creating the credit crunch. Meanwhile, Fannie and Freddie get stuck with mortgage paper they can't sell during a period of skyrocketing delinquency and foreclosure rates.

One of the byproducts of this mess is a combined loss of $14 billion for Fannie and Freddie in the past year.

So the Feds decide they had better spend some taxpayer money and prop up these two giants to avert an economic catastrophe. No one really knows how much the bailout will cost the American taxpayers, but the consensus is it depends upon Fannie's and Freddie's financial performance in the coming years.

What does this mean for future homeowners and those who want to refinance their loans? As part of the bailout, the Treasury Department has agreed to purchase Fannie's and Freddie's mortgage-backed securities in the open market, alleviating the credit crunch.

It also should bring down mortgage rates. It's anyone's guess as to how low rates may go, but rates dropped about three-eighths of a percent in the first day after the announcement.

If the trend continues, potential home buyers will see more affordable housing and homeowners will be able to save some money by lowering their interest rate through a refinance.

Realtor Notebook: Foreclosures are NOT bargains

2008-06-13T11:32:00.001-04:00

Inman News, June 5, 2008
By Teresa Boardman

Radio ads, printed ads, Web sites, news broadcasts and television shows give consumers the message that they can find bargains or even achieve wealth by purchasing bank-owned homes. Media hype is all around and in my market we even have bus tours of foreclosed homes.

Real estate agents are bombarded with information on how to get rich selling foreclosures. Opportunities exist for investors and agents who want to run a high-volume, low-commission business. The homes and the opportunities are not as wonderful as the marketing leads us to believe.

For most Realtors, foreclosures are a growing part of the inventory and we work with them because we have buyers who want to purchase them. The process of buying a home from a bank is different than buying it from a private party -- it is slower, and there is more paperwork and it always seems like the bank doesn't really care if the home gets sold.

Getting these homes inspected is a challenge because often the water has been turned off by the city. The bank has a process and policies, which means it takes longer to get the simple things done that most of us handle on the spot with a phone call.

Large asset management departments handle foreclosures. Employees are in charge of "files," and they have hundreds of them. They get sick, take vacations and don't answer the phone. These employees play the role of the seller. They don't get to make decisions; they follow rules and they get paid vacations, and do not receive commissions or bonuses when their "file" closes.

Buyers' agents make less money on lower-priced foreclosures and end up doing about four times as much work as they would with any other type of sale, mainly because of the extra paperwork and because our buyers will have to make a few offers. About one in every two or three offers a buyer's agent writes will result in a sale that closes.

Often no effort is made to clean bank-owned homes or remove refuse. I have toured unheated bank-owned homes in sub-zero weather. I once had a client slip and fall on the ice on the kitchen floor. There are holes in the ceilings, missing windows, missing water heaters and no appliances. Snow accumulates on the sidewalks and stairs making it challenging to get to the front door. Sometimes a screwdriver is needed to remove the screws from the porch door to get to the door with the lockbox. Yet members of the media call me and ask if bank-owned homes are "staged" to sell faster. No, they are not staged, and they stay on the market longer than other homes do.

The houses tell me stories. A child's toy on the kitchen counter, phone numbers for the pediatrician and family dentist on the refrigerator. It hurts to go inside some of them. Clients ask why the homes are in such disrepair and wonder where the children are now. I don't know where the children are, but I do know that people who are losing their homes don't make repairs and that some of the homes were owned by investors who never made a repair and tenants were left homeless with little warning. In some cases, the tenants take their frustration out on the walls and the windows as they leave.

Buyers contact me and say they are interested in buying a foreclosure property. No matter what I say to them they don't get it until they see the home. Some foreclosures are in better shape than others. My clients make offers on them and we wait for weeks to find out if the offer was accepted. After going through that a couple of times, some buyers say no to foreclosures.

It is a myth that bank-owned properties are a bargain -- some are, but many are not. The bank-owned homes that are priced very low often need so much work that the cost of the repairs is more than the value of the home after the repairs are done.

It will be interesting to see what my town will look like in a few years. About 25-30 percent of the inventory of available homes is foreclosures and that number is growing. The number of foreclosures locally and nationwide will have a measurable impact on the social fabric of our neighborhoods and on our economy. Some will make money from it, but right now it is not obvious to me who the winners will be. I don't want to sell these homes, but they make up too much of the market to be ignored.

Your Money - Negotiating for a House? Start With ‘Dear Seller’

2008-06-13T11:22:00.000-04:00

New York Times, May 31, 2008
By RON LIEBER

A few years ago, when multiple bidders would show up at a real estate open house, the truly desperate resorted to writing love letters to the sellers.

Their plaintive scribblings painted a picture of first-time buyers chasing the American dream or growing families hungry for more space. The letters dripped with compliments for the property and ended with a plea for mercy (and a signed contract).

Today’s real estate market, however, calls for a different kind of letter, less a fuzzy valentine and more like a cold splash of water. It’s what you write to accompany a bid that is so far below the listing price that it cries out for explanation.

Inspired by the success of a friend who used this tactic, I drafted a sample letter that buyers who fear overpaying might send to homeowners. Then, I crafted a reply that confident sellers could fire back.

No seller would be happy to get a letter like this. The most powerful missives stoke doubt and create fear. Sellers who get them may be tempted to write off the bidders as lowballers. But it makes little sense not to at least reply, given the number of competing properties in most places and the difficulty lately in getting mortgages.

The sample letters below, which I wrote after conversations with representatives of the National Association of Realtors and the National Association of Exclusive Buyer Agents, don’t mention local economic conditions, comparable sales or other such data. You’ll want to fill in those details yourself. But the templates below should work as a starting point.

One caveat is that you’ll generally be relying on real estate agents to deliver your letter. Ask them point blank whether they intend to do so.

Dear Seller:

I’m writing to let you know that I would like to make a bid on your property. I love the area and am committed to buying a house nearby. And your home fits my needs.

But given that my offer is well below your asking price, I also feel I owe you an explanation.

First, consider the big picture. Nationwide, home prices in the first quarter of 2008 fell 14.1 percent compared with the same period a year earlier, according to the Standard & Poor’s/Case-Shiller U.S. National Home Price Index.

That’s the biggest decline in the 20-year history of the data. And just in case you’re wondering, during the housing downturn of the early 1990s, the decline was never worse than 2.8 percent.

Not only that, earlier this month, the National Association of Realtors pointed to the huge number of existing homes on the market. As of the end of April, the total number was 4.55 million. At the rate people are buying right now, that represents an 11.2-month supply.

So buyers have options right now. A lot of them. I’m no different. Your home is great, but it isn’t unique. Few homes are. I know this may be hard to hear, since you’ve spent years creating memories here. But you may be waiting a long time if you hope to find a buyer with the same emotional connection that you have.

My mindset is hardly unique. We’ve all been reading the headlines. The accompanying articles appear prominently in major newspapers and sit on the Web pages where people check their e-mail every day. Everyone sees them, and the psychological impact is real.

Has your real estate agent laid any of this out for you? Maybe so, and you didn’t want to believe it. But it’s also possible that your agent, afraid of offending you and losing the listing, simply doesn’t want to initiate that sort of discussion. It may be worth sitting down for a candid reassessment.

It will be tempting to view my low bid as an insult. Please don’t make that mistake. Your home is genuinely appealing, and I wouldn’t have written this note unless I was serious about buying it. Getting a firm offer in this market is an accomplishment. So congratulations!

Oh, and one more thing. You presumably need someplace to move. My guess is that you’ll find these same points compelling when it’s your turn to buy. You just might succeed in buying for a better price, too.

I look forward to hearing from you soon.

Yours Truly,

The Realist

Dear Bidder:

Thanks so much for your note. I’m truly glad that you like our home as much as we do. You’re right that my family and I have many great memories of this place, and we hope someday you will, too.

And I just want you to know that I’m not insulted in any way by your offer. The fact is, none of us are very good at buying and selling homes. We don’t do it often, and as much as we know we’re not supposed to let emotions get in the way, it’s hard not to. After all, few people buy or sell anything else as expensive as a home in their lifetimes.

That said, your offer disappointed me. You seem to believe that I’m not aware of how bad things are out there or that I’m in denial. But I do read the headlines, and I priced the house accordingly. I knew I might have to wait awhile to sell it.

I should point out that your data draws on what has already happened in the housing market. Instead, I’d ask you to consider what’s about to happen.

One big reason for the falling prices is that it’s harder to get mortgages. Lenders went from giving money to anyone with a pulse to demanding higher credit scores and larger down payments. All sorts of buyers simply couldn’t make the numbers work anymore.

That may now change. Starting June 1, Fannie Mae and Freddie Mac, which buy mortgages from lenders and help make it possible for them to lend more money, are loosening restrictions on the sorts of loans they’ll buy in many markets. That is supposed to make it easier for people to buy a home with a down payment of 5 percent, or even less. Many more qualified buyers should mean more bids, and I’m willing to wait to see if it turns out that way.

I know you talked about having choices, but presumably we wouldn’t be engaging in this correspondence unless you liked my home best. Given that, I’d ask you to think about something: How often do you find a place that you can actually imagine living in? Sure, there are a lot of other properties out there. But an increasing number are in foreclosure and probably have problems lurking within the walls. So don’t let fear of a falling market keep you out of a home that you truly want.

It’s probably obvious by now that I’m not going to counter with a particular number. This doesn’t mean that I do not want to negotiate. I’d just like you to consider what I’ve said and see if you find it convincing. In the meantime, other shoppers who are interested in my home now have a price to beat. So thanks for helping me out with that.

Just one more thing. Please take another look at whatever mortgage calculator you’re using and see how your monthly payment will change if you brought your price up a bit. It almost certainly is not going to be enough to break you. But it may be enough to get us to a deal.

I look forward to your reply.

Yours,

The Undaunted

Profiles in Tenacity: Short-Sale Buyers

2008-05-13T16:17:00.001-04:00

Washington Post, Sunday, May 11, 2008
By Elizabeth Razzi

Laurel Wittman and her husband, Eduardo Lopes, are examples of a rare species: successful short-sale buyers.

The unfortunate trio of nothing-down mortgages, sharp increases in adjustable-rate payments and shrinking home values has driven more strapped owners to ask their lenders to approve short sales as an alternative to foreclosure. The sales price is short of the amount owed to the lender, but lenders will sometimes accept such deals because foreclosures cost them even more money.

It's not an easy way to buy a house.

Wittman and Lopes endured a five-month wait to buy a five-bedroom Fairfax County house that was headed for foreclosure. They offered to pay the full asking price, aware that their offer would have to be approved by the seller's lender.

They didn't expect to be the only ones interested in making the deal.

Months went by with no response from the lender, SunTrust Mortgage. At times, the couple wondered if the deal was worth the hassle.

But persistence won them a nice house with a garage for $510,000, which was $90,000 less than its recent appraised value and nearly $117,000 less than the latest tax assessment. If you believe that time is money, though, they paid plenty. "If you had any urgency, you couldn't have done this," Wittman said. "It was all about just trying to get anyone to respond."

The couple wanted to move from their house in Dale City to be closer to Wittman's job in Alexandria. They planned to rent out the Dale City house, which allowed them a more flexible schedule than if they had to coordinate a sale and a purchase.

The Dutch Colonial they found sits smack against Interstate 66 near Falls Church.

The house has several features that made it a good choice for Lopes, who has used a wheelchair since 2005 because of multiple sclerosis. There's a main-level bedroom and bathroom, plus an updated kitchen with plenty of maneuvering room. It can easily accommodate a ramp to the front porch and a chair lift to the back door.

The home went on the market last May at $575,000, which was out of the couple's price range. By September, the asking price was down to $550,000, still more than they could afford. On Sept. 19, the asking price dropped to $499,950.

Until then, Lopes hadn't wanted to get involved with the hassle of trying to buy anything at a short sale, but that price cut changed his mind. "Suddenly, it was inside our price range, and it was a lot of house," Lopes said. "It became worth our time."

They thought the lender's review would add only a few weeks to the process. After all, they were offering the full asking price. So their purchase offer called for settlement no later than Nov. 15 -- only six weeks away.

"We thought that was reasonable," Wittman said. And the waiting began.

Their home inspection revealed problems with heating and plumbing systems, plus an elevated radon level. The seller had no money to cover any repairs, so they removed the inspection contingency from their offer and estimated that they could face as much as $20,000 in repairs.

But they found the lack of communication about the sale particularly frustrating. "We could not directly contact the lender," Lopes said. The lender would communicate only with the seller and the seller's real estate agent.

Repeatedly, the couple extended the expiration date on their purchase offer. They said the seller and his agent seemed at times unaware that the contract was about to expire, but Wittman and Lopes needed to keep the deal alive so they would not have to reapply for a mortgage.

Behind the scenes, SunTrust, the lender that held both a first mortgage for $480,000and a second mortgage for $120,000 on the home, was communicating with the title insurance company, AIG United Guaranty. According to a letter Lopes obtained, the mortgage insurer told the lender that it wanted to increase the payoff on the second mortgage to $50,000. Wittman and Lopes weren't sure whether that meant they were going to get a counteroffer raising the price by $50,000.

"At that price, we weren't going to be able to do it, but we might have counteroffered," Wittman said. But there was nothing for them to respond to. Neither the bank nor the seller had made them a counteroffer, and their original offer continued to gather dust.

"At this point, we just started having doubts," Wittman said. They began to look at other houses. With hope that it might finally nudge the deal along, on Dec. 24 they increased their offer by $10,000, to $510,000. "It was just kind of a shot in the dark," Wittman said. "This was our last, best offer."

Their patience was running out. "You almost get a little offended," she said. After all, they weren't the ones who were behind on payments. All they wanted to do was to buy the house -- and for more than the listed price.

It took another month to get a response. On Jan. 25, SunTrust informed the seller's agent that it would accept the $510,000 offer. The commission to the seller's agent was cut to 2 percent of the sales price. The buyer's agent was also asked to cut his commission, but he refused.

The net to SunTrust: $476,548, nearly $124,000 less than was owed. I don't know what additional compensation, if any, the bank received from mortgage insurance. SunTrust representatives did not respond to requests for comment.

SunTrust required closing by Feb. 29. But Wittman and Lopes needed to close more quickly, as their mortgage commitment would expire Feb. 18. If they had to reapply for a loan, they would have had to increase their down payment by $25,000, which would have killed the deal.

Through the process, they never knew how close the bank was to foreclosing.

"Nobody was putting pressure except us to get this done," Wittman said. Probably that's because they were the only ones to walk away with a gain. The seller lost his house. The bank lost money, but its sluggishness very nearly cost it a sale, too.

Rent and Wait, or Sell and Cringe?

2008-05-13T16:13:00.000-04:00

Washington Post, Saturday, May 10, 2008
By Benny L. Kass

We have lived in our house for 15 years and have decided to move. We bought a new house six months ago and tried to sell our old one "by owner." We had no success. We had a real estate agent give us a price that he thought the home would sell for. My husband did not like that number. He thinks prices will come up again.

Do you think we should sell our home at the going rate or rent it out for a while until the prices come up again? I'm not sure they will, so I think we should just sell it at the best offer, but we thought we would ask for your professional advice.

My "professional advice" is probably as good -- or as bad -- as that of anyone else who is trying to predict when or even if the real estate market will bounce back. Whether to sell or rent is a personal question that only you and your husband can decide, after taking into consideration a number of important factors. Here are some things to consider:

· Tax implications. I suspect that during the 15 years you have lived there, your house has increased in value. You do not want to get hit with capital gains tax on the profit you have made. That means you will have to have lived in the house for at least two of the five years before it is sold. If you can meet this test, and assuming that you and your husband file a joint income tax return, you can exclude up to $500,000 of the gain from tax. (Single people and those married but filing separately can exclude up to $250,000.)

This means that if you move out and rent the house, you want to sell it before three years have elapsed.

Selling a house that has a tenant is not always easy. Some tenants do not keep the house in the same condition that you or a potential purchaser would like. Some tenants refuse to let you show your house to prospective buyers, even if your lease specifically permits you to do so. You may have to take the tenant to court to get a judge to order showings.

Thus, even with the best intentions of selling the house within three years, you may find yourself thwarted and so lose the valuable tax exclusion.

· Being a landlord. Not everyone is cut out to be a landlord. You have to learn the local landlord-tenant laws and make sure that your lease conforms to those laws. For example, some jurisdictions place limits on the amount of the security deposit you can collect when you lease the house. In the District, tenants have a number of rights they don't have elsewhere, including the opportunity to buy the house even if you find a buyer.

If a tenant does not pay rent, eviction can be time-consuming and expensive.

More important, do you want to get calls in the middle of the night complaining that the toilet is overflowing or that the roof is leaking?

· Carrying costs. You have already bought another home. Can you afford to pay for two houses? Keep in mind that to have a buffer between you and your tenant, you may want to hire a property manager. And the manager will want to get paid whether or not you have a tenant -- and whether or not the tenant is paying rent.

When you rent out a house, there will be months when it is vacant. But you still have to pay the mortgage and the real estate tax, and carry adequate insurance. Maintenance bills don't stop, either.

· Benefits of renting. Yes, there are also benefits to being a landlord. You can get tax deductions that are not available to homeowners, such as depreciation. Discuss the details with your financial adviser.

· Future of the market. Here, no one can assist you. Some "experts" predict that the real estate market will come back by the end of this year, while others say it may take two or three years. The crystal ball on my desk is cloudy.

But here's a suggestion: If you decide to rent out the house and you have a lot of equity, you may want to consider refinancing and pulling out some of that money (assuming you can find a lender in today's economy that is willing to make a cash-out loan). However, first calculate all the potential income and expenses involved with the rental. You do not want to pull out too much money, only to find that the new mortgage payments and other expenses will exceed the monthly rental income.

Another suggestion: Take your time and see if you can get a better offer for your house. Spring is usually a good time to try to sell. Perhaps you will get lucky and find a buyer who will come closer to your price.

In the final analysis, however, if you decide to sell, I am sure you will make a profit. It might not be as large as you would like, or as much as your neighbor got for a similar house two years ago, but it will still be a profit. Too many people want to forget that property values were going crazy in the past few years and are disappointed that they cannot sell at those same exorbitant prices. There's no room for that mind-set today.

Buyers and Sellers Cash in with Patience

2008-05-13T16:11:00.000-04:00

Washington Post, May 9, 2008
By Michele Lerner

'Patience is the best remedy for every trouble," wrote Roman playwright Titus Maccius Plautus sometime between 254 and 184 B.C. He clearly had no inkling of the tribulations of the modern-day real estate market.

Yet his advice, centuries later, is just what local real estate experts are urging for frustrated buyers and sellers.

Real estate agents with 20 to 30 years of experience with the local real estate market may be a bit more sanguine than newcomers to the real estate market, mostly because they have seen home values drop and sales slow in the past and witnessed the ensuing market comeback.

Some local agents report a lively spring market, with open houses attracting plenty of potential buyers and contracts on the rise.

The Washington-area real estate market is extremely local, with many areas within the District and in close-in suburbs feeling very little effect from the national real estate slowdown.

Other areas, particularly Prince William, Loudoun and Prince George's County, have been hit harder, with slower sales and dropping prices.

Evelyn Lugo, a Realtor with Long & Foster Real Estate in District, with more than 20 years in the real estate business, says that this current real estate cycle is different from the 1990s.

"In the 1990s, we had this huge real estate boom and then a terrible crash," Ms. Lugo says. "This time, especially inside the Beltway, it didn't happen that way. This has been more of an adjustment, which just had to take place since housing prices were increasing so fast. But, at least inside the Beltway, I think the real estate market is recession-proof because of the strong employment with government jobs and government contractors. Now consumers can feel confident that because of this employment infrastructure, there won't be a huge drop in home values."

Ms. Lugo acknowledges that this holds true inside the Beltway, with different scenarios in more distant suburbs.

Barbara Miles, associate broker with Coldwell Banker Residential Brokerage in Bethesda, has been in the real estate business for 25 years. She says this is the third slow market she has experienced.

"People have been saying the same things today that they have said in previous markets, such as that this is the end of the real estate world, but it always comes back," Ms. Miles says. "Recently at a company, we were read quotes from the 1940s that could have been media quotes about today's real estate market. Historically, real estate always goes up, and people need to understand this."

Ms. Miles says she never recommends buying a home for consumers staying in the Washington area for only two years or less, suggesting instead that they rent. She says buying and selling a home costs about 10 percent of the value of the home, which can be hard to make up in just two years.

"If you are not intending to move for at least three or four years, though, it just makes sense to buy a home," Ms. Miles says. "By buying, you have the pride of ownership, a tax write-off, a roof over your head, and, eventually, the value will go up."

Ms. Miles says home values dropped 20 percent overnight in 1992, but then rose in double digits every year between 1999 and 2005.

Dee Rosenberg, associate broker with RE/MAX Realty Group in Gaithersburg with 29 years in the real estate business, says that buyers and sellers need to be patient in this particular market. Sellers may find it takes a long time for their home to go under contract, and buyers may find it hard to choose the right home and obtain financing.

"This real estate market is different because I have never seen so many foreclosures before," Ms. Rosenberg says. "Foreclosures are a big part of the competition for sellers, but they are not always in as good condition, either."

Don Noll, associate broker with RE/MAX Select Properties in Sterling, has been in the real estate business for 25 years.

"The slow market is a lot different this time around because of what I call the 'funny money' loans," Mr. Noll says. "So many of the homes on the market right now are foreclosures and short sales, and not all of them are coming from subprime loans. Some of them are because people went in with these no-documentation loans and 100 percent financing, and they just didn't have a vested interest in the property. It has been easier for them to walk away from the responsibility of owning a home. Other people were just using their home equity as an ATM machine so they could take trips to Hawaii, and now they can't sell their homes because they owe more than it's worth."

On the positive side, Mr. Noll says that while the upturn in home values took place from 1995 to 2005, the Washington area has not seen home values drop all the way down to 1995 prices.

"The people that are hardest hit are those who bought in 2004 and 2005 when prices peaked," Mr. Noll says. "The market won't recover until some of the inventory is absorbed. In Northern Virginia, we have about one year's worth of inventory available. The farther out you are from the city, the longer it will take because now residents are also hurt by rising gas prices that make commuting so expensive."

Ms. Lugo says the biggest hit on the market right now is coming from mortgage lenders.

"Most lenders now want buyers to put 10 to 20 percent down, but consumers have become accustomed to needing little or no money down," says Ms. Lugo. "Single-family homes in this area often cost $600,000, so you are asking people to come up with $60,000 to $120,000 in cash."

Ms. Lugo thinks the recent change in FHA loan limits to $729,750 in the Washington area is already having a big impact on the local market.

"Raising the loan limits on FHA loans has opened up the market to people who want to buy a home with just 3 percent down," Ms. Lugo says. "That down payment can be a gift, too, and they can accept seller contributions towards closing costs of up to 6 percent."

FHA loans typically have easier qualification standards that allow consumers with lower credit scores to be approved.

Barbara Haardt, a senior loan officer with Prosperity Mortgage in the District, says that FHA loans, like other mortgage programs, qualify consumers based on income, assets and credit scores, and require full documentation through tax returns and bank statements.

"The difference is that for FHA loans of $392,900 and below, no minimum credit score is required," Ms. Haardt says. "For higher loan amounts, a minimum score of 600 to 620 is required."

Ms. Haardt says lenders in today's real estate market carefully analyze a variety of factors to determine whether each individual county is considered a stable or declining market, which can impact the approval of mortgage loans in that area.

"Lenders look at the number of units on the market, the values of homes in that market and the number of units on the market for more than 180 days to determine market status," Ms. Haardt says. "Currently, the D.C. market, including Northern Virginia and Prince George's County, is considered a declining or distressed market. Montgomery County has already improved to a soft market."

Ms. Haardt says in a declining or distressed market, most lenders require a minimum down payment of 10 percent for conventional loans. FHA loans are not impacted by this designation.

"Some lenders will automatically insist in lowering appraisals on homes in declining markets by 5 percent," Ms. Haardt says.

Two key pieces of advice that each real estate agent offered are these: Buyers should think conservatively when it comes to determining how much they can afford, and sellers should recognize that while they may sell low, they are also buying low.

"Sellers need to realize that if their home value is down by 10 percent from its peak, so is the value of the home you want to buy," Ms. Miles says. "You may have lost $30,000 by not selling your home in 2005, but you are gaining $60,000 on what the owner of your next house thought he would get. You just need to keep it all in perspective."

Ms. Miles says buyers need to compromise and not overextend themselves when purchasing a home. Plus, they need to make sure they understand their loan program, she says.

"You can always sell and move up later," Ms. Miles says.

Ms. Lugo says potential first-time buyers are "crazy" if they are not buying a home right now, since interest rates are low, financing is available and plenty of homes are available.

Ms. Rosenberg suggests that buyers be patient, since it may take more than one attempt to arrange appropriate financing and find the home they want. She says buyers should expect to make a down payment of at least 3 percent (with an FHA loan) or more, and they need to make sure they have a good credit score.

"Buyers need to be very specific with their buyer agent to make sure the agent understands exactly what they are looking for," Ms. Rosenberg says. "The most important thing is to make sure you are comfortable with the payment and your income. Do not push yourself into a more expensive home until you become uncomfortable with the payments."

Mr. Noll says that when he started in the real estate business, buyers had to make at least a 5 percent down payment, if not more.

"Now lenders are returning to that pattern and cracking down," Mr. Noll says. "They want buyers to have a vested interest in the home. So buyers may need some patience while they fix their credit and save money for a down payment."

Both Ms. Rosenberg and Mr. Noll suggest that sellers who do not have to sell their home now wait out the market.

"If you do have to sell, you need to be patient and understand that you are in it for the long haul," Ms. Rosenberg says. "You have to stage your home to make sure it looks the best it can, and you need to assume you will have to adjust your price."

Mr. Noll preaches patience, as well. "Buyers and sellers need to have realistic expectations in this market," he says. "They need a lot of patience until the market turns around again."

Bernanke Urges More Action to Stem Home Foreclosure Crisis

2008-05-13T16:07:00.000-04:00

Associated Press, May 5, 10:04 PM
By JEANNINE AVERSA

WASHINGTON (AP) - A rising tide of late mortgage payments and home foreclosures poses considerable dangers to the national economy, Federal Reserve Chairman Ben Bernanke warned anew Monday as he urged Congress to take additional steps to alleviate the problems.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy," Bernanke said in a dinner speech to Columbia Business School in New York. "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest," he said.

Some 1.5 million U.S. homes entered into the foreclosure process last year, up 53 percent from 2006, Bernanke said. The rate of new foreclosures looks likely to be even higher this year, he said.

To provide more relief, Bernanke again called on Congress to give the Federal Housing Administration, which insures mortgages, more flexibility to help distressed borrowers at risk of losing their homes. He also again urged lawmakers to move ahead on legislation revamping Fannie Mae (FNM) and Freddie Mac (FRE), which finance mortgages. And, he called on the two mortgage giants to quickly raise new capital.

House leaders plan action on those and other housing measures this week.

"Conditions in mortgage markets remain quite difficult," the Fed chief said. A copy of the speech was made available in Washington.

The reasons behind surging late payments and foreclosures can vary and that needs to be taken into account when developing solutions, Bernanke said. For instance, parts of New England, states in the Great Lakes, including Minnesota, Michigan and Wisconsin, show increased mortgage delinquencies and "notable increases" in unemployment rates, he said.

California, Florida and parts of Colorado, on the other hand, saw delinquencies rise during a period when unemployment generally decreased but the value of homes declined, he said.

Mortgage companies are used to dealing with delinquencies related to life events, such as job loss or an illness, with the most common approaches being a temporary repayment plan or the folding of missed payments into the principal balance, Bernanke said.

"A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue," Bernanke said.

The current housing crises has clobbered some borrowers home prices dropped. That left them with mortgages that are bigger than the value of their home. When that's the primary problem, Bernanke said the best solution may be reducing the amount that the borrower owes on the loan or some other permanent modification to the loan.

Rising foreclosures add to the glut of unsold homes and that put more downward pressure on prices, aggravating the housing slump, he said. More rapid declines in house prices could have an "adverse impact" on the broader economy and the stability of the financial system, he said.

In his remarks, Bernanke did not talk about the interest rate policy or the state of the economy.

To help bolster the economy, the Federal Reserve last Wednesday cut a key interest rate by one-quarter percentage point to 2 percent and strongly hinted that it may take a breather in its rate-cutting campaign that started last September.

The Fed hopes that its powerful series of rate cuts - its most aggressive in decades - along with the government's $168 billion stimulus package - including tax rebates that started flowing to bank accounts last week - will be sufficient to lift the country out of its slump in the second half of this year.

The mortgage meltdown started with problems with subprime mortgages - those made to people with tarnished credit. However, they have spread to more creditworthy borrowers.

The trio of crises - housing, credit and financial - have threatened to plunge the country into its first recession since 2001. The situation has roiled Wall Street, rattled consumers and has galvanized politicians in the White House, in Congress and on the campaign trail to come up with proposals to provide relief.

"The Realtor's mantra is 'location, location, location' ... local variation in housing and mortgage markets is considerable," Bernanke said. "This variation is useful for understanding the sources of the increase in mortgage delinquencies and foreclosures, and it should be taken into account as servicers and policymakers consider how best to avoid preventable foreclosures," he said.

Triple-A Failure

2008-05-13T15:58:00.000-04:00

New York Times Magazine, April 27, 2008
By ROGER LOWENSTEIN

The Ratings Game

In 1996, Thomas Friedman, the New York Times columnist, remarked on ''The NewsHour With Jim Lehrer'' that there were two superpowers in the world -- the United States and Moody's bond-rating service -- and it was sometimes unclear which was more powerful. Moody's was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages.

Obscure and dry-seeming as it was, this business offered a certain magic. The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody's, then the investor could forget about the underlying mortgages. He wouldn't need to know what properties were in the pool, only that the pool was triple-A -- it was just as safe, in theory, as other triple-A securities.

Over the last decade, Moody's and its two principal competitors, Standard & Poor's and Fitch, played this game to perfection -- putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody's in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.

By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and -- their capital thus replenished -- wrote new loans at a much quicker pace.

Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.

But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.

Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody's and Standard & Poor's that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.

In the wake of the housing collapse, Congress is exploring why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee were expected to begin April 22). Two key questions are whether the credit agencies -- which benefit from a unique series of government charters -- enjoy too much official protection and whether their judgment was tainted. Presumably to forestall criticism and possible legislation, Moody's and S.&P. have announced reforms. But they reject the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.

Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that ''the credit-rating agencies suffer from a conflict of interest -- perceived and apparent -- that may have distorted their judgment, especially when it came to complex structured financial products.'' Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, says that the conflict is a serious problem. Thanks to the industry's close relationship with the banks whose securities it rates, Partnoy says, the agencies have behaved less like gatekeepers than gate openers. Last year, Moody's had to downgrade more than 5,000 mortgage securities -- a tacit acknowledgment that the mortgage bubble was abetted by its overly generous ratings. Mortgage securities rated by Standard & Poor's and Fitch have suffered a similar wave of downgrades.

Presto! How 2,393 Subprime Loans Become a High-Grade Investment

The business of assigning a rating to a mortgage security is a complicated affair, and Moody's recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody's was fair-minded in choosing an example; the case they showed me, which they masked with the name ''Subprime XYZ,'' was a pool of 2,393 mortgages with a total face value of $430 million.

Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime -- that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.

Moody's did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. ''We aren't loan officers,'' Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody's, told me. ''Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?''

The loans in Subprime XYZ were issued in early spring 2006 -- what would turn out to be the peak of the boom. They were originated by a West Coast company that Moody's identified as a ''nonbank lender.'' Traditionally, people have gotten their mortgages from banks, but in recent years, new types of lenders peddling sexier products grabbed an increasing share of the market. This particular lender took the loans it made to a New York investment bank; the bank designed an investment vehicle and brought the package to Moody's.

Moody's assigned an analyst to evaluate the package, subject to review by a committee. The investment bank provided an enormous spreadsheet chock with data on the borrowers' credit histories and much else that might, at very least, have given Moody's pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs -- ''teaser'' loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble -- lending on the belief, or the hope, that new money will bail out the old.

Moody's learned that almost half of these borrowers -- 43 percent -- did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.

On the plus side, Moody's noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. ''That was a comfort feeling,'' Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, ''You'll give up your ski chalet first.''

Another factor giving Moody's comfort was that all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property's presumed resale value, which meant the borrowers had not a cent of equity.

In the frenetic, deal-happy climate of 2006, the Moody's analyst had only a single day to process the credit data from the bank. The analyst wasn't evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle -- a ghost corporation with no people or furniture and no assets either until the deal was struck -- would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody's was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank's point of view, the key to the deal was obtaining a triple-A rating -- without which the deal wouldn't be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. ''People say, 'How can you create triple-A out of B-rated paper?' '' notes Arturo Cifuentes, a former Moody's credit analyst who now designs credit instruments. It may seem like a scam, but it's not.

The secret sauce is that the S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1. The highest-rated bonds would have first priority on the cash received from mortgage holders until they were fully paid, then the next tier of bonds, then the next and so on. The bonds at the bottom of the pile got the highest interest rate, but if homeowners defaulted, they would absorb the first losses.

It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody's to classify them as triple-A. Imagine a seaside condo beset by flooding: just as the penthouse will not get wet until the lower floors are thoroughly soaked, so the triple-A bonds would not lose a dime unless the lower credits were wiped out.

Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. ''Everyone assumed the credit agencies knew what they were doing,'' says Joseph Mason, a credit expert at Drexel University. ''A structural engineer can predict what load a steel support will bear; in financial engineering we can't predict as well.''

Mortgage-backed securities like those in Subprime XYZ were not the terminus of the great mortgage machine. They were, in fact, building blocks for even more esoteric vehicles known as collateralized debt obligations, or C.D.O.'s. C.D.O.'s were financed with similar ladders of bonds, from triple-A on down, and the credit-rating agencies' role was just as central. The difference is that XYZ was a first-order derivative -- its assets included real mortgages owned by actual homeowners. C.D.O.'s were a step removed -- instead of buying mortgages, they bought bonds that were backed by mortgages, like the bonds issued by Subprime XYZ. (It is painful to consider, but there were also third-order instruments, known as C.D.O.'s squared, which bought bonds issued by other C.D.O.'s.)

Miscalculations that were damaging at the level of Subprime XYZ were devastating at the C.D.O. level. Just as bad weather will cause more serious delays to travelers with multiple flights, so, if the underlying mortgage bonds were misrated, the trouble was compounded in the case of the C.D.O.'s that purchased them.

Moody's used statistical models to assess C.D.O.'s; it relied on historical patterns of default. This assumed that the past would remain relevant in an era in which the mortgage industry was morphing into a wildly speculative business. The complexity of C.D.O.'s undermined the process as well. Jamie Dimon, the chief executive of JPMorgan Chase, which recently scooped up the mortally wounded Bear Stearns, says, ''There was a large failure of common sense'' by rating agencies and also by banks like his. ''Very complex securities shouldn't have been rated as if they were easy-to-value bonds.''

The Accidental Watchdog

John Moody, a Wall Street analyst and former errand runner, hit on the idea of synthesizing all kinds of credit information into a single rating in 1909, when he published the manual ''Moody's Analyses of Railroad Investments.'' The idea caught on with investors, who subscribed to his service, and by the mid-'20s, Moody's faced three competitors: Standard Statistics and Poor's Publishing (which later merged) and Fitch.

Then as now, Moody's graded bonds on a scale with 21 steps, from Aaa to C. (There are small differences in the agencies' nomenclatures, just as a grande latte at Starbucks becomes a ''medium'' at Peet's. At Moody's, ratings that start with the letter ''A'' carry minimal to low credit risk; those starting with ''B'' carry moderate to high risk; and ''C'' ratings denote bonds in poor standing or actual default.) The ratings are meant to be an estimate of probabilities, not a buy or sell recommendation. For instance, Ba bonds default far more often than triple-As. But Moody's, as it is wont to remind people, is not in the business of advising investors whether to buy Ba's; it merely publishes a rating.

Until the 1970s, its business grew slowly. But several trends coalesced to speed it up. The first was the collapse of Penn Central in 1970 -- a shattering event that the credit agencies failed to foresee. It so unnerved investors that they began to pay more attention to credit risk.

Government responded. The Securities and Exchange Commission, faced with the question of how to measure the capital of broker-dealers, decided to penalize brokers for holding bonds that were less than investment-grade (the term applies to Moody's 10 top grades). This prompted a question: investment grade according to whom? The S.E.C. opted to create a new category of officially designated rating agencies, and grandfathered the big three -- S.&P., Moody's and Fitch. In effect, the government outsourced its regulatory function to three for-profit companies.

Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed. Over the '80s and '90s, a latticework of such rules redefined credit markets. Many classes of investors were now forbidden to buy noninvestment-grade bonds at all.

Issuers thus were forced to seek credit ratings (or else their bonds would not be marketable). The agencies -- realizing they had a hot product and, what's more, a captive market -- started charging the very organizations whose bonds they were rating. This was an efficient way to do business, but it put the agencies in a conflicted position. As Partnoy says, rather than selling opinions to investors, the rating agencies were now selling ''licenses'' to borrowers. Indeed, whether their opinions were accurate no longer mattered so much. Just as a police officer stopping a motorist will want to see his license but not inquire how well he did on his road test, it was the rating -- not its accuracy -- that mattered to Wall Street.

The case of Enron is illustrative. Throughout the summer and fall of 2001, even though its credit was rapidly deteriorating, the rating agencies kept it at investment grade. This was not unusual; the agencies typically lag behind the news. On Nov. 28, 2001, S.&P. finally dropped Enron's bonds to subinvestment grade. Although its action merely validated the market consensus, it caused the stock to collapse. To investors, S.&P.'s action was a signal that Enron was locked out of credit markets; it had lost its ''license'' to borrow. Four days later it filed for bankruptcy.

Another trend that spurred the agencies' growth was that more companies began borrowing in bond markets instead of from banks. According to Chris Mahoney, a just-retired Moody's veteran of 22 years, ''The agencies went from being obscure and unimportant players to central ones.''

A Conflict of Interest?

Nothing sent the agencies into high gear as much as the development of structured finance. As Wall Street bankers designed ever more securitized products -- using mortgages, credit-card debt, car loans, corporate debt, every type of paper imaginable -- the agencies became truly powerful.

In structured-credit vehicles like Subprime XYZ, the agencies played a much more pivotal role than they had with (conventional) bonds. According to Lewis Ranieri, the Salomon Brothers banker who was a pioneer in mortgage bonds, ''The whole creation of mortgage securities was involved with a rating.''

What the bankers in these deals are really doing is buying a bunch of I.O.U.'s and repackaging them in a different form. Something has to make the package worth -- or seem to be worth -- more that the sum of its parts, otherwise there would be no point in packaging such securities, nor would there be any profits from which to pay the bankers' fees.

That something is the rating. Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.

The challenge to investment banks is to design securities that just meet the rating agencies' tests. Risky mortgages serve their purpose; since the interest rate on them is higher, more money comes into the pool and is available for paying bond interest. But if the mortgages are too risky, Moody's will object. Banks are adroit at working the system, and pools like Subprime XYZ are intentionally designed to include a layer of Baa bonds, or those just over the border. ''Every agency has a model available to bankers that allows them to run the numbers until they get something they like and send it in for a rating,'' a former Moody's expert in securitization says. In other words, banks were gaming the system; according to Chris Flanagan, the subprime analyst at JPMorgan, ''Gaming is the whole thing.''

When a bank proposes a rating structure on a pool of debt, the rating agency will insist on a cushion of extra capital, known as an ''enhancement.'' The bank inevitably lobbies for a thin cushion (the thinner the capitalization, the fatter the bank's profits). It's up to the agency to make sure that the cushion is big enough to safeguard the bonds. The process involves extended consultations between the agency and its client. In short, obtaining a rating is a collaborative process.

The evidence on whether rating agencies bend to the bankers' will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody's has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody's $200,000 and more for complicated deals. And the banks pay only if Moody's delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody's through the mid-'90s, says this arrangement is unhealthy. If Moody's and a client bank don't see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as ''ratings shopping.''

And it seems to have helped the banks get better ratings. Mason, of Drexel University, compared default rates for corporate bonds rated Baa with those of similarly rated collateralized debt obligations until 2005 (before the bubble burst). Mason found that the C.D.O.'s defaulted eight times as often. One interpretation of the data is that Moody's was far less discerning when the client was a Wall Street securitizer.

After Enron blew up, Congress ordered the S.E.C. to look at the rating industry and possibly reform it. The S.E.C. ducked. Congress looked again in 2006 and enacted a law making it easier for competing agencies to gain official recognition, but didn't change the industry's business model. By then, the mortgage boom was in high gear. From 2002 to 2006, Moody's profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody's reported net income of $750 million. Raymond W. McDaniel Jr., its chief executive, gloated in the annual report for that year, ''I firmly believe that Moody's business stands on the 'right side of history' in terms of the alignment of our role and function with advancements in global capital markets.''

Using Weather in Antarctica To Forecast Conditions in Hawaii

Even as McDaniel was crowing, it was clear in some corners of Wall Street that the mortgage market was headed for trouble. The housing industry was cooling off fast. James Kragenbring, a money manager with Advantus Capital Management, complained to the agencies as early as 2005 that their ratings were too generous. A report from the hedge fund of John Paulson proclaimed astonishment at ''the mispricing of these securities.'' He started betting that mortgage debt would crash.

Even Mark Zandi, the very visible economist at Moody's forecasting division (which is separate from the ratings side), was worried about the chilling crosswinds blowing in credit markets. In a report published in May 2006, he noted that consumer borrowing had soared, household debt was at a record and a fifth of such debt was classified as subprime. At the same time, loan officers were loosening underwriting standards and easing rates to offer still more loans. Zandi fretted about the ''razor-thin'' level of homeowners' equity, the avalanche of teaser mortgages and the $750 billion of mortgages he judged to be at risk. Zandi concluded, ''The environment feels increasingly ripe for some type of financial event.''

A month after Zandi's report, Moody's rated Subprime XYZ. The analyst on the deal also had concerns. Moody's was aware that mortgage standards had been deteriorating, and it had been demanding more of a cushion in such pools. Nonetheless, its credit-rating model continued to envision rising home values. Largely for that reason, the analyst forecast losses for XYZ at only 4.9 percent of the underlying mortgage pool. Since even the lowest-rated bonds in XYZ would be covered up to a loss level of 7.25 percent, the bonds seemed safe.

XYZ now became the responsibility of a Moody's team that monitors securities and changes the ratings if need be (the analyst moved on to rate a new deal). Almost immediately, the team noticed a problem. Usually, people who finance a home stay current on their payments for at least a while. But a sliver of folks in XYZfell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent. (Historically, it is rare for more than 1 percent of mortgages at that stage to be delinquent.)

Moody's monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.

By the spring of 2007, 13 percent of Subprime XYZ was delinquent -- and it was worsening by the month. XYZ was hardly atypical; the entire class of 2006 was performing terribly. (The class of 2007 would turn out to be even worse.)

In April 2007, Moody's announced it was revising the model it used to evaluate subprime mortgages. It noted that the model ''was first introduced in 2002. Since then, the mortgage market has evolved considerably.'' This was a rather stunning admission; its model had been based on a world that no longer existed.

Poring over the data, Moody's discovered that the size of people's first mortgages was no longer a good predictor of whether they would default; rather, it was the size of their first and second loans -- that is, their total debt -- combined. This was rather intuitive; Moody's simply hadn't reckoned on it. Similarly, credit scores, long a mainstay of its analyses, had not proved to be a ''strong predictor'' of defaults this time. Translation: even people with good credit scores were defaulting. Amy Tobey, leader of the team that monitored XYZ, told me, ''It seems there was a shift in mentality; people are treating homes as investment assets.'' Indeed. And homeowners without equity were making what economists call a rational choice; they were abandoning properties rather than make payments on them. Homeowners' equity had never been as high as believed because appraisals had been inflated.

Over the summer and fall of 2007, Moody's and the other agencies repeatedly tightened their methodology for rating mortgage securities, but it was too late. They had to downgrade tens of billions of dollars of securities. By early this year, when I met with Moody's, an astonishing 27 percent of the mortgage holders in Subprime XYZ were delinquent. Losses on the pool were now estimated at 14 percent to 16 percent -- three times the original estimate. Seemingly high-quality bonds rated A3 by Moody's had been downgraded five notches to Ba2, as had the other bonds in the pool aside from its triple-A's.

The pain didn't stop there. Many of the lower-rated bonds issued by XYZ, and by mortgage pools like it, were purchased by C.D.O.'s, the second-order mortgage vehicles, which were eager to buy lower-rated mortgage paper because it paid a higher yield. As the agencies endowed C.D.O. securities with triple-A ratings, demand for them was red hot. Much of it was from global investors who knew nothing about the U.S. mortgage market. In 2006 and 2007, the banks created more than $200 billion of C.D.O.'s backed by lower-rated mortgage paper. Moody's assigned a different team to rate C.D.O.'s. This team knew far less about the underlying mortgages than did the committee that evaluated Subprime XYZ. In fact, Moody's rated C.D.O.'s without knowing which bonds the pool would buy.

A C.D.O. operates like a mutual fund; it can buy or sell mortgage bonds and frequently does so. Thus, the agencies rate pools with assets that are perpetually shifting. They base their ratings on an extensive set of guidelines or covenants that limit the C.D.O. manager's discretion.

Late in 2006, Moody's rated a C.D.O. with $750 million worth of securities. The covenants, which act as a template, restricted the C.D.O. to, at most, an 80 percent exposure to subprime assets, and many other such conditions. ''We're structure experts,'' Yuri Yoshizawa, the head of Moody's' derivative group, explained. ''We're not underlying-asset experts.'' They were checking the math, not the mortgages. But no C.D.O. can be better than its collateral.

Moody's rated three-quarters of this C.D.O.'s bonds triple-A. The ratings were derived using a mathematical construct known as a Monte Carlo simulation -- as if each of the underlying bonds would perform like cards drawn at random from a deck of mortgage bonds in the past. There were two problems with this approach. First, the bonds weren't like those in the past; the mortgage market had changed. As Mark Adelson, a former managing director in Moody's structured-finance division, remarks, it was ''like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.'' And second, the bonds weren't random. Moody's had underestimated the extent to which underwriting standards had weakened everywhere. When one mortgage bond failed, the odds were that others would, too.

Moody's estimated that this C.D.O. could potentially incur losses of 2 percent. It has since revised its estimate to 27 percent. The bonds it rated have been decimated, their market value having plunged by half or more. A triple-A layer of bonds has been downgraded 16 notches, all the way to B. Hundreds of C.D.O.'s have suffered similar fates (most of Wall Street's losses have been on C.D.O.'s). For Moody's and the other rating agencies, it has been an extraordinary rout.

Whom Can We Rely On?

The agencies have blamed the large incidence of fraud, but then they could have demanded verification of the mortgage data or refused to rate securities where the data were not provided. That was, after all, their mandate. This is what they pledge for the future. Moody's, S.&P. and Fitch say that they are tightening procedures -- they will demand more data and more verification and will subject their analysts to more outside checks. None of this, however, will remove the conflict of interest in the issuer-pays model. Though some have proposed requiring that agencies with official recognition charge investors, rather than issuers, a more practical reform may be for the government to stop certifying agencies altogether.

Then, if the Fed or other regulators wanted to restrict what sorts of bonds could be owned by banks, or by pension funds or by anyone else in need of protection, they would have to do it themselves -- not farm the job out to Moody's. The ratings agencies would still exist, but stripped of their official imprimatur, their ratings would lose a little of their aura, and investors might trust in them a bit less. Moody's itself favors doing away with the official designation, and it, like S.&P., embraces the idea that investors should not ''rely'' on ratings for buy-and-sell decisions.

This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on? The agencies seem utterly too involved to serve as a neutral arbiter, and the banks are sure to invent new and equally hard-to-assess vehicles in the future. Vickie Tillman, the executive vice president of S.&P., told Congress last fall that in addition to the housing slump, ''ahistorical behavorial modes'' by homeowners were to blame for the wave of downgrades. She cited S.&P.'s data going back to the 1970s, as if consumers were at fault for not living up to the past. The real problem is that the agencies' mathematical formulas look backward while life is lived forward. That is unlikely to change.

Some Borrowers Hit New Snag In Refinancing

2008-03-07T05:59:00.000-05:00

Home-Equity Lenders Get Tougher on People Switching To Cheaper First Mortgages
Wall Street Journal, March 6, 2008
By RUTH SIMON

In the latest sign of how the credit crunch is hurting even borrowers with good credit, some home-equity lenders are starting to slam the door on homeowners who want to refinance their primary mortgages.

In some cases, homeowners who in the past would have been easily approved for a mortgage refinancing are finding that they can't get their home-equity lender to give the go-ahead, which is required to complete the transaction. Others are being told by their home-equity lender that they need to reduce the size of their loan or line of credit.

Approvals from home-equity lenders used to be routine, particularly if the borrower wasn't increasing the size of the mortgage as part of the transaction.

But that's no longer always the case -- even in places where the housing market hasn't been hit by huge price declines.

Such approvals, known in the industry as "subordinations," mean that the home-equity lender agrees to stand in second place behind the new mortgage and allow the existing first mortgage to be replaced by another first mortgage.

Many mortgage refinancings continue to go through without a hitch. But some homeowners who want to lower their rates or lock in a fixed-rate mortgage can't,
even if refinancing would save them money and put them in a better position to repay their loans.

"For borrowers trying to improve their situation, this is a nightmare," says Richard Redmond, a mortgage broker in Larkspur, Calif. That's because getting a new home-equity loan to replace the old one in order to get a refinancing approved "may be impossible," he says, as many lenders have significantly tightened their standards as housing prices have fallen.

During the housing boom, many borrowers used home-equity loans as a way to buy a home with little or no money down without having to pay for private mortgage insurance. Others turned to these loans to pay off higher-cost debt or to finance renovations and even vacations. The dollar value of home-equity loans outstanding stood at $1.1 trillion in the third quarter of 2007, according to the Federal Reserve.

The higher hurdles for borrowers come at a time when home-equity lenders are reeling from rising losses in the face of higher delinquencies and falling home prices. More than 5% of home-equity loans were at least 30 days past due in January, according to Equifax and Moody's Economy.com, up from 4.4% in December and 3.4% a year earlier. Delinquencies on home-equity lines of credit have also risen, to 2.2% in January, from 1.9% in December and just 1.2% a year earlier.

Lenders extended an estimated $456 billion of new home-equity loans and lines of credit in 2007, down from a peak of $504 billion in 2006, according to SMR Research in Hackettstown, N.J.

In an effort to stem future losses, home-equity lenders have tightened their standards by, for example, significantly cutting back on how much of a property's value borrowers can finance. They are also going back to some borrowers and freezing their home-equity lines of credit or reducing the maximum amount they can borrow. Charlotte, N.C.-based Bank of America Corp., for instance, began notifying some of its customers last month that it was blocking access to their home-equity lines because of falling home prices.

Cleveland-based lender National City Corp. last month stopped approving refinancing requests from borrowers who received a home-equity loan from the lender through a mortgage broker. Kristen Baird Adams, a National City spokeswoman, says the move was "consistent" with the company's decision last summer to stop making loans through mortgage brokers.

A 'Strategic' Decision

"As a general rule, we are declining" requests related to such loans, says Ms. Adams. "It was a strategic business decision." She adds that "in certain scenarios, if the borrower's first mortgage is with another lender and they are willing and eligible to refinance [the existing mortgage] through National City Mortgage, we could subordinate the existing second mortgage."

Some other borrowers are getting turned down by National City because of tighter lending standards, such as a reduction in the maximum percentage of a home's value a borrower can finance, Ms. Adams says.

Dale Betterton, a financial-software developer, was among those caught short by the change in National City's policies. Mr. Betterton bought a home in Boulder, Colo., this past summer with 5% down. When interest rates dropped last month, he decided to refinance. But National City, which holds his home-equity loan, declined to approve the deal. Mr. Betterton had "superb" credit and the new mortgage would cut his mortgage rate by more than a percentage point, making him a better credit risk, says his mortgage banker, Lou Barnes of Boulder West Financial.

"My understanding was it was pretty straightforward to refinance when rates go down, and there wouldn't be any strange obstacles," says Mr. Betterton, who is now considering paying off his second mortgage so he can refinance.

David Erickson, a mortgage broker in Lynnwood, Wash., says he's had two refinancings declined by National City that "would easily have gotten approval six months ago." In the past, he says, home-equity lenders were eager to keep the loan on their books. Now, he says, "they'd sure love to get paid off and get 100 cents on the dollar."

In some cases, borrowers are getting a thumbs down from their lender because of a change in credit-worthiness or because of falling home prices. Others are getting squeezed by tighter lending standards.

"If there's a material change in the borrower's credit or the value of the home, we might be less willing" to approve a refinancing, says Richard Lieber, mortgage bank chief credit officer for IndyMac Bancorp Inc. IndyMac evaluates refinance requests "on a case-by-case basis," he says. "Due to declines in home values, we are turning down more" of these requests now than in the past.

Other lenders are also giving refinancings more scrutiny. Michael Dunne, a loan officer in Canton, Mass., says one of his clients was unable last month to complete a refinancing that would have reduced his mortgage payments by about $250 a month because local lender South Shore Savings Bank, which held the home-equity loan, refused to give its approval.

South Shore originally held the mortgage, as well as the home-equity loan, but the mortgage was recently sold to investors, Mr. Dunne says. The borrower had good credit, he adds, wasn't pulling out cash and had never missed a payment, but his total mortgage debt exceeded 90% of the home's value at the time the loan was originated. The rejection "really kind of shocked me," Mr. Dunne says, adding that the lender's "situation was not being hurt in the least bit."

Christopher Dunn, an executive vice president with the South Weymouth, Mass., lender, says he can't comment on the specific situation. "I think we are all being more careful," he says. "On the other hand, if our position isn't being worsened and the customer is able to do something to improve their situation," the bank is likely to give its approval.

Reducing Credit Lines

In other cases, home-equity lenders are vetting applications more closely and reducing the size of their line of credit before approving a refinancing. On one recent refinancing, Wells Fargo & Co. asked for copies of bank statements and other documentation to get a better picture of the borrower's assets, even though it had approved the borrower for a home-equity line of credit four months earlier, says David Soleymani, a mortgage broker in Los Angeles.

Wells Fargo ultimately approved the deal, but reduced the size of the credit line to $220,000 from $250,000. The move didn't create a hardship for the borrower because he hadn't tapped the credit line, Mr. Soleymani says. "Historically, they would accept [the borrower's information] at face value" and not ask for the documents, he says. "There's a higher level of scrutiny, and there's no longer the automatic assumption that the holder of the home-equity loan will subordinate."

Wells Fargo evaluates refinancing requests "on a case-by-case basis," says Kevin Moss, head of home-equity for the San Francisco-based lender, "and we consider a variety of factors such as credit experience, the combined loan-to-property value, and the ability to repay the outstanding loans." We want to do everything we can to try to work with our customers," he adds, "and keep their business while following responsible lending practices."

Homeowners with home-equity loans or lines of credit may be able to refinance more easily by simply paying off their loans. With home values falling in his market, Steve Walsh, a mortgage broker in Scottsdale, Ariz., says he's encouraging some borrowers who haven't tapped their credit lines or owe only a small amount to close down those lines, even if they have to pay an early-termination fee, which can run about $300.

Don't Blunder Into The Home Market

2008-02-28T19:54:00.000-05:00

Forbes.com - Commentary
By Robert Jenson, February 26, 2008

Buying and selling real estate in today's tumultuous, highly demanding marketplace is not for the faint of heart. While tricks of the trade abound to give buyers and sellers a leg up on the competition, there are a number of basic pitfalls that buyers and sellers should avoid, lest they commence their real estate venture on shaky ground.

First and foremost, whether you are buying or selling, do your homework before hiring a real estate agent, as not all are created equal. Interview at least three real estate professionals and come prepared with questions. How are their track records? How do they market listings? What services do they provide as a buyer's agent that their competitors don't? Due diligence is key to finding a representative prepared to work not just hard but smart on your behalf, and who will be available to answer your questions along the way.

For sellers it's also wise to have listing paperwork and disclosures completed at least one week before your house officially goes on the market. This way your agent can have photos complete, fliers ready and Internet ads up and running on the first day your listing hits the market. Also be sure to get a copy of your home's Multiple Listing Service listing from your agent so you can avoid a costly error. It's entirely possible a bedroom was missed or something was overlooked. Work as a team to make sure your home's listing is accurate--and the description enticing.

Those whose homes have languished on the market for longer than anticipated should start thinking outside the box and contemplate making a reverse offer.

Consider the buyer who has been back for a second or third look but hasn't pulled the trigger. Make an offer. Yes, you, the seller, should put something in writing and submit it to the buyer's agent. This will create an opportunity for the agent to sit down with the buyer and potentially help close the deal.

House still for sale four weeks later? It's time to take a hard look at the price. Your greatest number of showings will happen within the first three to four weeks of a listing hitting the market. This is because there is already a pool of qualified buyers waiting for new homes to come on the market that might match their criteria. So, if you've had no bites by week four, it's time to increase your exposure by making a price adjustment. Repeat this process again every four weeks or sooner, depending on how urgent or motivated your situation is.

For buyers, if you intend to secure a mortgage loan, you'll want to get pre-qualified, which determines how much you can afford. This will allow you to move swiftly when you find the right home, especially when there are other interested buyers. It also indicates to the seller that you are serious and can afford to buy the property. If you plan to pay for the transaction in cash, you'll then need to provide advance proof of available funds.

Buyers should spend the time shopping for the most favorable rates and terms. A difference of even half a percentage point can mean a considerable savings over the life of a loan. For example, the difference in the monthly payment on a $100,000 mortgage at 8% vs. 7.5% is about $35 per month. Over 30 years, that's $12,600.

Once the finances are in order, there are many other things to consider when buying a home, including its resale potential. For example, in neighborhoods with attached three-car garages, a two-car or detached garage may adversely affect the home-sale and future value. Floor plans, the number of bedrooms,

location and proximity to noisy streets are other factors that can prove problematic for a future sale.

The bottom line? Take a macro approach to evaluating homes before signing the dotted line.

Starting the Clock Again - Rule Change Reduces Waiting Period Before Relisting

2008-02-28T19:46:00.000-05:00

Washington Post, February 23, 2008
By Mara Lee

When home shoppers see that a house has been on the market for months, they will probably conclude that it's priced too high -- and that there could be room to negotiate a lower offer.

Last week, Metropolitan Regional Information Systems, the Washington area's multiple-listing service, made it easier to hide that information.

The service is the database that real estate agents use to list and find homes for sale, and the information in it is the basis of many Web sites that allow home buyers to shop for themselves.

The change allows sellers to withdraw their property from the market for 90 days, then place it back on the market as a new listing. Previously, a seller had to wait 180 days to do that. As a new listing, it gets more attention from buyers, MRIS says. But others say the change favors sellers at the expense of buyers, who may not know to ask about an earlier failed attempt to sell the house.

The change was made because agents considered the previous six-month resting period too long. Those who favor the new rule say market conditions are changing more rapidly, so 90 days is enough to count as a new market cycle. "The home deserves another look in less than 180 days," said Mary Jo Powell, a spokeswoman for MRIS. The new rule "helps it pop up in the search without changing the facts at all."

Stephen Israel, president of Buyer's Edge, a Bethesda agency that represents only buyers, is indignant about the change.

"If it's been on for three months, that's a very different animal than a property that's been on the market for one day," he said. "It promotes the opportunity for there to be misinformation."

Many Web sites that buyers use to shop do not list how long the property has been on the market, although some, such as Long & Foster's, mark new listings.

But agents have access to the password-protected MRIS, which includes days-on-the-market information, as well as the history of price drops by the seller. The previous attempt to sell the house will still be in the records, but not on the current fact sheet. "Agents know to always look at the property history,"

Powell said. "So you can't deceive because that's always there."

Kim Bradley, owner of Marquee Properties in Haymarket, works as an appraiser and a real estate agent. She said she has mixed feelings about the change. From an agent's perspective, she said, "I prefer to see what's going on."

She said that with a little more effort, she will still be able to tell clients all the information they need to make an informed bid.

But the way it will change the appraisal side of her business underlines what potentially is the bigger impact -- blunting the bad news of declining prices and sales by presenting a lender with a rosier picture of a neighborhood because houses could show as being sold after fewer days on the market.

That's because an appraiser's report shows a year's worth of all comparable sales, or "comps," and three years of history for the property where a sale is progressing.

"As an appraiser, I like it," Bradley said of the change. She said she has seen 10 sales fall through in the past six months because lenders would not offer loans at the terms the buyers needed when they saw the patterns of slow sales and dropping prices.

"So many lenders are requiring [reporting of] days on market. When they see 233 days, they kind of freak out," she said.

If the lenders don't see those long times before a sale, they won't call her for clarification about those properties, which she said is "more work on our part."

"It's a game we play with underwriters, too," she said. "We all have to do our jobs and make things go through."

Ilissa Flamm, an agent with W.C. & A.N. Miller Realtors in Bethesda, supports the change. She said the MRIS argument that 90 days is a full market cycle makes sense because most buyers have found the house they want in that time.

She initially agreed with Bradley's position on leaving out information about previous attempts to sell when listing comparable sales. She said fresher sales statistics are a more accurate reflection of the market than those nine months ago, although she added: "I hate that the word 'game' was used."

But when pressed, she said the lender has the right to decide whether it needs to know a year's history for comps to decide if a neighborhood's prices are declining. That evaluation, she said, has an impact on how large a down payment would be needed to make it less likely that a buyer could owe more on the house than it is worth two years down the road.

"The lender having an interest in this property, the buyer having an interest in this property: Everyone wants [the selling history] accurately reflected," she said.

Nonetheless, she backed the rule change, which was supported by a majority of the 4,169 agents who responded to an MRIS survey.

"I don't think this change would be made if they thought games would be played," Flamm said.

Debra Leafty, owner of Leafty Appraisals in Gaithersburg, said the change makes hiring a buyer's agent more important; the agent can find the full history of listings.

Because the history is not erased, Leafty said, she doesn't think the new rule will change bidding patterns much. "People are going to still look that up and see you're desperate," she said.

And she wonders how many people will take their houses off the market anyway. "If it's vacant, you really can't afford to take it off for three months. You're still making payments."

With 2007 Dispensed with, VA Realtors Look Forward

2008-02-28T19:41:00.000-05:00

Arlington Sun Gazette, February 17, 2008
By SCOTT McCAFFREY

Home sales statewide in 2007 were down 11.8 percent from a year before, with average sales prices down slightly, but the statewide market is likely to fare better in the coming year than the nation as a whole.

That last bit of analysis is from Lisa Fowler, director of the Office of Housing Policy Research of the George Mason University School of Public Policy, who analyzed the current state of Virginia's housing market on behalf of the Virginia Association of Realtors.

“Overall, Virginia faces stronger market fundamentals than many other states, with a relatively strong economy and a housing market with a relatively small share of investors,” Fowler said in the analysis.

She anticipates increases in the demand for housing in the parts of the Old Dominion that have strong job growth and low unemployment rates, areas that include Northern Virginia and most of the commonwealth's other metropolitan areas.

“In some desirable neighborhoods - that is, places close to jobs, amenities and transportation routes - the recovery is already happening,” Fowler says. Looking ahead gives the state's Realtor community the chance to put an ugly 2007 into the rear-view mirror.

Homes sales statewide totaled 95,413, down 11.8 percent from the 108,196 sales recorded in 2006. And, in general, sales in the second half of the year showed more dramatic drops than those in the first half.

(The year-end sales figures for 2006 and 2007 do not include figures from Charlottesville, whose Realtor association does not report them to the Virginia
Association of Realtors.)

In all, 21 of 22 geographic areas across the commonwealth reported fewer sales in 2007 than 2006, with the Southwest Virginia area showing a 1.4-percent increase. Nineteen regions reported double-digit declines from a year before, including seven areas with declines of more than 20 percent.

In December, sales across the commonwealth totaled 6,006, down 25.6 percent from the 8,077 sales recorded a year before (not including Charlottesville sales).

Homes sales across the local region all were in negative territory:

* Sales across the inner suburbs of Arlington, Alexandria and Fairfax County declined 29.9 percent in December, to 1,199.

* Sales in Loudoun County declined 30.5 percent, to 328.

* Sales in Prince William County declined 28.4 percent, to 273.

Statewide, the average sales price of $276,847 in December was up 0.7 percent from a year before. The average sales price in the inner suburbs of Northern Virginia in December rose 1.4 percent, to $536,710, while prices in the outer suburbs declined.

Statewide, it took an average of 138 days for a home that sold in November to go from listing to ratified contract. That compares to the long-term, historic average of 90 days.

Locally, the average number of days on the market was 103 in the inner suburbs, 104 in Loudoun and 143 in Prince William. For the full year, average sales prices in 2007 were down 3.1 percent, compared to a 30-year average annual increase of 6.4 percent. The year-long average number of days on the market was 88 days.

Fowler says the housing market is “inextricably linked” to the health of the economy, but, over the past decade, that linkage has been skewed:

* During the boom market of 2000-06, home prices and sales increased at a level much higher than would be expected, given fundamental laws of supply and demand.

* Over the past year, the reverse occurred: housing activity was below what would be expected in areas that continued to have strong economic health.

“In order for the housing market to return to a more normal state, there will be periods of slower-than-average growth to follow five years of rapid growth,”

Fowler said. “We are currently in that period of slower growth.”

Assessment Shock: Know Your Rights

2008-02-28T19:13:00.000-05:00

Washington Post, January 6, 2008
By Elizabeth Razzi

Homeowners are about to get black-and-white documentation of the latest changes in their property values. Because of the varying ways local governments go about valuation, don't be surprised if your home is still assigned a high value despite the sluggish housing market.

From now through mid-March, local governments are mailing property tax assessment notices. Be on the lookout for this important piece of mail. It's the foundation for the tax bill you will have to pay later. And its arrival starts the clock on a strictly limited appeals period.

Depending on where you live, you could have less than a month after the notice arrives to review the details and put together an appeal. An appeal would be in order if there are inaccuracies or if you can document that your home has been overvalued compared with similar properties.

Maryland residents were the first to receive their notices. The state assesses a property's value every three years. Notices mailed at end of December reflect a statewide average increase of 33 percent since those properties were last assessed, in 2004. That breaks down to an average annual increase of 11 percent to be phased in over the next three years.

For a Marylander's primary residence, those annual increases will be capped at rates that vary by county. In the Washington area, the caps range from 2 percent in Anne Arundel County to 10 percent in Montgomery and Calvert counties. Bottom line: Your assessment is going up, thanks in part to price increases during the peak of the real estate market.

For the first time, Maryland residents have to take action to ensure that they get the benefit of those annual caps. You must file a homestead-tax-credit application to document that the home is your principal residence and not a vacation or rental property, which wouldn't qualify for the cap. Applications can be filed at http://www.dat.state.md.us.

The District and most Virginia counties and cities assess properties annually. In Virginia, procedures vary significantly among jurisdictions. Appeals windows range from less than 30 days in Falls Church to more than four months in Prince William County.

In Prince William, one of the areas hit hardest by foreclosures and stagnant sales, assessments for existing homes will decline by 14 to 16 percent this year, depending on the type of property, according to Allison Lindner, the county's real estate assessment chief. The reduced number of sales in 2007 has made this year's assessments a challenge, she said.

Although nearby foreclosures make it harder to sell your home at a reasonable price, they may not pull down your property assessment. Lindner said foreclosure prices don't reflect market value because they are not normal, arm's-length transactions.

"We don't put a lot of emphasis on foreclosure sales, and hopefully we will have enough non-foreclosure sales so that it's not an issue," Lindner said. "We are going to have neighborhoods where all we have are foreclosures or no sales at all. In that case, we will try to go to a similar neighborhood and establish market value."

And what if a home identical to yours sells for a bargain price in the next few weeks? Surely, you might think, that would be a strong argument for lowering

your assessment. Alas, it won't. Sales after Jan. 1 will not count for appeals of this year's assessments. "We tell them we will use that sale for next year's assessment," Lindner said.

Valuing real estate is an imprecise art, so there could be reason to contest the government's estimate of your home's value. At a minimum, you need to ensure that the government has its facts straight.

* Be aware of when your assessment notice should arrive. If it's lost or delivered to the wrong address, you could run out of time for an appeal.

* Review the notice for factual errors. Is the lot number correct? (You can find that on the land survey tucked away with your home-purchase records.) Is the square footage correct? Are the numbers of bedrooms, bathrooms and fireplaces correct?

* Verify that your assessed value is in line with the values being assigned to nearby, comparable homes. Most jurisdictions have online databases of local tax records. They often update these records just before mailing assessment notices. An assessment higher than those for homes that are comparable to yours could be a compelling argument for an appeal.

Your first round of appeal should be to contact the assessor's office by the deadline listed on the notice. Local rules vary, with some requiring this first-round appeal to the assessor's office. If you are unsatisfied with the assessor's decision, you can present a more formal appeal to a review panel.

Prince William County is among the jurisdictions that allows a homeowner to skip the administrative appeal with the assessor's office and instead plead a case directly before the county's Board of Equalization by Aug. 1.

"Residents are not required to file an administrative appeal, but we prefer that they do," Lindner said. "If there is an error, or even if it is just too high, our preference is that they come to us first so we can fix it if there is an issue."

Details about your jurisdiction's appeals process will be printed with your assessment notice and can be found on your local government's Web site.

Even with a first-round appeal, you will need facts to back up your case. Assessors may decide to remeasure your home or confirm your claim that it has fewer bedrooms than stated in their records. You will need printouts from their property tax database demonstrating that similar homes are assessed at a lower value. Photos of comparable homes wouldn't hurt. If you need to research sales prices for similar homes, a real estate agent active in your neighborhood may be willing to help. You may also find that information in the county or city's online records.

"What we don't want to hear is people who come in and just say, 'It's too high,' " Lindner said. The appeal isn't the time to rant about local government spending, either. Tax rates and government budgets are beyond the assessor's domain. All the assessor is supposed to do is come up with a value for your home, so keep your arguments focused.

Finally, brace yourself for the idea that even a lower assessed value won't guarantee a lower property tax bill. A number of local governments are still considering increasing the tax rate to compensate for the revenue they stand to lose from lower assessed values.

Bush Plan Leaves Out Borrowers With Option Arms

2007-12-26T12:16:00.000-05:00

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

2007-12-26T12:05:00.000-05:00

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

2007-12-26T12:01:00.000-05:00

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

2007-12-26T11:57:00.000-05:00

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 ??

2007-09-24T14:48:00.000-04:00

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.

2007-09-24T14:40:00.000-04:00

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

2007-04-09T14:01:00.000-04:00

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

2007-04-09T13:56:00.000-04:00

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

2007-04-09T13:54:00.000-04:00

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

2007-04-09T13:41:00.000-04:00

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

2007-03-06T13:27:00.000-05:00

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

2007-03-06T12:59:00.000-05:00

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?

2007-01-28T18:07:00.000-05:00

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

2007-01-12T11:15:00.000-05:00

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

2007-01-12T11:09:00.000-05:00

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

2007-01-12T11:05:00.000-05:00

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

2007-01-08T14:22:00.000-05:00

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

2007-01-08T14:19:00.000-05:00

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.

A Holiday Rush On Refinancings

2006-12-23T10:39:00.000-05:00

Washington Post, December 23, 2006
By Kenneth R. Harney

You may be thinking about the holidays, but thousands of your fellow homeowners have been thinking about refinancing, rate reductions, cash-outs and money-saving debt consolidations.

For the past two weeks, they have been bombarding lenders with applications for mortgage refinancing -- driven by the most attractive rates in more than a year. Refinancings were up in mid-December by 60 percent over the corresponding period last year, and they accounted for more than half of all new mortgage applications -- the highest proportion since the spring of 2004.

Thirty-year fixed rates slipped below 6 percent two weeks ago, and although they have rebounded slightly, they are still nearly a percentage point below where they were last summer. Fifteen-year fixed-rate loans in the mid-to-upper 5 percent range are readily available to applicants with solid credit.

Could a holiday-season refi be in the cards for you? Maybe, but it probably depends on whether you fit into one of several categories where today's rates make a lot of sense:

? You have an adjustable-rate mortgage that's scheduled to reset into higher payments in the six months ahead. Your loan might be a payment-option mortgage, an interest-only mortgage originated in 2003 or 2004 with a three-year reset, or simply an adjustable tied to short-term Treasury rates that's already costing you more than the fixed-rate alternatives.

- You have a "piggyback" first-and-second mortgage package that was originally intended to let you purchase your house with a minimal or zero down payment while avoiding mortgage insurance premiums. But now the floating-rate second is above 8 percent and you want to bail.

- You need cash for a home improvement, a business investment or a vacation home now available at a bargain price. Even though the fixed rate on your first is below 6 percent, the opportunity to cash out thousands of dollars and refinance into a larger replacement mortgage is compelling, even if the rate is a little higher.

So many current homeowners fit into these categories that Anthony Hsieh, president of LendingTree.com, the online network of 200-plus mortgage companies, predicts that this month's refi boomlet could stretch into 2007 -- provided, of course, that rates remain close to 6 percent.

"This has legs," he said in an interview. "This is no head fake; it's for real" because mortgage money at 6 percent offers such exceptional problem-solving opportunities.

For example, Douglas G. Duncan, chief economist for the Mortgage Bankers Association, estimates that $1.1 trillion to $1.7 trillion of adjustable-rate mortgages are scheduled for payment resets in the coming 12 months, and that $600 billion to $700 billion is likely to be refinanced by homeowners eager to avoid higher monthly outlays.

Some of these loans are "nontraditional" mortgages that combine low initial payment periods with drastically higher payments after several years. For thousands of those borrowers facing big payment jumps -- 50 percent, 100 percent or more -- a refi into a fixed-rate mortgage is a no-brainer, according to Duncan.

Other people who purchased during the housing boom years using popular "3/1" adjustables in the mid-4 percent range for the initial three years now face significantly higher payments because short-term interest rates today are much higher.

Consider this example provided by LendingTree: Say you bought your house in late 2003 with a $200,000 "3/1" adjustable at 4.375 percent with a margin of 3.75 percent and a 20 percent down payment. Your principal and interest payments have been $998.57 for the first three years. But now you face a reset into a 7.53 percent rate on your $197,000 balance -- and a monthly payment hike of $383.

Your alternative: Refinance into a new 30-year, fixed-rate, $197,000 mortgage at 6.1 percent. Sure, your payment will be about $195 higher than your current 4.375 percent rate, but not what you would pay if you stuck with your current loan's post-reset rate.

Here's another scenario: Say you have a great rate on the $200,000 first mortgage that you took out in 2002 -- 5.5 percent. But you need $25,000 cash for kitchen remodeling or a business investment. On the one hand, you hate to get rid of a once-in-a-lifetime 5.5 percent rate. However, you have the opportunity to pull out the $25,000 with a refi, add it to the $192,500 balance on your current loan, and walk away with a new $217,500 replacement mortgage at 6.1 percent fixed for 30 years.

Your new monthly payment: About $184 higher than your current.

A gift from Santa? Hardly. Cash-out refis cost money. But your 6.1 percent fixed rate -- not far above 40-year record lows -- should still look good years from now.

Price, Condition, Site Grab Buyer Attention

2006-12-23T10:36:00.000-05:00

Washington Times, December 22, 2006
By M. Anthony Carr

One of the biggest mistakes sellers make in a buyer's market is trying to price their houses with a "cushion" in the asking price for negotiation room. In the current market where most sellers find themselves, it's all back to price, condition and location.

Pricing the house from the start is the first offensive strike the seller possesses in his arsenal. The best way to determine price in our market is to start looking at two categories of real estate: solds and actives.

Properties that have sold in the last 30 days -- solds -- provide you a picture of what price range pulled in offers 60 days ago. By looking over those properties, you'll know if you're headed in the right direction with your price.

Then, after seeing what's pulled in offers, look at where the competition is priced -- actives -- and price lower than the lowest price. If the trend is headed downward during the last 12 months, the motivated seller will get in front of that price trend and sell for less than everyone.

This can be an emotional ordeal for sellers. The seller who approaches the sales price of a house like the asking price of a used car -- where negotiation and give-and-take is expected -- will also be calling the movers sooner and get through the transaction with the least amount of emotional turmoil.

Condition is the second part of this equation that sellers have control over in today's market. It's got to look new, period. Here are the steps that must be taken for a successful sale.

• New paint everywhere. Don't leave one room unpainted. Paint is the cheapest, yet most effective way to give a house a face-lift.

• New carpet and flooring. New flooring and paint make people drop open their mouths with "wow."

• Replace the small things. Attention to detail can make a big difference for buyers. New faucets throughout, new hardware on the doors, and new switches and switch plates take the house from merely cleaned up to new.

• Deep clean. I always have to mention this because a lot of sellers still just don't get it. It's still amazing to me how many people will leave a house in the "un" condition: unvacuumed, undusted, unwashed. Invite friends over for a deep cleaning or hire it out. This is a must, no questions asked.

• Do the windows. Get all the windows cleaned and caulked. The house may look great from the inside, but if you can't look outside because of the dusty film over the glass, steps one through four could be for naught.

Finally, location is what buyers are looking for. I saw a listing the other day that was obviously connected to a realistic agent and seller. It was a lot of house for the price with the larger than 1-acre lot, and it was "priced for location" because the house backed to a very busy four-lane highway.

The comps in the neighborhood were almost $100,000 more.

While you may not be able to do anything about the location of your listing, you can definitely spin the benefits of where it's located. Near commuter routes means the house is next to big highways. For some shoppers who just want to get home quickly after work, this is going to be a benefit, but only if you market it that way.

Sell the lifestyle of the house as much as the amenities of the house itself. With prices dropping in some areas, headlines such as "quit commuting," "walk to everything," and "cut your gas bill" are more and more enticing.

The third-acre to 1-acre lot doesn't look as good after the 75-minute commute. Some commuters are looking to move back in to the work centers.

Market to buyers outside the community who would find your neighborhood attractive. It's amazing how many buyers won't mind a busy two-lane street when they've been overlooking the Beltway for years.

Remember to market the benefits that you liked about the house when you bought several years ago.

Mortgage Applications Surge on Decline in Rates

2006-12-23T10:34:00.000-05:00

Wall Street Journal, December 14, 2006
By Rex Nutting

The volume of applications for mortgages from major U.S. banks climbed to the highest level in more than a year last week, the Mortgage Bankers Association reported.

Applications, encompassing both those for loans to purchase homes and for refinancing of existing mortgages, increased 11.4% last week from the previous week to the highest level since October 2005. Total applications are up 22.2% compared with the same week a year ago. Application volumes had been down by double-digit percentages for most of the year.

Lower mortgage rates have spurred a rebound in loan applications, said Mark Fratantoni, senior economist for the mortgage bankers group, in a news statement. Average rates have fallen about 0.8 percentage point since early summer, he noted.

Applications for a loan to buy a home rose 8.7% last week compared with the previous week, reaching the highest level since January. Purchase-loan volumes are down about 3% compared with the same week a year ago, the smallest year-over-year decline since January.

By comparison, home sales are down about 14% compared with a year ago.

The refinancing boom continued last week: Applications for refinancings rose 15.8% to the highest level seen since September 2005. Refinancing applications are up about 60% from a year ago.

Refinancings accounted for 52.6% of all applications, representing the greatest share since April 2004.

Lower mortgage rates have spurred a new refinance boom as borrowers flock to lock in lower rates or to get out of adjustable loans that are about to be reset at higher rates.

The average rate for a 30-year fixed-rate mortgage rose to 6.02% from a 14-month low of 5.98% the previous week. Since June, the benchmark rate has fallen from 6.86%.

The rate for a 15-year fixed-rate loan, a popular vehicle for refinancing mortgages, averaged 5.75%, up from 5.66% a week earlier, which was the lowest rate since January.

The average rate for a one-year adjustable-rate mortgage dropped to 5.76%, the lowest rate since March and down from the prior week's 5.79%. ARMs accounted for 24.9% of loan applications, up from a three-year low of 23.9% set the previous week.

Online Alternative to Foreclosures

2006-12-23T10:32:00.000-05:00

MortgageKeeper Aims to Connect Troubled Borrowers with Counseling
Inman News, December 14, 2006
By Matt Carter

With the cost of foreclosing on a property running $40,000 or more, it's no surprise that lenders would rather continue receiving loan payments from borrowers than resort to taking their homes away.

But homeowners get into trouble on their mortgages for many reasons, which can make helping them through difficult times complex.

Some borrowers may simply be overwhelmed when an adjustable-rate mortgage resets to a higher rate, and monthly payments become unmanageable. Others may be coping with the loss of a job, unexpected medical or home repair bills, rising utility bills or a substance abuse problem.

Chances are, a lender's collections department can't offer much advice or assistance to borrowers who are coping with issues that aren't related to the terms of their loan. Even credit counselors aren't the best source of advice for problems that are more than just financial.

But there are hundreds of nonprofits around the nation that are qualified and equipped to help people work through such issues. Ithaca, N.Y.-based MortgageKeeper Referral Services Inc. maintains a database of such organizations, providing lenders access to the database for a fee.

The company is a collaboration of J. Michael Collins, who spent more than a decade researching consumers on behalf of mortgage lenders, and Rochelle Nawrocki Gorey, who has 15 years experience working with nonprofit community development organizations.

Collins' past clients included a large government-sponsored mortgage lender, and he's worked with mortgage counseling programs in dozens of cities including Chicago. In focus groups he's conducted with borrowers in foreclosure, many complained that lenders didn't listen to their explanations of the problems they were facing or offer any help, he said.

"We said (to lenders), 'Why not make referrals to local services? There is probably some organization in your community that can help you out,' " Collins said. "The lenders said there is no way to keep up on what services are available."

Nonprofits come and go, Collins said, and the services they provide are constantly changing and can vary in quality.

Collins and Gorey founded MortgageKeeper not only to identify what nonprofit organizations are out there, but to stay current on the services they provide and to monitor the quality of delivery.

"When somebody is in trouble, the last thing they need is to be sent down a blind alley" to an organization that no longer exists or doesn't have the necessary expertise, Collins said.

After identifying potential service providers, MortgageKeeper interviews local experts to make sure they are reputable, and then follows up with people who are referred to them to see if they would recommend the service to others, Collins said.

The work involved in keeping the database accurate, up-to-date and reliable means MortgageKeeper only provides coverage in 15 cities. But those cities were selected because they are among those with the highest rate of foreclosure, and Collins and Gorey plan to add 10 cities next year.

For now, MortgageKeeper tracks nonprofits in Akron, Ohio; Atlanta; Baltimore; Chicago; Cincinnati; Cleveland; Columbus, Ohio; Dayton, Ohio; Dallas; Detroit; Indianapolis; Philadelphia; San Antonio; St. Louis; and Toledo, Ohio. Groups in the database offer services in 17 areas, including job counseling, tax help, assistance with pharmaceutical costs and utility bills, and substance abuse help.

Substance abuse, while "not a huge source of default and delinquencies," was a factor in about 8 percent or 9 percent of foreclosures in studies Collins has done, he said. A family member with a substance abuse problem can drain its finances or keep members from being employed.

Working with borrowers to resolve such issues "is a low cost way to say we're listening to you. We're not going to provide you a free ride, but we're interested in working this out" to prevent foreclosure, Collins said.

MortgageKeeper has been up and running for a year, and so far has five clients that do business nationwide, including the Homeownership Preservation Foundation. The Minneapolis-based group, founded in 2004 with $20 million in seed money from GMAC-RFC, partners with local, state and federal government agencies and nonprofits to keep homeowners out of foreclosure.

MortgageKeeper provides services on a subscription basis, with clients paying a licensing fee for each person accessing its database. This week, MortgageKeeper rolled out a new site, www.NonprofitReferral.org, that provides access to the database over the Web.

The Unreal Estate Market and Me

2006-12-23T10:29:00.000-05:00

Weekly Standard, December 10, 2006
By Jonathan V. Last

The real estate market is a complex beast, one only dimly understood by the mere mortals among us. Thank God we have real estate professionals. Unlike, say, journalists, Realtors undergo hours of rigorous training. They even have to pass a test. So they're a lot like doctors, maybe even priests.

If Realtors are indeed a priesthood, then David Howell is their oracle. After I bought my first home, a condo in Old Town Alexandria, in the spring of 2004, I began receiving a monthly newsletter from the local real estate giant McEnearney. Prominently featured in the three-page mailing is MarketWatch, a column penned by Howell, the managing broker of McEnearney's office in McLean.

Unfortunately, the pronouncements of this particular oracle, while absolute and pure, are sometimes hard to understand and, over time, even harder to reconcile.

When I first started reading Howell's column, in 2004, the real estate market was roaring. He wrote: "Ten More 'Boom' Years? The National Association of Realtors' Chief Economist David Lereah expects the current real estate boom to continue for the next decade. . . . And if you have been reading this space for any period of time, you know that we feel just as strongly about the health of this area's housing market."

In his first dispatch of the following year, Howell asked: "2004 Was Another Record Year -- Could 2005 Be Even Better?" The answer was affirmative. "Despite predictions from many this time last year that the local real estate market would begin to taper off in 2004, it was another record year for home sales in Northern Virginia. . . . Is there any way the market could improve over these staggering numbers? Yes -- with a key exception. We believe that the number of sales will increase in 2005. . . ." In nearly every column he wrote in early 2005, Howell gleefully related the market's enormous gains in sales prices. And although he would sometimes hedge his bets, writing that such runaway increases probably wouldn't last, even he didn't seem to believe it. "While some in the national press continue to talk about a housing bubble that's about to burst, we maintain that 2005 will set new records for the number of sales," he wrote in his February/March column that year. "We had also projected home price appreciation in the range of 7% - 9% for the year. . . . It turns out that, if early indications continue, we were wrong. We weren't optimistic enough! The average price of homes that settled in January 2005 climbed 21% from January 2004 sales, and the median price jumped by 26%. We know this is too early to say that this trend will continue, but we are also seeing the lowest inventory of available homes on the market at any time in at least the last 20 years."

It's hard to square disclaimers about slower appreciation with such statements. But then again, the path to wisdom is an arduous one.

One thing that wasn't hard to understand was Howell's dislike of the media. He has gone after publications from the Nation to Fortune, and he really dislikes The Washington Post. In March/April 2005, he assailed a Michael Kinsley opinion essay in The Post that argued that the housing market was due for a correction -- and that the correction would be good for the country. Howell insisted that there would be no downturn and that, regardless, there was no upside to a real estate crash. "[Y]ou and your colleagues similarly do not understand the dynamics of the residential real estate market," he thundered. "Local real estate professionals do."

By summer 2005, the number of purchase contracts was decreasing precipitously. This caused worry for some people who thought that drops in contracts were often followed by rising inventory and falling prices.

But the oracle was there to steady us. "Has the market finally topped out?" Howell asked. "No, it hasn't. In fact, in most senses the market has never been better." In the July/August 2005 MarketWatch, Howell explained that "the rate of home price appreciation appears to be moderating just a bit. We have stated for some time that the 22-25% home price appreciation that we have witnessed for the last two years is not sustainable over an extended period of time. . . . We fully expect that prices across the board will be rising between 12% and 15% by the end of the year."

By autumn of 2005, the oracle was again troubled by the unbelievers: "[I]t would appear that any number of media outlets have decided that there is money to be made in spreading baseless fear that the real estate sky is falling. . . . Is the market softening? Absolutely. Are properties taking longer to sell? Absolutely. Is there substantially more inventory on the market in Metro DC than this time last year? You betcha." Then Howell dropped the hammer:

"Is it possible that some area home prices might actually go down? Possible -- but not probable. What we are seeing is the expected return to a more normal market after two white-hot years that were anything but normal. Instead of 20-25% appreciation, expect the average price to rise 7-12% next year. . . ."

In his March/April column this year, Howell began with a quote from a local lawyer: "Real estate here will never depreciate." The quote was from 1891. Later in the column, Howell casually mentioned that "we would not go so far as to say that values can 'never depreciate.' Twice in the 1990s, the average sale price of a home in Northern Virginia dropped from the previous year."

Somehow, I'd missed that small fact in his prior columns -- maybe because he'd never mentioned it in all the months I'd been reading MarketWatch.

By spring of this year, overall inventory in Northern Virginia had increased 442 percent from the previous year, Howell said. Houses were sitting on the market longer, and Howell had all but stopped including figures for average and median sales prices in his columns.

Clearly, the oracle was testing my faith.

Then came the June/July MarketWatch. "When demand drops and supply increases, prices fall. That's Economics 101, right?" Howell asked. "Wrong. Remarkably, 4.6% represents the increase in the average sales price from the first five months of 2005 to the first five months of 2006. . . . While 4.6% is a far cry from the 20% - 25% annual increase that we have seen in the last several years, it is nonetheless a truly remarkable number. A note of caution: This does not mean that all homes are worth more today than they were this time last year because that clearly is not the case. Some homes, based on neighborhood-level supply and demand, have fallen in value."

So, it seems that declining prices had moved from the realm of the improbable to the "clearly" obvious. If I hadn't seen it happening in my own neighborhood, I wouldn't have believed it.

The September/October MarketWatch gave the "Top Ten Reasons to Be Optimistic About Northern Virginia's Housing Market." Reason No. 1: "The softening of the market. Believe it or not, that's a good thing." (Take that, Kinsley!) Howell also noted that the market has history on its side. "The compounded average annual increase in the average sales price of a home in the metro DC area over the last 30 years is 7%. . . . We won't see that in 2006, but an individual's housing decision should be a long-term decision. Feel good about owning a home here -- unless you have to sell right now."

Fortunately, I don't have to sell right now. My wife and I can wait for those 7- to 12-percent annual increases, which I'm sure are right around the corner.

That's what we thought, anyway. But Howell's October/November column was more sober:

"Most of the major statistical indicators of the health of Northern Virginia's market are trending down, but we still believe that there is a 'soft landing' going on, not a crash. Inventory of available homes is up; the number of contracts is down; it is taking longer for properties to sell. . . . As a consequence, the average sales price of a home in Northern Virginia has actually dropped about 6% -- on average -- from this same time last year. Nonetheless, we remain confident that the market is experiencing a wholly expected and normal adjustment after several years of ultimately unsustainable price appreciation."

Hoping to rid myself of confusion, I sought wisdom from the only source who could ease my anxieties -- the oracle himself. I called Howell and asked him if, in hindsight, he had been too optimistic.

"Maybe a little," he responded. "But honest to goodness, I don't think very much. . . . Yes, my projections were probably a little on the rosy side. But there are still folks who are talking about a bubble bursting or prices really coming unglued. . . . Are prices down now compared to where they were a year ago? Absolutely. But if you look through a slightly different side of that same prism, prices today are still considerably higher than they were two years ago. . . ."

So, I found my consolation -- and I remain confident in David Howell. If you get too bogged down in numbers, you might encounter bad news. But oracles serve deeper truths. After all, Howell does this for a living.

The Ifs, Ands or Buts:

2006-11-20T13:07:00.000-05:00

Contingencies Muscle Back Into Contracts
Washington Post, November 18, 2006
By Dan Rafter

The price was solid, but otherwise the offer that real estate agent Jane Fairweather's clients received for their house last month was far from a good one.

The would-be buyers are also trying to sell their house, and they didn't want to purchase a second residence -- or carry two mortgage payments -- until they found a buyer. So the offer had a catch: Closing wouldn't take place until Feb. 14.

Making the sellers wait four months to close was bad enough. But the real deal-breaker, according to Fairweather: If the buyers didn't sell their house by Feb. 14, the offer would simply disappear, leaving her clients with a home they still needed to sell.

"Here they wanted to string my seller out for basically four months, and then there'd be no guarantee that come February there would even be a closing," said Fairweather, an agent with the Bethesda office of Coldwell Banker Residential Brokerage. "What they were telling the sellers was that they didn't want any risk in this deal. They were going to put their home on the market. If it didn't sell, they weren't going to lose anything. They wanted to shift all the risk from themselves to the sellers."

Offers to purchase homes can include all sorts of requirements for things that must happen for the deal to go through, known as contingency clauses. Many contracts make the deal contingent on, for instance, a satisfactory home inspection or the ability to obtain financing. For sellers, the most troublesome is the home-sale contingency, in which the purchase depends on the buyers in turn finding buyers for their own home.

Such clauses were rare during the real estate boom of recent years. However, as the market has slowed, they have begun to reappear.

Nothing about such a clause prevents a seller from accepting a better offer should one come along. The sellers merely have to give the first buyers the chance to sweeten their offer, perhaps by lifting the contingency, shortening it or raising the price they are willing to pay.

Even with this flexibility, many real estate agents who represent sellers consider such offers last resorts. That's because many buyers who might otherwise be interested in a home will ignore those that have outstanding contingent offers. They would rather not get into a bidding war.

Offers contingent on home sales, then, would seem a good deal for buyers and awful for sellers. But agents and sellers can work together to make contingent offers more attractive.

"Now that the market has slowed, some home buyers are finding that a home seller might accept an offer with a home-sale contingency," said Holly Worthington, managing broker and vice president of the Chevy Chase and Woodley Park offices of Long & Foster Real Estate. "But to convince a seller to take their home off the market, the buyer's agent must make a compelling case."

That compelling case is the key to home-sale contingency offers that work. For instance, Fairweather said that after her home-seller clients received that contingent offer last month, she went back to the buyers and their real estate agent to hammer out a better deal.

First, Fairweather requested that the buyers provide proof that a reputable lender would provide them with a bridge loan -- which would give the buyers cash to make a down payment on the sellers' home -- should the buyers fail to sell their house by Feb. 14. Second, the offer was amended to state that even if the buyers didn't sell their home by that date, the closing would still happen.

This gave something to everyone. The buyers would still have nearly four months to sell their current home. The sellers would be assured that they would close in February.

"If you are making a contingent offer, you need to convince the seller that you are highly motivated to sell your [current] house," Fairweather said. "We needed to see that."

Marc Fleisher, a real estate agent with the Friendship Heights office of Long & Foster, takes a similar approach. When one of Fleisher's sellers receives a contingent offer, the agent goes to work, taking a close look at the price the buyers are asking for their own home. If that price doesn't seem reasonable, Fleisher asks the buyers to lower it. If the buyers refuse? Fleisher advises his client to walk away from the offer.

"There are certain stipulations that you need to put with a contingent offer," he said. "In any home-sale contingency being considered, we put in language stating that the home must not be priced to exceed a certain level. I'll take a look at the property personally before making any recommendations to my sellers."

Fairweather, too, examines a buyer's asking price before advising her sellers to consider an offer with a home-sale contingency. A compromise might state that the sellers will consider the contingent offer for 30 days while the buyers try to sell their existing home at the original price. If the buyers do not receive an offer during those first 30 days, they then must make a specified reduction in the asking price. If in two more weeks there is still no offer, then the buyers are required to cut the price again.

Buyers who agree to such stipulations prove that they are motivated, Fairweather said.

"The seller controls his own house and the price he puts on it, how well it shows, how easy it is for agents to get in. When he accepts a contingent offer, he has now tied his life to another property where he doesn't control the price, the condition it shows in, the access to it and how easy it is for agents to show it," Fairweather said. "He doesn't control any of the marketing or the quality of the agent the buyer is working with. That's why you need to offer the seller protection when dealing with contingent offers."

Some agents still advise their sellers to avoid contingent offers if at all possible. Melinda Estridge, an agent with Long & Foster's Bethesda office, is one.

"The simple fact is, if someone buys a property with a contingency, that person is almost always less motivated to sell a home," Estridge said. "For them, if it doesn't work out they can stay where they are and re-evaluate. If they receive less money for their property than they expected, they can try to renegotiate with the seller, who is now in a more precarious situation. I always tell my sellers that if they take a contingent offer, there is only a 50/50 chance of it working out."

Estridge also coaches buyers to avoid the situation in which they must make contingent offers. She instead recommends that they put their home on the market, get it under contract and negotiate a long-term or flexible closing date, one that gives them enough time to search comfortably for their next home.

David Rainey, a real estate agent with the Mount Vernon office of Weichert Realtors, agrees that non-contingent offers are best for sellers. That doesn't mean, though, that contingent offers should automatically be dismissed.

The key to working out a good deal is to approach the sale as a business decision, not an emotional one, he said.

"The home always has emotional connotations," Rainey said. "Trying to move sellers away from these emotions is not always an easy thing to do. It can be difficult for Realtors to sometimes rein in one or the other parties to make it a purely business decision."

Buyers can go a long way toward doing this by making professional offers, Fairweather said. They and their agents should create presentations that analyze their real estate market, showing the selling prices similar homes have fetched. This way, the buyers can show the sellers at least some evidence that they have set a reasonable asking price for their home.

Making a contingent offer that will be considered seriously also means offering the right price. A contingent offer is already flawed in the minds of most sellers. Buyers who place a home-sale contingency in their offer and request a sales price far lower than asking price may risk scuttling a deal before negotiations start.

"If you are going to offer a price that is low, you need to be more careful about the kind of contingencies you are putting into the contract," said Richard DuBeshter, an agent with Long & Foster in the District.

"If you put too many contingencies in there, you need to make an attractive offer closer to asking price."

Sellers, especially when presented with a well-prepared offer, should then look hard at their own property to determine whether a contingent offer might be the best they can expect, Fairweather said. Sellers whose homes back up to major highways, sit on busy roads or are the ugliest in a neighborhood may want to strongly consider that offer, she said.

"The last six or seven years, we didn't see any contingent offers," Fairweather said.

"We'd never let a buyer even think about making one. Now buyers are not only thinking about them, they're actually doing it."

Holding On To Deal Newest Seller Problem

2006-11-20T13:05:00.000-05:00

Washington Times, November 17, 2006
By M. Anthony Carr

Word on the street has it that while the market has slowed across the country, the most tedious task for agents these days is keeping the deal together once the buyer and seller have agreed to an offer.

During the not-so-distant seller's market, if a buyer fell out of the transaction, no sellers worried. They would simply keep some or all of the buyer's deposit funds, release the contract, take the next buyer in line and most likely get thousands of dollars more for the property now that it had aged on the market a few weeks longer.

Buyers now can do their own switching in place on the transaction to their benefit. Even with a contract in place, there's nothing stopping them from looking around for yet another house and, if they see something they like, using one of several contract clauses to get out of the contract and into another house -- and if it has seasoned long enough, for less money.

While we would all like to think that once everyone has signed a contract that it's binding from the point of the signing, in real estate, such is not the case. Once you sign your name to the contract, there may be several points in the contract that allow one or both of the parties to get out of the agreement.

As you're looking over the contract, note several paragraphs that should be in your agreement and make sure they get performed to protect yourself from a deal falling through the cracks.

One of those clauses is the financing contingency. You want to be sure that the buyer can actually perform on this one and the sooner the better. Look over the various aspects of this contingency -- the deadline of when they are to apply, what kind of financing, interest rates and principal amounts.

There are various reasons why this contingency could damage the closing. Can the buyer qualify for the type of mortgage involved in the sale? Have they put down a certain mortgage interest rate or "market rate"?

A problem may arise if the rates change from the time the contract was written to the time the loan application is made.

If rates head upward, this could drop them out of qualifying for the loan amount. Of course, it would be best if the buyer would have applied for the mortgage before he's even signed the contract.

Right behind this contingency is the appraisal. Make sure, as the seller, that you allow enough time for this appraisal to get done and then for the underwriting to approve the appraisal. Depending on your market area, 30 days should cover it.

Sometimes buyers are surprised when they get an appraisal listed on the property substantiating the offer price, but then have the appraisal thrown out by the underwriters.

This contingency can get pretty sticky for both the buyer and seller if home values are slipping. First of all, if the appraisal comes in less than the contract amount, someone has to make a new agreement on price or come up with more money.

For instance, if the contract is for $400,000, but the appraisal comes in at $385,000, there's an instant shortfall in value of $15,000, and that could have several ramifications.

For one, the seller may be planning on that $15,000 to help the buyer with closing costs or to use it to purchase his next house. Meanwhile, the bank originally agreed to finance 80 percent of a property worth $400,000 -- which would be $320,000.

Now the 80 percent loan-to-value will only allow a mortgage up to $308,000. Who's going to come up with the additional $12,000?

Well, in a buyer's market, this puts the seller over the barrel a lot more than the buyer. In essence, the buyer may need to be willing to cut the offer price by $15,000 and take the loss.

In addition, if the buyer still needs the closing costs, the seller may have to keep that money on the table to get the deal through.

Once the contract has been written, your real estate professional should be on top of the performance of the contract to ensure all points from contract to settlement are followed through and completed.

Nontraditional Loans Can Carry Big Risks

2006-11-20T13:00:00.000-05:00

Washington Times,November 17, 2006
By Rebecca Boreczky

Record numbers of people have taken out nontraditional mortgages, loans with lower initial payments or other options designed to help buyers with limited resources overcome skyrocketing home prices. But these loans -- which in some cases are considered predatory by consumer advocates -- come with higher risks. Not only are these risks to the individual buyer, these alternative loans have not been tested in a time of economic hardship, so their larger effect on the economy is unknown.

Comprising less than 1 percent of the loan market in 2000, some estimate that as many as a third of all mortgages currently are nontraditional loans, Allen J. Fishbein, director of housing and credit policy for the Consumer Federation of America, testified before the Senate Banking, Housing, and Urban Affairs subcommittee on economic policy in September.

Additionally, although industry experts say there is likely a correlation between high-risk mortgages and foreclosures, "statistics on how many homes foreclose because of high-risk mortgages is hard to track," says Fannie Mae Foundation Director of Public Affairs Albert King.

Mr. Fishbein told the Senate subcommittee that 2006 delinquencies on adjustable rate mortgage loans increased 141 percent over delinquencies in 2005. Some estimate that subprime borrowers are 25 percent more likely to default on their mortgage, he says.

Still, lenders are filling what they perceive as a need in the marketplace.

"Three out of five of my clients will be interested in a more 'risky' type mortgage," says John Womeldorf, Realtor with Liz Moore & Associates in Williamsburg.

Mr. Womeldorf says it's usually the first-time home buyers who look for the loan that allows them the least out-of-pocket cash and the lowest possible monthly payment.

Home buyers have several costs involved in their mortgages. A mortgage payment includes principal and interest and also includes taxes and insurance. It is sometimes referred to as the PITI. For our purposes, we'll be discussing the principal -- the amount borrowed -- and the interest, the amount the lender charges for the loan.

How a homeowner repays the loan with interest is what determines the true cost of a home.

Home buyers have many creative ways to finance a home, rather than the so-called traditional 30-year mortgage. Here are four options, from the "safest" to the "riskiest."

• A 40-year, fixed-rate mortgage reduces the monthly payment by about $100. The trade-off is that it is slower to earn equity.

• Another choice is an interest-only loan, where consumers can pay nothing toward principal for a period of time. Typically, these loans work like an adjustable rate mortgage (ARM) with a three- to 10-year term that ends with a balloon payment.

For example, when the 10-year interest-only feature ends on the 30-year loan, the entire principal has to be paid over the final 20 years. This can cause the monthly payment to jump by as much as 50 percent.

• A low-documentation loan available for self-employed home buyers relies only on the word of the consumer as to annual income. The home buyer is asked to sign an income declaration form and complete a loan application.

• Finally, there is a loan that economists consider to be the riskiest, the option-ARM, a loan where the buyer has the option to pay only a portion of the interest monthly. The balance of the monthly interest charge is rolled back into the loan, increasing the principal.

Interest rates on option-ARMs generally start between 9 percent and 10 percent. If homeowners cannot refinance before the introductory rate expires, they could find themselves paying up to 15 percent interest.

"I consider the payment-option ARMs to be the riskiest loans available," Mr. Womeldorf says. "If the loan is not used properly, the buyer may accrue negative amortization over time, which will eventually chew up a lot of equity in the home."

Mr. Womeldorf says he believes that many home buyers lack an understanding of how the loan works.

"If a home buyer has an option-ARM loan and sees their interest rate go up two points within two years, they could see their mortgage payment up by 30 percent," he says.

Gary Herman, president of Consolidated Credit Counseling Services.com, counsels people who fall victim to overwhelming debt because of risky mortgages.

"The initial rate these mortgage lenders quote is almost always a teaser," Mr. Herman says. "It's never spelled out for the borrower what the final payment 'could' be if the interest rate keeps rising."

Mr. Herman says many people don't know what it will cost them over the life of the loan.

The majority of Mr. Herman's clients have credit card debt and a second mortgage.

"A client asked me to talk to a financial service for them about what their final payment could be and what they would actually pay for the loan," Mr. Herman says. "I called them up and asked them for the bottom line and to fax me the paperwork. The guy laughed at me and said that if they knew that they wouldn't take the loan."

The upside? ARMs give consumers with credit problems and no savings a way to finance housing.

But there are other choices.

Mr. King says Fannie Mae offers a 40-year fixed mortgage.

"A 40-year fixed mortgage helps consumers avoid some of that term-interest payment," Mr. King says. "It helps make the monthly payments more affordable."

Gary and Linda Baines took out a 40-year mortgage on their $350,000 home in Greenbelt earlier this year.

"The 40-year mortgage will help us pay down our debts and still have enough to pay the mortgage," Mr. Baines says.

"We have two small children, and there are always unexpected expenses. This gives us room to breathe," Mrs. Baines says.

Only about 5 percent of prime bank lenders offer risky mortgages. About 65 percent of so-called subprime financial services offer high-risk mortgages.

Financial industry insiders say consumers often are unaware of the difference. Prime lender interest rates are regulated by the federal government and subprime financial services interest rates are not.

The 109th Congress, currently in its lame-duck session, has considered, but has not passed, several measures to combat so-called predatory lending practices, including H.R. 1182, the Miller-Watt-Frank bill; H.R. 1295, the Ney-Kanjorski bill; and H.R. 4471, the Uniform National Mortgage Lending Standards Act introduced by U.S. Rep. William Lacy Clay, a Missouri Democrat.

Critics of the latter two measures say they would weaken state laws already in place regulating such loans. Industry groups, such as the Mortgage Bankers Association, the National Home Equity Mortgage Association and the National Association of Mortgage Brokers have announced they favor the Ney-Kanjorski proposal.

For details, consult the National Low Income Housing Coalition's summary

Meanwhile, federal regulators, including the Office of the Comptroller of the Currency, the Federal Reserve Board, Federal Deposit Insurance Corp. and others, last summer issued a 27-page "Interagency Guidance on Nontraditional Mortgage Product Risks"

The concern for economists is that these alternative loans have not been tested in an economic downturn, so they not only pose a risk for individual consumers, but potentially could have deeper ramifications.

Mr. Fishbein told the Senate subcommittee that consumers had relied upon what he called the "superheated housing market" to increase housing prices -- and their equity in the investment -- in order to refinance their way out of subprime loans into more traditional financing, avoiding large balloon payments. But as the market cools, this will no longer be possible, he testified.

The new financing is complicated not only for consumers, but also for real estate agents.

"We have meetings at least once a week where our preferred lenders update us on mortgage information," Mr. Womeldorf says. "We make sure our clients are educated and aware of all the options available to them and the risks associated with each."

Dave and Ellen Parker of Fredericksburg understand what it is to be "surprised" by a jump in their monthly mortgage payments.

"When we bought our home six years ago for $400,000, we never planned to stay more than five years," Mr. Parker says.

"Our payments were $1,050 a month," he says. "Then the ARM ended and our payment shot up to over $1,500. Now we are facing foreclosure."

Mrs. Parker says she can't believe what's happened.

"Our dreams of owning our own home weren't supposed to end like this," she says. "They never told us how high our mortgage payments could get. Now we are in credit counseling and are trying to hold on to our dream."

Technology Gains Ground In Home Transactions

2006-11-20T12:58:00.000-05:00

Survey: Most home sellers choose full-service brokerage
Inman News, November 16, 2006

Technology is dominating many aspects of the real estate transaction process, but the most important factors are purely human, according to an industry survey of home buyers and sellers.

Most sellers prefer full-service brokerage, where brokers handle all aspects of the transaction process from listing to closing, according the survey, which found that 83 percent of sellers use full-service brokerage, 9 percent use limited services and 8 percent use minimal service, such as simply listing a property on a MLS.

The study, released by the National Association of Realtors, was based on a mailed questionnaire and asked buyers and sellers about preferences and habits in real estate transactions.

NAR 2006 President Thomas M. Stevens from Vienna, Va., said historic comparisons are not available, but that limited and minimal services were a relatively small market share in the past and the question was not part of previous surveys. "Anecdotally, there’s been a modest rise in recent years, and in all probability a somewhat higher level of sellers used full-service brokerage through the early part of this decade," said Stevens, senior vice president of NRT Inc.

"Our sense is that professionals will continue to experiment with business models and that the lion’s share of consumers will continue to opt for full-service brokerage, but there’s room for all ethical business practices in this industry," he said.

Additional findings show consumer satisfaction with the level of brokerage service varies, with 71 percent of sellers being very satisfied with their full-service experience and another 24 percent somewhat satisfied. Limited services also received high marks with 76 percent being generally satisfied; however, 50 percent of sellers using minimal service were dissatisfied with their experience.

The survey also found a downtrend in the number of for-sale-by-owner transactions, falling from 13 percent of market share in 2005 to 12 percent today. "When you factor out the properties that were not placed on the open market, the actual number of FSBOs is only 7 percent - the rest are simply unrepresented sellers in private transactions," Stevens said. NAR began tracking the FSBO market in 1981; the record high was 20 percent in 1987.

The median home price for sellers who use an agent is 31.9 percent higher than a home sold directly by an owner; $247,000 versus $187,200, according to the NAR survey. However, unassisted sellers in this survey, unlike agent-assisted sellers, were more likely to be in a small town or rural area, and their income was 7.2 percent lower than sellers using agents - suggesting their homes may be worth less than the typical home sold by an agent.

The most difficult tasks reported by FSBOs are preparing the home for sale, understanding and performing the paperwork, and selling within the desired time frame.

To find a real estate agent, the survey shows the most important factor for both buyers and sellers is word-of-mouth recommendation. The most important criteria in choosing an agent are reputation and trustworthiness.

The typical home buyer is 41 years old, earned $71,800 and purchased a home costing $214,000 that was 1,815 square feet in size, according to the survey. They searched eight weeks and visited nine homes before making a decision.

Sixty-one percent of buyers are married couples, a record 22 percent are single women, 9 percent single men, 7 percent unmarried couples and 1 percent other. Eleven percent were born outside of the United States.

Three-quarters purchased a detached single-family home, 9 percent a townhouse or rowhouse, 11 percent a condo and 5 percent some other kind of housing; 78 percent of respondents purchased an existing home and 22 percent a new home. The median distance from the previous residence was 13 miles, and 55 percent of all homes purchased were located in a suburb or subdivision.

The biggest factors influencing neighborhood choice are quality of the neighborhood, convenience to job and convenience to family and friends. Other factors with high responses include neighborhood design, convenience to shopping and quality of the school district.

The number of first-time buyers dropped to 36 percent of respondents, compared with 40 percent in the previous three annual surveys. The median age of a first-time buyer is 32, a fairly consistent finding since 1981, with a median income of $58,300. They purchased a home costing $165,000 and plan to stay in that home for six years. The median downpayment by first-time buyers was 2 percent, but 45 percent purchased with no money down. Of first-time buyers who made a downpayment, 22 percent received a gift from a friend or relative, usually their parents.

The typical repeat buyer is 47 years old, earned $81,900, purchased a home costing $249,000 and plans to stay in that home for 9 years. They made a median downpayment of 16 percent, but 11 percent paid cash for their property. Of those making downpayments, 62 used the equity from their previous home.

Buyers used a wide array of resources in searching for a home: 85 percent used a real estate agent, 80 percent the Internet (up from 77 percent in 2005), 63 percent yard signs, 55 percent print or newspaper ads and 47 percent attended open houses. Smaller categories include a home book or magazine, home builders, television, billboards and relocation companies.

When asked where they first learned about the home purchased, 36 percent of buyers identified a real estate agent; 24 percent the Internet; 15 percent from yard signs; 8 percent from a friend, neighbor or relative; 8 percent home builders; 5 percent a print or newspaper ad; 3 percent directly from the seller; and 1 percent a home book or magazine.

Eighty-one percent of home buyers who used the Internet to search for a home purchased through a real estate agent, in contrast with 63 percent of non-Internet users who were more likely to purchase directly from a builder or from an owner they knew in advance of the transaction.

Local metropolitan multiple listing service (MLS) Web sites were the most popular Internet resource, used by 53 percent of buyers, followed by Realtor.com, 52 percent; real estate company sites, 41 percent; real estate agent Web sites, 40 percent; local newspaper sites, 14 percent and real estate magazine Web sites, 6 percent; other categories were smaller.

In order of priority, home buyers want agents to help find the right house, negotiate the terms of the sale, determine what comparable homes were selling for, help with price negotiations, help with paperwork, help determine how much they could afford and help with finding and arranging financing. Three-quarters of buyers use only one agent in the search process.

When asked about the benefits provided by an agent, 55 percent of buyers said agents helped them understand the process, 40 percent said their agent pointed out unnoticed features or faults with the property, 37 percent indicated the agent improved their knowledge of the area, 36 percent said agents negotiated better contract terms, 35 percent reported a shortened search process and 29 percent said their agent negotiated a better price.

Of buyers who use an agent, 64 percent choose a buyer’s representative. Eighty-five percent of all buyers said they were likely to use the agent again or recommend to others, and almost all buyers were satisfied with their agent’s honesty and integrity, with 83 percent being very satisfied.

The median age of a home seller is 46, with an income of $83,800. Seventy-two percent are married couples, had been in their home for six years and moved a median distance of 17 miles. Their home was on the market for six weeks, up from four weeks in the 2005 survey. Ninety percent of sellers were satisfied with the selling process.

Forty-four percent of sellers chose agents based on a referral by a friend, neighbor or relative, and 30 percent used their agent previously; 69 percent of sellers contacted only one agent. Reputation and trustworthiness are the most important factors in choosing an agent; 82 percent said they were likely to use the same agent again or recommend to others.

NAR mailed an eight-page questionnaire in August 2006 to a national sample of 129,500 home buyers and sellers who purchased their homes between July 2005 and June 2006, according to county records. It generated 7,548 usable responses; the response rate was 6.3 percent. All information is characteristic of the 12-month period ending in June 2006 with the exception of income data, which are for 2005.

In a Downswing, Looking Up:

2006-11-20T12:56:00.000-05:00

Once Locked Out by High Prices, Aspiring Buyers Now Find Reason for Hope
Washington Post, November 15, 2006
By Kirstin Downey

Kristy LaLonde, who rents an apartment in Crystal City, spent the past four years "freaking out" as home prices here climbed relentlessly. She feared she would never be able to own the kind of place she had been raised to expect.

Now, she's feeling better.

A dramatically slowed housing market has disappointed home sellers and left real estate agents waiting for the phone to ring. But it has brought relief to would-be homeowners such as LaLonde, 29, a federal policy analyst, and her fiance, Gregory Daphnis, 35, a project manager for a health insurance plan.

Not long ago, they thought the best they could afford was a condominium. Last month, though, they were delighted to find they could qualify to buy a red-brick Colonial in Wheaton -- because the seller had dropped the price from $499,000 to $435,000.

"We feel like we can begin building our life together, start a family," LaLonde said. "We can move somewhere that's not temporary, with a yard, and with a neighborhood community feeling."

The Washington area remains one of the most expensive places in the nation to buy a home. Still, over the past year, as the number of available homes for sale has climbed, prices have flattened or fallen. That has propelled some buyers toward homes that had slipped beyond their reach. It has allowed them more time to shop and afforded them a greater selection. It has also made sellers much more willing to help with such things as closing costs.

The decline in prices is most evident in the District and Northern Virginia, according to figures released last week. The median price of all types of houses and condominiums sold in the District dropped 12 percent in October from the same month a year earlier, dropping from $425,000 to $375,000, according to Metropolitan Regional Information Systems Inc., the region's multiple listing service. Prices fell 6 percent in the same period in the close-in Northern Virginia suburbs, dropping to $458,850 from $490,000, according to MRIS, and were essentially flat in Montgomery County, at about $430,000. The median is the price at which half the homes cost more and half cost less.

"The shoe is on a different foot," said Diana Whitfield, an agent with Long & Foster Real Estate in Burke. "Buyers are realizing they are more in control."

Buyers, particularly the first-timers who feared they had been priced out of homeownership, are gleeful.

Susan O'Hora, 29, an operations manager in international licensing at the Discovery Channel, felt like she was running as fast as possible but still falling behind. After graduating from the University of Richmond and moving to the Washington area in 1999, O'Hora resolutely scaled the career ladder. She has more than doubled her salary, but real estate prices moved up much more quickly. The median home price in the region was $181,600 in the second quarter of 2000 and $443,000 in the same quarter of 2006, an increase of 144 percent, according to the National Association of Realtors.

"It was kind of sad to get better, better jobs and move up in my career when the progress I was making was being so outpaced by the housing market that I thought I would never be able to get anything livable," said O'Hora, who rents a studio apartment near Dupont Circle. But the recent market shift has left her "excited and optimistic" about her prospects.

"I feel like finally I might be able to get in on this," she said. "I feel relieved."

Daniel Moshinsky, 26, a computer programmer for the Census Bureau, also watched prices climb in the five years after he graduated from college, outstripping his wage gains.

"My reaction was horror," he recalled. "I thought, 'Will I ever get a house?' I felt like I had missed the Gold Rush, that everybody was making money in real estate and that I was left out."

Moshinsky, who lives in a townhouse in Silver Spring with three roommates, still can't afford the home he would like. Now, though, he is "hopeful," he said. "I hope prices keep falling a little bit longer. So far they haven't fallen enough to be affordable."

Some people who already own homes but are looking to trade up to a more expensive house are also pleased, even if they are losing out a bit on the selling side. For Deanna Behnken, 26, part of the pleasure of her recent home-buying experience was that she felt no sense of urgency. In late 2003, when she and her husband, Corbin, bought their townhouse in Gainesville, they felt pressured to buy quickly because they feared if they delayed, the property would be snatched up by someone else.

"It was kind of 'Hurry up, find a house, anything,' " she recalled. "Now, time is on your side."

Earlier this year, they found a new, single-family house in Haymarket with granite countertops, stainless steel appliances and a yard that backs up to a forested area. The price had been cut from $624,000 to $544,000 -- a stretch, but one they could afford. The builder was eager to make a deal because it had been sitting vacant since April.

"It's much nicer than I ever thought I would have," she said. "Everything is top of the line."

First, though, the Behnkens had to sell their townhouse. It took four months and a $50,000 price reduction.

"I still made a profit, and in the grand scheme I was able to upgrade and come out ahead," said Behnken, a hospital contract specialist with a medical diagnostic laboratory. Her husband is an engineer.

The decline in prices is making other buyers wary because they fear purchasing in a declining market. Scott McCrimmon, 34, a software engineer, has been studying the market for a year, since he and his wife moved to the Washington area from Miami. They are renting a house in Germantown and will wait to see what happens in the spring.

"I have a strong suspicion the market is still a bit overpriced," McCrimmon said. "There may be some basis for why others are not buying, so I'm holding back, too."

NAR: Housing Spiral Mostly Over

2006-11-20T12:55:00.000-05:00

Realty Times, November 13, 2006
By Lew Sichelman

NEW ORLEANS -- The worst of the housing downturn is over for three-quarters of the country, the National Association of Realtors' top economist said here earlier this month.

Noting that like politics, "all real estate is local," David Lereah, the chief economist of the nation's largest trade organization, said 74 percent of the nation's housing markets will once again be expanding "in a sluggish way" in 2007.

Mr. Lereah divides the country into five "divergent" sectors:

Non-Boom Stallers, or places which never participated in the housing boom which began 15 years ago

Non-Boom Gainers, or markets which didn't participate in the boom but grew nevertheless.

Boom Lites, or markets which shared only slightly in the boom.

Average Boomers, or places which took part in the explosion but only on an average basis.

Hot Boomers, or places where house prices jumped out of sight.
Only the last group, which represents 26 percent of the country, still has a ways to go to work their way back to normal, Lereah said at NAR's annual convention here. "The correction is pretty much over with" for the rest, he added.

The economist would not hazard a guess as to how low prices would need to fall in the most overheated markets or how long it would take for them to hit bottom, saying it would be "pure speculation" on his part or that of anyone else.

But he did say that the places where speculators were most active will be the ones that take the longest to work their way back to equilibrium.

He also said price corrections should be welcomed, not feared. "What gives health to the economy is sales -- the number of transactions -- not price," he said. "Every 1 percent drop in prices qualifies 50,000 more potential purchasers."

"We now have the most favorable market for home buyers in years," Lereah said, noting that sellers are starting to be "more realistic about current market conditions" and pricing their properties more appropriately for the downturn.

"Conditions for buyers have improved because sellers are flexible now and mortgage rates are near historic lows," he said. "And sellers who have been in their homes for a normal period of ownership are still seeing very healthy returns on their investments."

Lereah expects existing home sales in 2007 to "coast" at roughly the same level as this year, which, despite a projected 8.6 percent decline to 6.47 million, will go down as the third best year on record.

New home sales, on the other hand, should fall 8.7 percent to 975,000 units, largely because many builders have slowed their pace of construction, according to the NAR economist. Such a decline would be on top of the expected 17.8 percent drop to 1.07 million units this year.

Despite the slow down, however, Lereah is still predicting slight increases in housing prices. For this year, he says the national median for existing homes should rise by 1.9 percent, to $223,700.

And for 2007, he expects a 1.7 percent increase to $227,500.

New homes prices, on the other hand, should slip by 1.1 percent this year, to $238,400, and then go back up 1.3 percent next year, to $241,400, he said.

Realtors See 'Perfect Alignment' Of Low Interest Rates, Ample Listings

2006-11-20T12:54:00.000-05:00

Bloomberg News, November 11, 2006
By Sharon L. Crenson

There's a bright side to the decline in the U.S. housing market, says the National Association of Realtors: plenty of choice.

"Right now may actually be one of the best times to buy a home," the association said in the first full-page ads in its 98-year history. With "interest rates near record lows," the "large inventory won't last."

The largest U.S. real estate trade association is spending $1.3 million on a two-week campaign that's running in the New York Times, the Wall Street Journal, USA Today, the Los Angeles Times, the Chicago Tribune and The Washington Post. The ads are designed to entice home buyers as sales have slid, inventories have risen and builders are offering incentives.

"There's a big change in psychology and that's what they're reacting to," said Robert Shiller, an economics professor at Yale University, who cut out the ad and showed it to his students. The campaign is a true "sign of the times," he said.

Total existing-home sales, including single-family, townhouses, condominiums and co-ops, dipped 1.9 percent to a seasonally adjusted annual rate of 6.2 million units in September from a level of 6.3 million in August. They were 14 percent below the 7.2 million-unit pace in September 2005, the Realtors group said on Oct. 25.

Last month, the Realtors said the median price for a new U.S. home probably will dip 0.2 percent to $240,500 in 2006, the first decline in 15 years. In October, the Mortgage Bankers Association predicted U.S. new home sales will plunge 18 percent this year and mortgage giant Freddie Mac said declining sales will shave a full percentage point off economic growth in the second half of 2006.

"The market is much better than you might hear or read," National Association of Realtors President Thomas M. Stevens said in a statement on the organization's Web site. "Consumers should take advantage of this perfect alignment of low rates and extraordinary inventory."

One theme in the campaign is that the 3.8 million unsold homes offer "the greatest choices in decades." For sellers, that means it would take seven months to close deals on all the existing homes for sale if no others came on the market.

Another claim the ads make is that buying a home gives you a financial boost. "Homeownership is a safe, secure way to long-term wealth," the ads said.

Home Sales Still Sluggish Across Arlington

2006-11-20T12:52:00.000-05:00

Sun-Gazette, November 11, 2006
By SCOTT McCAFFREY

Home sales across Arlington in October remained soft, with average sales prices down nearly 20 percent and inventory remaining high headed into the slower winter season.

The good news? It's taking less time to sell a home in Arlington than in most other jurisdictions across Northern Virginia, and sellers are getting a marginally higher percentage of their original list price than those in other parts of the region.

A total of 197 single-family homes, townhouses and condominiums in Arlington changed hands in October, according to figures released Nov. 10 by Metropolitan Regional Information Systems, the area's multiple-listing service.

That's down 19.6 percent from the 245 units that were sold in October 2005.

Counting all units, the average price for properties sold in October was $520,047, down about 9 percent from the $570,883 recorded 12 months before.

The average original listing price of those homes had been $555,819, meaning sellers received 93.6 percent of original list price, down from 98.5 percent a year ago. During the height of the boom market, Arlington homes, on average, were selling for more than what they had been listed for, as buyers bid up the price in a frenzy.

Perhaps not surprisingly, average sales prices varied by type and size of home.

Among single-family homes, the average sales price was $488,583 for those with one or two bedrooms; $608,228 for those with three bedrooms; and $826,850 for those with four or more bedrooms.

For townhouses, the average price was $450,436 for those with one or two bedrooms, $662,900 for those with three bedrooms. There were no sales during the month of townhouses with four or more bedrooms.

The average sales price for condominiums in October was $399,428.

Average sales price also varied by location. In North Arlington's 22207 ZIP Code area, the average price was $801,130, up nearly 7 percent from a year ago. That ZIP code has the largest concentration of single-family homes, so its average price is not diluted by large numbers of less-pricey condominiums.

The average sales price in 22201, also in North Arlington, was $540,488. In South Arlington communities, the average sales price in the 22204 ZIP code was $482,736, and in the 22206 ZIP code, it was $384,777.

It took an average of 75 days for a home to go from listing to ratified contract, which is three times longer than a year ago. At the market's peak, the average number of days on the market contracted to as little as 14.

For sellers, the silver lining was the more than a third of homes sold within a month of listing, and more than half sold within two months. Historically, across Virginia, the average number of days on the market has been about 90.

A total of 374 properties came onto the Arlington market for sale during the month, bringing the number of active listings to nearly 1,200. Slightly under half those properties were single-family homes and townhouses, with the remainder being condominiums.

Figures include most, but not all, homes on the market. Figures are preliminary and are subject to revision.

Bursting the Bubble Bubble

2006-11-16T15:34:00.000-05:00

Smartmoney.com, October 16, 2006
By Ray Hennessey

I'VE HAD QUITE ENOUGH of bubble talk. Any time anyone talks about real estate nowadays, their faces turn grave and they speak of the value of their home as if they've just seen the asteroid that's going to make us go the way of triceratops. House values are falling, mortgage rates are rising, inventory of existing homes is growing. Repent. The end of the world is nigh.

I'm not so sure. If anything, now may be the right time to buy or sell real estate.

Full disclosure: I speak with the conviction of someone who has to be right, since I'm one of the potential losers in the midst of selling one property and buying another. But this is more than the alcoholic explaining to himself in the middle of the night that he can hold his liquor. I'm in the real-estate market today because I believe the time is right, and the apocalypse will wait.

Here's why: There are still buyers in the market. I know; they've traipsed their muddy boots through an open house at my existing place, and, oddly, left full handprints all over my bathroom mirror. (I choose not to ask.) One of these buyers, with the blessing, will write me a check and change the name on the mailbox. What may be different now than, say, even a year ago is that these folks are more price-sensitive. They have choices, and less competition, so they're in a position to negotiate. As a seller, I had to respond by listing my place at a realistic price, even, in some cases, undercutting the price tags of comparable homes in my area. Shudder the thought.

But, ah, you may say. There lies proof that the bubble is bursting. Prices are going
down. I'll concede that, as I must, but it ain't a bubble. Bubbles burst, often with a quick drop in prices where values of assets fall by 50% or more. It happened with tulips and web-content companies, but it's not happening in housing. Real estate just isn't that liquid. You can't buy and sell it quickly. God forbid if you could. Given the conditions in the market, quick real-estate transactions would've driven home prices even higher, where a three-bedroom townhouse with riparian rights could be bandied around like another Pets.com. Then, the fall in prices would be more severe. But that's not the nature of this particular beast. Instead, we have prices coming down to levels where thinking people, after a long, often tedious, process, are willing to buy. That sounds like an efficient market to my ears.

Will I get less for the place I'm selling now than I would've a few years ago? Sure.

Will I still make money on it? Of course. I have a colleague who complains about having to come down about $100,000 on his house to attract buyers. He's still tripling the amount he paid for the place. Yet, he talks like Ben Bernanke broke into his house, stole money from his 401(k) and kicked his dog on the way out. Perspective, methinks, is in order.

And, speaking of Bernanke, let's look at rates for a second. Mortgage rates are higher, but they're not historically high. And, as a buyer, I've been amazed at their elasticity. I'm not locking in quickly because there's a chance that rates will go down.

And banks are competing for my business by offering me attractive deals. Reasonable
rates, a healthy inventory, realistic prices. Ayn Rand would be proud.

Are there areas at risk? Yes. I'm buying a home, not a property, so my time horizon for growing the value of my real estate is long. Those who are speculating in the market are more likely to lose out than in the past. Also, new home builders, as we've seen, are in a bit of trouble, but that's mostly their own fault, since they made the bad business decision of overbuilding, swelling supply and overstripping demand. Serves 'em right.

Also, there are a bunch of people who are going to get caught short because they bought too high and took an exotic mortgage to boot. When adjustable-rate mortgages start re-setting, some people are going to find their monthly payments soar. But, again, the fault can be laid at the feet of the buyers, not the banks. (I'm not giving mortgage brokers a free pass, mind you. I'm still offered all sorts of deals that I need a nautical chart and abacus to figure out. But I'm an old-fashioned guy who likes to curl up with a glass of port and a 30-year fixed.) Still, many people simply made the conscious decision to buy more house than they could afford. They'll now have to sell, or face foreclosure. But rather than ending up moving into a Fridgidaire box outside Penn Station, they'll downsize. And probably end up in a more modest home they should've purchased in the first place.

So, please, for the sake of all that's holy, stop talking about the housing bubble. For one thing, it just makes you look uninformed. And, worse, it may scare buyers away from the place I'm trying to sell.

Appraising Zillow

2006-11-06T15:49:00.000-05:00

Washington Post, November 4, 2006
By Kenneth R. Harney

Have you ever checked out the satellite photos and market-value estimates of homes in your neighborhood on Zillow.com, the Internet real estate site that says it offers "free, instant valuations and data for 67 million-plus homes?"

Zillow was launched with major media fanfare in February, backed with a reported $57 million in venture capital. It is one of the most popular real estate sites on the Web, visited millions of times a month by sellers, buyers, agents, lenders and homeowners. It also has begun distributing its free Zestimates through Yahoo.com and real estate brokerage sites.

But now Zillow is coming under harsh scrutiny. In a complaint filed Oct. 26 with the Federal Trade Commission, the National Community Reinvestment Coalition said Zillow knowingly deceives the public by presenting its property estimates as accurate, whereas they are frequently far off the mark.

The nonprofit coalition, made up of housing and economic justice organizations around the country, says its audit of Zillow's accuracy documented that its valuations are within 10 percent of actual market value "less than one-third of the time."

The allegedly erroneous estimates are especially harmful in low- and moderate-income and minority neighborhoods, the complaint said.

"While overvaluations were prevalent in predominantly white areas, undervaluations were more frequent in communities that were predominantly African-American or Latino by census tract," the complaint said.

That alleged disparity, in turn, has opened the door to a variety of deceptive and predatory real estate practices in those neighborhoods.

"NCRC and its members are aware of a growing number of real estate and lending professionals who are using the misinformation on Zillow.com to perpetrate fraud in our nation's markets, often by targeting consumers in violation of federal and state fair housing laws," the complaint said. It added that NCRC was considering filing fair-housing and equal-opportunity complaints against the company with the federal government.

In a statement, Zillow called the coalition's complaint "groundless."

"As we say consistently and prominently on our Web site, Zillow is a free research tool for consumers, and Zestimates are designed to be a starting point for consumers who want to learn about the value of houses. We make every effort to explain on our site the role of Zestimates as a research tool, as well as to clearly display our rates of accuracy for every area we cover."

In an interview, Stan Humphries, Zillow's director of advanced analytics, said his company's internal audits found a median margin of error of 7.2 percent nationwide. Audits also found that, contrary to NCRC's claims, undervaluations were more common in higher-cost areas, whereas overvaluations were more typical in lower-priced neighborhoods. Humphries questioned whether NCRC "has much of an empirical basis for [its] claims."

In the complaint, NCRC cited two other studies -- one by MSN Money, an online service, and a second by R. James Girardot, president of an appraisal firm in Washington state. MSN Money examined Zillow's valuation estimates for a sample of houses in five metropolitan areas and found them within 10 percent accuracy 29 percent of the time. The five metropolitan markets -- Seattle; Minneapolis-St. Paul; Scottsdale, Ariz.; Cincinnati; and Portland, Ore. -- all were ranked by Zillow as among its most accurate areas for valuations, according to the complaint.

Girardot's study covered 200 houses, comparing Zillow valuations with actual closed selling prices, and found inaccuracies ranging from 11 to 50 percent. In one case, Zillow's estimate valued a property at $246,865, but the house sold for $489,950 last July.

Putting aside the specifics of the complaint before the FTC, the Zillow-NCRC dispute throws light on a simmering tension within the residential real estate market: On one hand, mortgage lenders are demanding valuation alternatives that are faster and cheaper than traditional, full-blown appraisals. The proprietary technology Zillow uses to produce its estimates is a form of automated valuation model (AVM.)

Many banks and mortgage companies use commercially marketed AVMs for home equity loan valuations and to help spot fraudulent or grossly inaccurate appraisals. Traditional appraisals generally cost $300 to $500; AVMs can cost a high-volume lender $20 or less.

On the other side of the issue, professional appraisers are threatened by lenders' push for lower costs and high-tech valuations. Though they sometimes use commercial AVMs as data supplements, appraisers insist that their time-tested, hands-on methods produce the most accurate valuations.

Appraiser Vicky Cassens Zillioux says "valuing a property for a financial decision is not a game -- and should not be treated lightly by the consumer, lender or the vendor supplying that value." She notes that appraisers are held to high standards of accuracy and legal liability by lenders and regulators, and "a similar level of accuracy should be expected by the consumer at Zillow.com."

10 Reasons Local Real Estate Market Will Stay Strong

2006-11-06T15:46:00.000-05:00

Arlington Sun-Gazette, November 3, 2006
By David Howell

Top Ten Reasons To Be Optimistic About Northern Virginia's Housing Market: We don't have David Letterman's comedy writers and, for us, real estate is serious business. But we like Dave's countdown format, so here are the top ten reasons to be optimistic about Northern Virginia's housing market:

10. The softening of the market. Believe it or not, that's a good thing. There is no doubt that the market is slower and softer in every respect when compared to the last several years. The 20- to 25-percent appreciation rates were not sustainable. And the longer they continued, the harder the fall would be. (More on this topic below.)

Markets seek balance, and that is precisely what this market is doing. The pendulum has swung in favor of buyers, and that is good for the long-term health of the region's housing market.

9. The media. OK, this may seem a bit tongue-in-cheek, but area homeowners should rejoice every time the national media and even local media predict doom and gloom for area housing - because they have so often been wrong. The relentless drumbeat of negativity seems almost totally disconnected from reality. Our current favorite: Forbes predicts that the median price of a home in metro D.C. will increase only 3 percent over the next ten years.

Not 3 percent annually, mind you. A total of 3 percent. In the best regional economy in the country.

8. History. The compounded average annual increase in the average sales price of a home in the metro D.C. area over the last 30 years is 7 percent. (Forbes, are you paying attention?) Seven percent is normal; 7 percent is sustainable. We won't see that in 2006, but an individual's housing decision should be a long-term decision. Feel good about owning a home here - unless you have to sell right now.

7. Income. Three of the 10 wealthiest counties as measured by median household income in the United States are in Northern Virginia: Loudoun (No. 1), Fairfax (No. 2), and Prince William (No. 7). The entire D.C. region ranks second only to San Jose, Calif., in median income, and we have the lowest regional poverty rate in the country - 7 percent. That means we have a stable, broad-basedeconomy.

6. Virginia. Virginia is one of a handful of states with a AAA bond rating and continues to attract businesses - and jobs - from all over the world. The state not only has a huge number of well-paying white collar jobs, but with Hampton Roads among the busiest seaports in the United States, the state also has a huge industrial base. The future for the Commonwealth looks very good.

5. Northern Virginia. We are the economic engine of Virginia. The pace of commercial development is accelerating; we have the lowest office vacancy rates in the country. Our local “downtown” - Tysons Corner - has more office space and more jobs than the downtowns of most major metropolitan areas.

The emerging town center developments throughout the region will create more jobs closer to major transportation arteries. Rail to Dulles will help fuel and sustain the region's growth. (More on transportation issues later.)

4. Interest Rates. Mortgage interest rates are already low and have been trending slightly lower over the last couple of months. Yes, they were a full point lower in the spring of 2005, and the rise in rates contributed to the slowing of the market. A brief historical note: McEnearney Associates was founded in 1980 when mortgage interest rates topped 17 percent, and people still bought and sold homes. Today's rates look pretty darn good.

3. Federal spending. Although the pace of growth in federal spending in the region has slowed compared to the first half of the decade, Northern Virginia still receives more than 50 cents of every federal dollar spent in the region, and federal jobs and federal spending provide a very strong foundation for our broad-based economy.

2. Demographics. We still have net migration to the area, and we are forming households at a pace that exceeds the number of new housing units being built.

And, while in the transitioning market we are seeing an increase in rentals and a decrease in sales activity, people still have to have a place to live.

1. Jobs. The region has the lowest unemployment rate in the country - 3.5 percent - and Northern Virginia's is lowest in the region - right around 2 percent.

We continue to create jobs at a significant pace. Here's just one example: 22,000 new jobs will be coming to Fort Belvoir over the next five years, the equivalent of a new Pentagon coming to the I-95 corridor. And these jobs, by and large, will be well-paying, highly technical jobs.

This is our passionately held conviction: there is no better place in the United States to own a home than in this metropolitan area, and Northern Virginia is the best place in the region.

(David Howell is managing broker of McEnearney Associates' McLean office. He authored the following column, which is reprinted with permission.)

A Record Drop In Home Prices

2006-11-06T15:43:00.000-05:00

Washington Post, October 26, 2006
By Kirstin Downey

The price of existing homes last month fell 2.2 percent, the largest monthly decline in the almost four decades the number has been tracked, according to an industry report released yesterday.

Nationwide, the number of existing single-family homes sold fell 14.2 percent in September compared with September 2005, according to the report from the National Association of Realtors. The number of sales has fallen each month since March.

Prices fell everywhere in the country, with the Northeast and West most affected. Declines were more moderate in the South, which includes the Washington area.

The median price nationally of an existing single-family home in September was $220,000, down from $225,000 a year earlier. It was the largest monthly decline since the Realtors began monitoring prices monthly in 1968. It was the second month in a row that home prices fell compared with a year earlier. The median is the point at which half of the homes cost more and half cost less.

One reason prices are dropping is that sellers are having a harder time finding buyers.

Nazirahk Amen, 39, a natural medicine practitioner and acupuncturist, thought a buyer would snap up his three-bedroom, three-bath Cape Cod in Takoma Park. He was so confident that his organic garden and greenhouse would be a particularly strong lure in that community that he bought another house nearby and moved. For the past two months, he has been making two mortgage payments, and recently reduced the price $25,000 to attract a bidder.

"Of course it's frustrating," Amen said. "I'm looking for this to end. It's frustrating, to say the least."

Realtors' association officials blame the continuing slump on what Lawrence Yun, the group's senior economist, called "confidence issues." Yun said buyers are waiting until they think the market has hit bottom, particularly because high prices have made houses less affordable.

"Psychological factors have people on the sidelines," Yun said. "They are waiting to time the market."

Yun saw reason for optimism, and thinks an upturn is at hand. He said the September figures represent a "trough in the market," because for the past two months, the inventory of unsold homes has fallen slightly.

"Supply was artificially elevated" earlier in the year when real estate investors bailed out of the market, Yun said.

Thomas M. Stevens, a Vienna-based real estate broker who serves as president of the national trade group, said in a statement that he was heartened by the decline in properties coming onto the market, which he said would lead to a better "supply balance."

Charles W. McMillion, an economist and president of District-based MBG Information Services, said he saw little sign that the decline was ending. "I don't see stability when sales continue to decline sharply and price continued to decline sharply," McMillion said. "It's pretty hard to argue we've reached a sustainable level."

Peter Morici, an economist at the University of Maryland, said reduced inventory of unsold houses may mean "frustrated buyers are removing their homes from the market." Morici said that major price adjustments will be needed to bring the market back into balance.

"The speculative frenzy of recent years is causing a major adjustment, and the happy talk of Realtors is prolonging the process," Morici said. "The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses like any other asset can be overpriced. . . . Things are likely to get worse before they get better."

According to yesterday's report, prices in the Northeast in September dropped 5.1 percent compared with a year earlier and those in the West dropped 4.3 percent. In the South, they were down 1.6 percent.

The federal government is scheduled to release figures today on sales of new homes, which have also been falling this year. That weakness has been reflected in the earnings reports of national home builders. This week, for instance, Dallas-based builder Centex Corp., which has 40 projects in the Washington area, reported that its earnings in the quarter ended Sept. 30 fell 59 percent. "We have been aggressively responding to deteriorating market conditions" by reducing land purchases and cutting staff, Timothy R. Eller, Centex's chairman and chief executive, said in a statement.

Mortgage Rates Continue to Drift Lower as Housing Market Eases Back from Record Highs

2006-09-02T07:56:00.000-04:00

Realty Times, September 1, 2006

McLEAN, VA -- Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMSSM) in which the 30-year fixed-rate mortgage (FRM) averaged 6.44 percent with an average 0.4 point for the week ending August 31, 2006, down from last week's average of 6.48 percent. Last year at this time, the 30-year FRM averaged 5.71 percent. This is the lowest the 30-year FRM has been since the week ending April 6, 2006, when it averaged 6.43 percent.

The average for the 15-year FRM this week is 6.14 percent, with an average 0.4 point, down from last week when it averaged 6.18 percent. A year ago, the 15-year FRM averaged 5.32 percent. This is the lowest the 15-year FRM has been since the week ending April 6, when it was 6.10 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) fell to 6.11 percent this week, with an average 0.5 point, down from last week's rate of 6.14 percent. A year ago, the five-year ARM averaged 5.30 percent. This is the lowest the five-year ARM has been since March 30, 2006, when it was 6.02 percent.

One-year Treasury-indexed ARMs averaged 5.59 percent this week, with an average 0.7 point, was down from last week when it averaged 5.60 percent. At this time last year, the one-year ARM averaged 4.48 percent. This is the lowest the one-year ARM has been since April 6, 2006, when it was 5.57 percent.

"Mortgage rates continued to drift lower this week in large part because of the cooling in the housing market and in consumer confidence, thus giving financial markets reason to believe that economic growth will moderate and inflation
will remain in check," said Frank Nothaft, Freddie Mac vice president and chief economist. "As a matter of fact, the 30-year FRM is nearly 40 basis points lower than its peak of 6.8 percent in July of this year."

"By some indicators, personal incomes are growing faster than the cost of housing. Combined with the still historically low mortgage rates, this will help to support the housing industry as it levels off from the record highs of the last few years."

Most Buyers Begin by Looking on Web

2006-09-02T07:52:00.000-04:00

Washington Times, September 1, 2006
By M. Anthony Carr

The latest buyer survey by the National Association of Realtors reveals that 80 percent of all buyers now begin their search online for real estate.

That's quite a surge in just a few years, when only about 7 percent of all buyers looked online when real estate and the Internet first met.

If any industry benefits the consumer online, it's real estate. There are millions of houses advertised online for buyers to peruse. They can view floor plans and watch video tours. It's all there, and it's free.

We take for granted what it takes to create such a system.

Today's electronic multiple listing service (MLS) began years ago on paper. Realtors across the country would turn in listings with a picture to the processing manager, who then handed them off to the local Realtor association.

Associations would then print up a book or cards and then hand-deliver them to real estate offices -- usually one per agent -- either weekly or biweekly. The MLS book was one of the most highly sought-after commodities in the Realtor's toolbox.

The MLS serves as a co-op between competing real estate agents so they can sell each others' listings.

The electronic MLS also starts and ends with these agents. Without the brokerages that gather data on millions of homes and pay billions in fees and programming costs, there would be no Internet-based real estate database.

There would be places online for homeowners to advertise their homes for sale, but there would not be a pure database, where buyers and sellers could come together with secure data updated daily.

I can't think of any other databases of homes for sale online that operate like the MLS.

The For-Sale-by-Owner-type Web sites are not databases. They are advertising, much like what you would find in a newspaper Web site.

Often, even after the property is sold, the ad for that property remains online for some time. Buyers don't really know if what they're clicking through is still on the market.

The Realtor-operated MLS systems are internally regulated. Agents can be fined for registering erroneous information or not updating information soon enough.

In fact, the information is so good that other Web site operators have taken aim at these online services. They want the information for their own sites.

NAR's Center for Realtor Technology has released two programs to help op "scraping" of the data by online predators.

"NoScrape" is a program that places the data into a rendering, or graphic file, from which data cannot be copied. Computers aimed at scraping data from real estate sites cannot strip the information from this type of Web page.

A second anti-piracy program is "reCaptcha," which "is a way to tell computers and humans apart and is based on CAPTCHA technology." CAPTCHA stands for Completely Automated Public Turing test to tell Computers and Humans Apart.

It identifies the party trying to access your site as a human or a computer program by generating questions that only a human can answer correctly. The reCaptcha program displays a distorted image of a word that a user must identify correctly and retype to gain passage to parts of the Web. This type of program is also used by financial, ticketing and Web log sites to ensure humans are using the site rather than computers.

Good Time to Shift as Rates Drop

2006-09-02T07:46:00.000-04:00

Washington Times, September 1, 2006By Henry Savage

The advertisements are increasing. The media has picked up on it. The bloggers are talking about it. And yes, mortgage rates have dropped more than many of us realize.

After almost two years of gradually rising rates, there are signs that long-term mortgage rates may have ebbed. The 10-year Treasury bond, the best benchmark to gauge the direction of 30-year fixed-rate mortgages, is showing signs of a downward trend.

The question is whether the latest drop in rates is the beginning of a long-term trend or a mere blip.

On June 30, 2005, the 10-year Treasury bond yielded 3.94 percent. Since then, the yield has risen slowly, peaking on June 28 at 5.25 percent. Since then, the T-bond has dropped to 4.79 percent.

Likewise, 30-year mortgage rates have dropped, some would say significantly. Back in early July, refinancing with zero points and zero-closing-costs might carry a rate of 7.125 or 7.25 percent. Today, the same zero-closing-cost option has dropped to almost 6.50 percent.

In the old days when the consumer's only choice was to take a rate that carried thousands of dollars in points and closing costs, a 1/2-percent or 3/4-percent drop in rates would have little effect.

Today, with the zero-closing-cost option, even a 1/2-percent drop can save the homeowner some money. The principal and interest (P&I) payment on a $350,000 loan at 7.25 percent, for example, is $2,388 per month. At 6.75 percent, the P&I drops to $2,270, a difference of $118.

Whether saving $118 a month is significant depends upon how you look at it. Think of it this way: Shaving 1/2 a percent off your mortgage rate will buy you almost 40 gallons of gas every month at $3 a gallon. Now I have your attention.

Homeowners are beginning to respond to the drop in rates and the incessant stimuli provided by mortgage advertisers. The Mortgage Bankers Association recently reported that refinancings, while down more than 25 percent from the same period last year, are at a recent five-month high.

But it's not just the drop in long-term rates that's creating the rush to refinance. Adjustable rate mortgages (ARMs), as most folks know, have skyrocketed in recent months. ARM rates as low as 3 percent a few years ago have, or will soon be, adjusting to new fully indexed rate of somewhere between 7 and 8 percent, depending upon the ARM's index and margin.

The newest trend in the media is to warn homeowners carrying adjustable rates about the pending increase in rate and payment. These warnings should be heeded. The sharp acceleration in home values created a sharp demand for low-payment mortgages, such as ARMs, interest only programs, and the so-called "option ARMs."

My advice on what to do differs depending on the type of program you have. Let me try to summarize.

• Folks who are carrying a long-term ARM with an interest-only payment option: These are programs with a fixed rate for seven or more years that allows a low, interest-only payment. Compare your current rate with market rates. Since the rate is fixed for a significant period, you may not be in a rush to refinance unless the current rate is well above market rates.

• Folks holding an ARM that's due to be reset anytime within the next 48 months: My advice is to consider refinancing now, unless your plan is to sell prior to the rate adjustment. Rates may, indeed, fall more in the next few months, but there's certainly no guarantee. The recent drop in long-term rates, coupled with low- and no-closing-cost options, provide a window of opportunity.

• Folks carrying an option ARM who are making the minimum payment and negatively amortizing the loan: Negative amortization means that the minimum payment allowed doesn't cover the interest charged, thereby increasing the balance each month. These folks need to get out now, not necessarily because of the negative amortization feature, but because the rates on these programs are now well north of 7 percent. If you think you can't afford more than the minimum payment, speak with an experienced loan officer about a long-term interest-only program that carries a low rate.

Whatever your current situation, it certainly doesn't hurt to pull out your mortgage note and make sure that there are not products available in the market today that can improve your overall financial picture.

Future Home Demand Drops

2006-09-02T07:43:00.000-04:00

Dow Jones Newswires, September 1, 2006
By Benton Ives-Halperin

A gauge for future home demand fell sharply during July, the largest monthly drop since the index was created, indicating that the rate of home sales will be leveling out a lower pace in the months ahead.

The National Association of Realtors' index for pending sales of existing homes decreased at a seasonally adjusted annual rate of 7.0% to 105.6 from June's 113.5, the industry group said Friday.

July's index level is the lowest since February 2003, when it was 99.3.

And July's index reading was 16.0% below the level of July 2005.

David Lereah, NAR's chief economist, said the year-to-year numbers have been a good predictor of the actual pace of home sales.

"Based on recent changes from a year ago, the index shows existing-home sales should continue to ease after a stronger-than-expected decline in July, but are likely to flatten in the months ahead," Lereah said in a statement.

By region, the index showed a 7.7% drop in the Northeast in July from June - and a 15.5% decrease since July 2005.

In the West, the index dropped 5.5% in July and 20.3% below a year prior.

The South fell 6.4% in July and was 11.3% below July 2005. The Midwest decreased 9.0% in July and was 20.1% below the level a year earlier.

Lereah attributed much of the drop in the July index to "psychological factors."

"We've never seen a general decline in the housing market against a healthy economic backdrop where jobs are being created, the economy is growing and interest rates are favorable," he said.

"Psychological factors are causing some buyers to remain on the sidelines, waiting for prices to stabilize or for more favorable news about the market and the economy...in the end we believe that underlying market fundamentals will prevail," Lereah added.

The NAR's pending home sales index was designed to try measuring the direction of the housing market in the future.

It is based on pending sales of existing homes, including single-family homes and condominiums. A home sale is pending when the contract has been signed but the transaction has not closed. Pending sales typically close within one or two months of signing.

Ideas & Trends: Read Between All Those For-Sale Signs

2006-08-27T22:27:00.000-04:00

New York Times, August 27, 2006
By DAVID LEONHARDT and VIKAS BAJAJ

REAL bubbles pop. They are fully formed one moment and gone the next. Financial bubbles rarely meet with such a definitive end, which has always been the biggest problem with the metaphor. They let out their air in unpredictable bursts, and it’s usually impossible to figure out whether they have finished deflating or are just starting to.

Still, the latest housing numbers seem like they could be a turning point. A real estate crash might not be the most likely outcome, but it certainly seems legitimate to think about what one would look like.

The number of building permits being issued is falling at a rate usually seen only in recessions. In July, 11 percent fewer existing homes were sold than were sold a year earlier; 22 percent fewer new houses were sold. After the new-house data was released last week, Capital Economics, a consulting firm, wrote an e-mail message to its clients that began, “New day, same depressing housing market story.”

The fate of the housing market will influence whether the economy will merely slow over the next year, as the Federal Reserve forecasts, or fall into a recession for the first time since early 2001. Lehman Brothers, the investment bank, said Friday that “for-sale” signs had replaced gas-price signs as the most important indicator of potential trouble.

The collapse of most bubbles does not have a single obvious starting point, like a bad corporate earnings report or an interest-rate rise. Instead, the psychology of buyers and sellers shifts, slowly at first and then sometimes in a cascade.

“It’s always mystified people about why these things turn,” said Robert J. Shiller, a Yale economist and author of "Irrational Exuberance,” a history of speculation. “People want something concrete.”

There seem to be three major paths that housing could follow over the next year: a soft landing, the start of a long slump, or a crash. A soft landing is the one predicted — and preferred — by most economists on Wall Street and at the Fed. A long slump is what many past real estate booms turned into. A crash is the outcome that a small group of analysts say is the only possible ending for the biggest housing boom of all.

Their prediction looks better than it did a few weeks ago, but even they aren’t sure whether this is the beginning of the end or another false turning point. “The funny thing about bubbles,” Mr. Shiller said, “is that you never know when they’re over.”

For a crash to happen, prices would have to decline significantly in some once-hot markets. So far, as sales have slowed and the number of houses on the market has soared, many owners have chosen to sit tight. If they were instead to decide that selling later would be even worse than selling now, this could change quickly.

The doomsayers’ strongest argument may be that too few families can afford prices in some metropolitan areas. In Las Vegas, Los Angeles and Miami, prices have almost doubled since 2003, and they have risen about 50 percent in New York and San Francisco, the National Association of Realtors says.

Jumps of this magnitude have little precedent. To afford homes, some buyers, especially in California, have resorted to aggressive mortgages, like those that allow artificially low payments in the early years. In effect, families seem to be
buying houses they cannot afford, in the hope that their incomes or property values will rise significantly. “Prices just shot up too much,” said Robert T. McGee, chief economist at U.S. Trust, an investment firm based in New York. The firm has forecast a soft landing for housing, he said, but “as time goes by that starts to look like wishful thinking.”

If prices do decline, some of the first victims would be families in a financial bind that are unable to rescue themselves by refinancing their mortgage. Foreclosures would then rise, damaging banks and increasing the number of homes for
sale.

Even homeowners not in danger of losing their home — an overwhelming majority, certainly — might respond to falling prices by cutting spending, particularly if they had been counting on their home’s value to serve as a retirement account. That could force job cuts in a wide range of industries.

Already, the housing slowdown has begun damaging the job market. Builders, mortgage lenders and real estate agencies have stopped adding to payrolls. Defined broadly, the real estate sector has accounted for 44 percent of jobs created since 2000 and employs more than one in 10 American workers, according to Moody’s Economy.com.

Perhaps the biggest reason to be skeptical about a real estate crash is that the country has not really suffered through one before. Not since the Depression has the combined value of residential real estate fallen over the course of a full year. Homes seem to be much less vulnerable to crashes than other assets, because people rarely sell them in a panic.

But earlier booms have been followed by modest price declines in some cities that turned into long periods in which increases trailed inflation. After peaking in much of California and the Northeast in the late 1980’s, house values fell during the recession of 1990-91 and then drifted for years, often rising more slowly than the price of milk.

In inflation-adjusted terms, prices in the New York and Washington areas did not return to their late-80’s peak until 2002. In Boston, it didn’t happen until 2000, and in San Francisco, 1999.

It isn’t hard to imagine a similar chain of events over the next decade. Based on futures contracts traded on the Chicago Mercantile Exchange, investors expect the median house price in Los Angeles, New York and some other regions to fall about 5 percent in the next year, which would be similar to the decline that started the 90’s slump.

From there, prices might start rising again, but at a slow enough pace that incomes would eventually catch up. Families that now need an exotic mortgage to buy a house in Los Angeles could eventually afford one the old-fashioned way.

Interest rates could play a role in a long slump, too. They have been falling for much of the last decade, helping push house prices higher by allowing buyers to afford bigger mortgages. Most economists expect rates to remain lower than they were a generation ago but not to return to the extremely low levels of a few years ago, making big swings in house prices, in either direction, unlikely.

Christopher J. Mayer, director of the Paul Milstein Center for Real Estate at Columbia University, argues that the recent drop in sales does not suggest that a larger bust is coming. “So far we have only seen people asking pie-in-the-sky asking prices and not getting them,” said Mr. Mayer, who expects housing to continue slowing but not enough to create a recession.

He believes that the boom in house prices was largely a result of the appeal of “superstar cities” like New York and San Francisco that are unlikely to lose their allure. In much of the rest of the country, prices are not unusually high,
considering the relatively low interest rates.

Moreover, few borrowers are falling behind on their mortgage payments, and the economy looks fairly healthy outside of housing. So if prices start falling, new buyers may jump into the market and prevent any extended slump. “The fundamentals of real estate are solid, still,” said James Gillespie, chief executive of Coldwell Banker, the real estate company.

Which is it, then — a brief pause, or a big correction?

“Either argument is very compelling. I can debate myself on it,” said Mark Zandi, chief economist at Moody’s Economy.com. “That’s why there’s a great deal of uncertainty.”

Agents Hold the Keys to Safer House Buying

2006-08-27T22:23:00.000-04:00

Washington Times, August 25, 2006
By M. Anthony Carr

I hate going to the dentist. I've always had good teeth, only one cavity, so why spend all that money -- not to mention the dental insurance -- on a service I've never really needed?

As long as I brush and floss, why do I need someone with a doctor's degree to look over my teeth, clean them and whiten them? I've pulled teeth myself -- when I was just a grade school kid, in fact. So if I can pull teeth at that age, with

just a string and a doorknob, why on Earth do I have to pay a professionally trained tooth-puller now?

As I reminisce on my early tooth-pulling days, I even recall getting paid for pulling my own teeth. That's right ... every morning after pulling my teeth, I had money under my pillow.

Anyone who has received quality dental care sees right through the absurdity of this argument. However, when it comes to real estate agents, everyone wants them to provide their services for discounted prices, even free.

Licensed real estate professionals bring state-mandated training and knowledge to the table for buyers and sellers. In fact, agents have to get as much or more training than it would take for some college degrees before getting a state
license to represent buyers and sellers in a transaction.

By the time a transaction is over, it is full of legally binding documents pulling two parties together to exchange hundreds of thousands of dollars. All this for one transaction. Most people repeat this process only a couple of times in their lives.

Nearly half of the buyers are purchasing for the first time, according to the National Association of Realtors. They only think agents are there to usher them into houses and that's it. And that's because hundreds of thousands of agents
make it look so easy -- like a grade-schooler pulling baby teeth.

Why should you have a real estate agent on your investing team when it comes to building wealth? There's talk on Capitol Hill of how the real estate industry has a "stranglehold" on the business. It makes me want to, not so much defend, as much as bring to the forefront what licensed professionals actually bring to the table for consumers.

You've heard the axiom that "you get what you pay for." That doesn't go wasted on agents. Many sellers would love to get through the transaction themselves without any help from a "middle man" to save the commission.

It sounds like it makes sense: Why pay thousands of dollars to sell a house when you can do it yourself?

It makes me wonder why 88 percent of those each year who try to sell their own homes eventually hire a professional.

First, there is the license regulated by the state. If someone is going to represent someone in the sale or purchase of real estate, they must follow these rules of real estate. They must know various aspects of real estate law, rules and regulations, such as: what rights exist besides land and how they can be traded; how title can be held; and how to ensure clear title to the land. They must know about financing: traditional, nontraditional and owner-held.

They must follow fair housing laws, the federal, state and local limits on the sale and trade of real estate. They must heed state disclosure laws and regulations on the trade of real estate. They have the necessary contracts and forms.

Most sellers and buyers I've talked with, while they might have access to plenty of information from the Internet about sales transactions, do not have a handle on the nuances, pitfalls and inherent legal dangers they can face in the midst of this huge investment.

As Data Point to Slowdown, Housing Market May Land Harder Than Economists Predict

2006-08-09T11:59:00.000-04:00

Wall Street Journal, August 7, 2006
By MARK WHITEHOUSE

NEW YORK -- Home prices in some parts of the country are falling. Builders are scaling back. Bubble or not, the biggest housing boom in recent U.S. history is coming to an end.

Now here is the big question: How bad will the aftermath be? At this point, most economists expect a "soft landing," a gradual decline that won't derail the nation's economic expansion, now in its fifth year.

But there is a good chance they are being too optimistic. The boom has depended heavily on the upbeat psychology of consumers, builders and lenders. As moods swing, the landing could be very hard indeed.

"We could be underestimating the dark side," says Mark Zandi, chief U.S. economist at Moody's Economy.com and among the first to seek to quantify the housing boom's broader effects. "Euphoria could turn into abject pessimism very quickly."

With each passing data point, signs of the housing slowdown grow stronger. In June, total single-family-home sales fell 8.7% from a year earlier, to an annualized rate of 6.9 million -- the sharpest year-to-year drop since April 1995.

The government's report on second-quarter real gross domestic product, the inflation-adjusted value of the nation's output, showed that fixed investment in housing by companies and individuals declined at an annual rate of 6.3% in the quarter. That was a sharp change from a year earlier, when it was increasing at an annual rate of 20%. As of Friday, futures markets were predicting about a 5% drop in house prices by May 2007.

Still, judging by most economists' forecasts, the fallout from a slowing housing market doesn't look all that unpleasant. Typically, they expect the decline in housing -- and housing-related activity -- to shave about a percentage point off inflation-adjusted GDP growth in 2007, compared with the estimated one percentage point the sector contributed to growth in 2005. If business investment and exports accelerate as expected, that would bring inflation-adjusted GDP growth to about 2.8% in 2007, down from a forecast 3.5% this year.

Economists, however, have few clues on which to base their predictions. Today's housing boom differs radically from its predecessors. For one, it has been bigger and longer-lived. House prices are still more than twice the level of 1991, when the boom began. Even after the recent decline, June's rate of home sales is 40% above the 20-year average.

Much of the recent increase has been driven by an unprecedented flood of cash into U.S. capital markets. Global demand for U.S. mortgage bonds, competition among big national lenders and the advent of exotic loans have made it easier than ever to borrow money to buy a house -- and to turn rising home values into cash.

Because the market has risen so far, economists worry it has the potential to fall much harder than their main forecasts would suggest. As Janet Yellen, president of the Federal Reserve Bank of San Francisco, put it in a speech last week: "We can't ignore the risks of more unpleasant scenarios developing."

One big question is how much the housing slowdown will affect consumers, whose spending accounts for more than two-thirds of the economy. If house prices plateau or fall, homeowners will feel poorer, and thus less willing to go out and buy more cars, boats and refrigerators. Typically, this "negative wealth effect" would be only about three to five cents of spending for each dollar of wealth lost.

But modern mortgage finance has magnified the effect of home values on spending, says Jan Hatzius, chief U.S. economist at Goldman Sachs in New York. He estimates that when people take cash out of their homes through home-equity loans and refinancings -- which they were doing at an annualized rate of $558 billion in the first quarter -- they tend to spend about 50 cents of every dollar. If house prices merely stabilize, people's diminished ability to use their houses like automated-teller machines would subtract about 0.75 percentage point from annualized GDP growth in 2007, Mr. Hatzius says.

Another question is how fast home sales, and consequently home building, can fall. Even after the second-quarter decline, investment in residential construction accounted for about 6.1% of the economy -- close to a 50-year high. If, as some economists expect, housing investment merely returns to the long-term average of about 4.6% over the next two years, the decline also would shave 0.75 percentage point from annual real GDP growth.

But there is reason to believe home builders will have to pull back more sharply. That is because the leveling off of house prices changes the equation of homeownership. When mortgage rates were less than 6% and house prices were rising at about double that rate, people could reasonably expect to make more on their house's appreciation than they would pay in interest on their mortgages. Now, though, inflation-adjusted mortgage rates -- the interest rate on a typical 30-year mortgage minus the percentage rise in home prices -- are on track to turn positive for the first time since 2001.

When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50% decline in sales, says Ian Shepherdson, chief U.S. economist at consulting firm High Frequency Economics. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. "It's a 15-year bubble unwinding in two years," Mr. Shepherdson says. "It's going to hurt."

If Messrs. Hatzius and Shepherdson are both right, the effect of the housing slowdown on construction and consumer spending alone would subtract more than two percentage points from economic growth in 2007, bringing it well below 2%.

But that isn't all. Economists can't quantify some risks, including the biggest: the chance that a sharp drop in house prices -- what economists call a "disorderly downturn" -- would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending -- a move that could snuff out economic growth.

"For me, the risk of a disorderly downturn is the greater one," Mr. Hatzius says. "That's a scenario that people would worry about a lot, because typically recessions are the result of a general unwillingness to lend."

Price Dips Make Loan Plan Droop

2006-08-07T14:19:00.000-04:00

Washington Times, July 28, 2006
By Henry Savage

Q:I have read several articles about interest-only loans. One thing they all say is that an interest-only loan is good for people who don't plan on holding the home for a long time. Because very little principal is paid off in the first few years of a loan that's amortized over 30 years, we might as well take out an interest-only loan and lower the payment.

Because we plan on selling within three years, our objective is to tie up as little cash as possible. Do you agree that an interest-only loan is right for us?

A: Actually, I disagree with your planned strategy, although I have read the same articles with the same advice.

Interest-only loans simply swap principal curtailment in exchange for a lower monthly payment. Interest-only loans are fine when the rate is low and the borrower is financially responsible, but to be frank, I have never understood the correlation between an interest-only loan and a short holding period.

Although it's true that very little principal is curtailed in the early stages of a loan that's amortized over 30 years, that has nothing to do with the holding period of the property. In fact, I recommend against highly leveraged financing and interest-only payments in cases where the property will be sold in just two or three years.

Why? The answer is simple. In the event of a market downturn, selling the property could result in writing a big check at the settlement table.

Let's take a look at some numbers.

A property purchased for $350,000 with no down payment and interest-only payments will carry a loan balance of $350,000 until the borrower decides to pay down the loan. Such a plan fits in with your objectives because you want to tie up as little cash as possible.

Now, let's say you sell in three years. How much does the property have to appreciate to prevent your writing a check at settlement? Real estate commissions typically are 6 percent, and it's not uncommon in a balanced market for the seller to accept an offer that requires a contribution toward the purchaser's closing costs. Let's assume 2 percent. Your total cost to sell the house is equal to 8 percent.

This means that you will have to sell the property for about $380,000 in order to break even — 8 percent of $380,000 equals $30,400, leaving you with $349,600 to pay off a $350,000 mortgage.

Although it is perfectly reasonable to assume that the property will appreciate by $30,000 over a three-year period, it's certainly not guaranteed.

A short holding period and the desire to put little or no cash into the home have no correlation, except risk. Any asset is likely to appreciate over time but is just as likely to experience dips along the way. By the same token, financing a property 100 percent simply equates to higher borrowing costs over time and a bigger debt to pay off when you decide to sell.

Folks who buy a house with the intent of a short-term hold need to understand that timing the market is much more crucial for them than for folks who buy a house and hold for the long term.