Article in August 28, 2006 Wall Street Journal

Managers See Leaving Ford As a Better Idea

By JEFFREY MCCRACKEN and JOANN S. LUBLIN
August 28, 2006

As Ford Motor Co. struggles to turn around its North American operations, management recruiters say they are hearing from an increasing number of senior managers and executives who are looking to leave the company -- if not the industry.

The inquiries are coming not just from top executives, but also senior managers in charge of key departments or previously targeted for advancement within Ford, say recruiters and ex-Ford officials who keep in contact with former colleagues.

Within the last year, Ford has lost several top executives who were either in charge of Ford's most profitable operations or at business units the company pointed to as examples of Ford's ability to execute a turnaround. Ford also lost executives whom Chairman and Chief Executive Officer Bill Ford Jr. singled out as key leaders.

Earlier this month, Ford hired a new executive recruiting firm, Korn/Ferry International, to help it cope with turnover in its dispirited management ranks. Korn/Ferry took over from Heidrick & Struggles International Inc., which declined to re-bid on the Ford contract, according to a Ford spokeswoman.

A Korn/Ferry spokesman declined to comment.

Ford's recruiting move reflects concern both inside and outside the struggling auto maker about senior employees leaving the company to join the competitors. Heidrick & Struggles decided against rebidding on the Ford contract because Ford wanted a promise that it wouldn't do searches for any other auto makers, according to a person familiar with the matter.

A Heidrick & Struggles official declined to comment.

Mr. Ford, who stepped into the post in 2001 after the ousting of former CEO Jacques Nasser, has tried unsuccessfully to woo executives from other companies to take senior roles at Ford. Meanwhile, Ford has lost a number of senior managers in key areas such as finance and product development as the company's business has soured and prospects have dimmed for management bonuses.

"I am really concerned. I must have talked to about nine people at senior levels at Ford within the past year or so. I've encouraged them to stay, to talk with Bill about their concerns, but the vast majority want to get out. There is a brain drain for sure," said John Slosar, chairman and chief executive of Triniti Executive Search firm, which does work for the auto industry, manufacturing, retail and other industries.

Mr. Slosar, who left Ford as an executive director of auto components in 1994 after 34 years there, says his firm hears from "three times as many Ford people as GM people."

Ford -- which has about 300 senior-officer and about 2,000 in director-level positions -- disputes it is losing an inordinate number of managers and senior-level people. Spokeswoman Marcy Evans says the auto maker benchmarks itself against 20 other industrial companies and determined that "we think historically we have a low quit rate," among salaried workers. She said in the past four years that rate has been half of the companies it benchmarks.

Ford declined to make Joe Laymon, Ford's head of human resources, available for this article.

Internally at Ford, there is some concern. A senior manager said the company has "discussed on and off again whether we need retention bonuses because so many good people are leaving." He cited the finance and treasury departments as areas of high turnover, saying it was because "their skills are portable and they have no confidence in a turnaround."

Attrition may fit in with the auto maker's goal of shrinking its salaried work force of 35,000. Ford is studying cuts of 10% to 30% of its salaried costs as part of an accelerated structuring that will likely be unveiled in September, say Ford officials.

"I get a call a week from someone at Ford at a high level wanting to get out of the automotive world," says Peter D. Crist, chairman and CEO of Crist Associates, a small search firm in Hinsdale, Ill. The volume of such Ford calls "has tripled in the last 18 months," he continues. And "it's exponentially larger than it was two or three years ago."

Some Ford executives have moved to auto-parts makers. But others don't care what industry they join. Mr. Crist says they call him and say, "I need to get out of Detroit" because they are "running from something and not to something."

The problem: Companies in other industries aren't keen to hire automotive-industry veterans who lack a broad range of work experience. One such manufacturer recently interviewed -- and rejected -- a senior Ford executive recommended by Mr. Crist.

"They liked the guy a lot," the recruiter remembers. But the prospect hadn't worked anywhere else but Ford.

The reasons for the departures vary, say recruiters and ex-Ford managers. Many cite the lack of bonuses for salaried workers and the importance of variable compensation.

Ford officials say top managers at Ford can get 40% to 100% of their salary in bonuses -- if the auto maker does well, like it did throughout the 1990s. Ford didn't pay out a bonus in 2006 for the year prior. With the auto maker on track to lose $4 billion in North America, Ford officials don't anticipate a bonus this year either. Ford has paid out a salaried bonus just twice in the past five years, after paying out a bonus the previous eight straight years.

"Clearly at the senior levels in Ford a large part of your compensation is in bonuses and options. Well, your options are worthless so you look closely at that bonus and whether there is one," said John Coletti, who left Ford in 2005 at age 55 as director of special vehicle teams after 33 years with the auto maker.

Mr. Slosar said it goes beyond compensation: Ford promoted a number of younger workers a few years back and created a "false expectation" that managers with 20 years experience should become senior officers -- rather than taking nearly 30 years as it had in the past.

Some of the executives who have left Ford recently include those who were involved in promoting some high-profile initiatives at the auto maker.

Among the recent departures is former Ford Credit Chief Financial Officer Dave Cosper, who left March 1 to take a job as finance chief at Sonic Automotive Inc. Ford Credit has long been more profitable than Ford's automotive operations and Mr. Cosper was one of the executives chosen to speak in January to investors and the media to discuss Ford's initial Way Forward restructuring plan. Ford has since acknowledged the Way Forward didn't go far enough and will next month unveil an accelerated version. Mr. Cosper didn't return a telephone message seeking comment.

Another departed executive is Antonio Maciel, former president of Ford South America, which the auto maker this summer touted for returning to profitability and doubling market share a few years after Ford nearly closed the unit. Mr. Maciel departed May 3 to take a top job at a Brazilian paper manufacturer. Mr. Maciel couldn't be reached for comment.

Last October, Ford's head of product development Phil Martens left the company after 18 years. Mr. Martens, who recently was named senior vice president of supplier ArvinMeritor Inc., was singled out by Mr. Ford in a Sept. 21 public speech to employees and put in charge of a so-called "Innovation" effort at Ford. Mr. Martens declined to comment on his departure.

The key element of that Innovation speech, which the company later touted with national TV ads, was a push to increase Ford hybrid production to 250,000 vehicles by 2010. Accompanying Mr. Ford for the announcement was Mary Ann Wright, head of Ford's hybrid-technology program. She left Ford on October 28 after 17 years and later took a job with bankrupt auto supplier Collins & Aikman. Earlier this summer, Ford backed away from the hybrid goal -- saying it would focus instead on building more ethanol vehicles. Ms. Wright didn't return a phone call seeking comment.

Article in August 26, 2006 Detroit News

Homeowners down in the dumps

Housing slump catches many off guard, puts pinch on other areas of economy, including jobs.

James R. Hagerty and Michael Corkery / Wall Street Journal

HERNDON, Va. -- For years, real-estate brokers and home builders promised the soaring property market eventually would glide to a soft landing. These optimists predicted home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5 percent or 6 percent a year.

However, it isn't working out that way. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago. It's too early to say how hard the landing will be, but at a minimum it will be bumpy for many people who need to sell homes. And the economy as a whole, buoyed in recent years by the housing frenzy, could suffer.

The pain homeowners and home builders are feeling follows a raging national house party. As Americans soured on the stock market after the tech bubble burst in 2000, they poured money into real estate, spurred on by the lowest interest rates in four decades and looser lending standards. Surging demand created home shortages in California, Florida and the Northeast. Over the five years ending Dec. 31, average U.S. home prices jumped by 58 percent, according to a federal housing index.

But, mortgage rates began rising, and surging inventories of homes for sale finally caught up with demand. Though economists had been predicting a slowdown in housing for years, many homeowners and builders were surprised by how fast the market changed.

"It's just like somebody flipped a switch," says Lynn Gardner, a real-estate auctioneer who works in Northern Virginia.

A never-before-seen trend

"It would be difficult to characterize the position of home builders as other than in a hard landing," says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported this week that net income fell 19 percent in the third quarter ended July 31.

In his 40 years as a home builder, Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or ... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates."

In much of the country, including Michigan, property markets began cooling rapidly in the second half of last year. Home builders were still turning out houses at a rapid clip, and the surge of new and previously occupied homes on the market convinced buyers there was no need to hurry. Over the past year, the number of previously occupied homes listed for sale nationwide has risen nearly 40 percent. In some metropolitan areas, including Orlando and Phoenix, the supply has quadrupled.

Homeowners in a bind

Allen Sinai, chief economist at Decision Economics Inc., a research firm, contends that housing is poised for something "harder than a soft landing but softer than a hard landing." The weaker market will hurt the economy by eliminating jobs in construction and other housing-related fields and by reducing the ability of consumers to finance spending by borrowing against their home equity.

Sinai predicts these factors could shave as much as a percentage point off economic growth over the next year or so. Taking that into account, he expects the economy to grow at a relatively sluggish annual rate of 2.5 percent to 2.75 percent in 2007, compared with 2.5 percent in this year's second quarter and 5.6 percent in the first quarter.

For some homeowners who bought as the market was peaking last year, the downturn is already creating a financial pinch.

In April 2005, Jennifer Bloom paid about $229,000 for a condominium in Yarmouth Port on Massachusetts's Cape Cod, where her son planned to live.

After his plans changed, Bloom, a software specialist for a computer company, decided early this year to sell the condo. She initially listed it at $229,000, and then gradually shaved the price to $199,000 as the market weakened. Earlier this month, she gave up on finding a buyer at a price she could bear to accept.

Instead, she is renting out the condo for $1,000 a month, which she says is more than $200 below her monthly costs for mortgage payments, insurance, taxes and other items.

She says she intends to hold off on selling it until the market improves.

Article in August 25, 2006 Detroit News

Incentives heat up sales in cool markets

Upgraded bathrooms, professional landscaping are being offered; Pulte leads the way in Detroit.

Kamil Skawinski / bankrate.com

Time was that when you heard of a home being offered for sale with a discount or some other generous bonus, your first thought was, "OK, so what's wrong with it?" But with prices leveling off and properties now staying on the market much longer than they used to, it's becoming more common to find lucrative incentives offered on both newly built and existing homes.

Of course, everything depends on whether you're house hunting in a real estate market that has cooled. But if you're in the right place at the right time, you could wind up getting considerably more than you bargained for -- in the best possible sense -- when you make an offer on a home.

Tom Stevens, president of the National Association of Realtors, says home builders started offering incentives in cooling markets such as certain parts of Florida, Las Vegas, California and the Northeast.

"Home builders were among the first to react with various incentive programs and promotions to help keep their properties moving and to reduce unsold inventories," he says.

High-end kitchen cabinets and counters, upgraded bathrooms, generous hardwood flooring packages, finished basements and professional landscaping are just a few of the common gratis offers Stevens has heard of.

"And good old-fashioned discounts and cash incentives ranging between $25,000 and $50,000 are out there, too."

Three-quarters of the 369 homebuilders recently surveyed by the National Association of Home Builders said that they are now including once-expensive extras at no additional cost to help sell their homes. One-third reported that they are now also absorbing such costs as financing points on mortgages to help move unsold properties. Several even admitted to offering free vacations.

Generous incentive packages can be found in the Midwest.

"This year, there's definitely a lot more negotiating and discounting going on with most builders in our area," says David Balcerzak, vice president of sales and marketing at Pulte Homes in Detroit.

"But our company has taken a different approach. We're taking a much closer look at our potential buyer's situation and asking what we can do to help offer them a solution."

For instance, one of the biggest hurdles new home buyers now face is selling an existing home. To help them, Pulte (through its own mortgage company, Pulte Mortgage) has implemented a special program that basically covers three to six months of buyers' existing and new mortgages, both interest and principal, plus tax payments so that these customers aren't stuck with the pain of making twin payments on two properties.

While builder-incentive programs have attracted the most attention, developers aren't the only ones to offer inducements. More home sellers today are also including tempting freebies that go well beyond the usual appliances, fixtures and window treatments. Typical incentives can include assisting a buyer with closing costs, paying points, covering homeowners' association fees for a year or more or selling the home with a comprehensive warranty.

"If you're a reseller, your only real option is to price your house in a way that will sell, which is in itself an incentive," says Sacramento-based RE/MAX Gold agent Loren Ransier.

But if you aren't quite ready to make a home-buying decision right now, you probably need not fear missing out on today's generous deals.

"This whole thing with incentives is really just starting now," says McCabe. "There's no telling what types of very creative marketing offers we're going to see in the next couple of years."

Article in August 23, 2006 Wall Street Journal

Housing Prices May Become
More Volatile, Fed Report Says

By BRIAN BLACKSTONE
August 23, 2006

WASHINGTON -- The rise in housing prices over the past decade "owes significantly" to falling inflation-adjusted interest rates and changes in the mix between rates and the "housing premium," which could mean more volatile home prices in coming years, according to a paper written by Federal Reserve economists.

"If the break we observed in 1997 proves to be permanent, we should expect housing prices to be much more volatile in the future," Fed economists Sean Campbell, Joshua Gallin, Robert Martin and former Fed economist Morris Davis wrote in a paper.

The paper, dated April, was posted on the Fed's Web site Monday.

The economists studied ratios between housing rents and prices between 1975 and 1996 and between 1997 and 2005, the latter period being characterized as the recent housing boom. They used three components -- future rent growth, real interest rates and the "housing premium," which is the return to housing investments over and above the yield of the 10-year Treasury note.

Similar methods have been used by economists to study stock and bond values. In the 1975 to 1996 period, interest rates and the housing premium offset each other, but after 1997 "this negative correlation appears to have disappeared," the authors stated.

"A substantial portion of the increase in prices relative to rents can be attributed to falling real rates, and an even more substantial portion...can be attributed to a decline in the housing premium," the authors said, calling their results "a novel way to characterize the recent housing boom."

The authors said one of the "major contributions" of their research is that it allows the housing premium to vary over time and location, rather than holding it fixed as other studies have done.

The research "implies that the expected future real return to housing is the primary determinant of the trend and variance of rent-price ratios," the authors wrote. "In this way, the housing market is remarkably similar to the stock and bond markets."

The behavior of housing prices is key to the economic and interest-rate outlook, and to the extent there's more volatility, it could make it tougher for the Fed to forecast housing's impact on the economy, said Brian Bethune, economist at Global Insight.

"It's always a challenge because when you look at household balance sheets, housing is huge," Mr. Bethune said. Therefore, "if we did see more volatility (in home prices), it would make forecasting more difficult."

Fed Chairman Ben Bernanke said in congressional testimony last month that "home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the nation as a whole, though significantly less rapidly than before."

That moderation means less of a boost to consumer spending, he added. The Fed expects a slowdown in demand to help limit price pressures in coming months, a forecast that formed the basis of its decision this month to pause its two-year rate-raising campaign with the Fed funds rate at 5.25%.

Article in August 24, 2006 Detroit Free Press

Realtors report sales drop, mounting home inventory

July figure is lowest since January '04

BY JEANNINE AVERSA
ASSOCIATED PRESS

August 24, 2006

Sales of previously owned homes plunged in July to the lowest level in 2 1/2 years, and the inventory of unsold homes climbed to a record high, fresh signs that the housing market has lost steam.

The National Association of Realtors reported Wednesday that sales of existing homes and condominiums in July dropped 4.1% from June's total to a seasonally adjusted annual rate of 6.33 million. That was the lowest level since January 2004.

By region, sales dropped 5.9% in the Midwest, 5.4% in the Northeast, 1.2% in the South and 6.4% in the West.

The latest snapshot of housing activity was weaker than analysts anticipated. Economists forecast that the pace of sales would fall to 6.55 million.

"The housing sector is fragile," said David Lereah, the association's chief economist.

The median price of a home sold last month was $230,000. That was up 0.9% from the July 2005 and marked the smallest year-over-year increase since May 1995. The median price is the middle point at which half the houses sold for more and half sold for less.

The inventory of unsold homes rose to 3.86 million in July. That figure represents a supply of homes still available for 7.3% of a month.

Wednesday's report shows the bloom is off the rose.

For five years running, home sales hit record highs as low mortgage rates lured buyers. But the housing sector lost steam this year as mortgage rates went up and would-be buyers grew cautious amid high energy prices and a slowing economy.

Against that backdrop, earlier this month the Federal Reserve decided to halt a rate-raising campaign that had pushed interest rates higher over the last 2-plus years to fend off inflation.

The Fed's goal is to raise rates sufficiently to thwart inflation but not enough to hurt the economy.

One thing Federal Reserve Board Chairman Ben S. Bernanke and his colleagues are watching closely is the housing slowdown. If home prices and sales were to crash, that could spell big trouble for the economy overall. Thus far, Bernanke has said the market's slowdown has been fairly orderly and smooth.

Lereah said he still expects a "soft landing" for the once high-flying housing sector. But he urged the Fed to leave interest rates alone and refrain from bumping them up again, an action that some analysts have said is a possibility.

The housing sector's transition from a red-hot market to a cool one has important implications for the economy.

Consumers who watched their home values rise rapidly over the last several years felt wealthy and more inclined to spend. They borrowed against their homes -- treating them like ATMs -- to support their spending ways.

But because now home values aren't going up as much as the double-digit gains we saw in the past, consumers have tightened their belts. That has contributed to a slowing in economic activity.

Recent reports underscore the housing slowdown's impact.

On Tuesday, luxury homebuilder Toll Brothers reported a sharp drop in third-quarter profits. One day earlier Lowe's Cos., the nation's second-largest home-improvement chain, warned that a slowing housing market would hurt its earnings for the rest of the year.

Last week the National Association of Home Builders reported that confidence among builders sank to a 15-year low.

Article in August 19, 2006 Wall Street Journal

Measuring the Cracks in the Foundation

By MARK WHITEHOUSE
August 19, 2006

Economists looking for evidence of a hard landing in the housing market will be watching closely next week when the National Association of Realtors releases its latest data on existing-home sales and prices.

Some think there is a chance the report will show the median price of a single-family home declined in July when compared with a year earlier. If so, that would be the first time prices have fallen in more than a decade.

Economic data often defy the forecasters, and monthly housing data are notoriously volatile. But whether the data show a decline or not, many people trying to sell their homes probably already have felt one. That is because the official numbers tend to be rosier than reality, particularly at turning points like the present.

For much of the past year, economists have been engaged in a slow-motion debate over where the housing market is headed. Most still predict a soft landing, in which sales would decline and prices would stall, but only enough to take a small bite out of economic growth. Lately, though, worries have mounted amid indications that the landing could be harder.

Last week, for example, the National Association of Home Builders reported that its index of new, single-family-home sales fell to a 15-year low. The previous week, luxury-home builder Toll Brothers Inc. said orders were down 47% in the three months ending July 31 from a year earlier. Chief Executive Robert Toll said he had never seen such a sharp downturn in an otherwise healthy economy.

For the most part, economists expect next week's housing reports, which include fresh July data from the Census Bureau on new homes, to confirm the downward trend they already see. But fresh data on median prices -- particularly for existing single-family homes, which make up most of the market -- could raise some eyebrows. So far this year, price gains have shown a sharp deceleration: In June, they were up only 1.09% from a year earlier, compared with 12.61% in January. Should prices actually fall in July, that will be a telling sign that housing could be in for the kind of sustained decline in prices that could weigh heavily on consumers' moods and finances.

Moreover, there is some reason to believe the reality is even harsher than the numbers reflect. That is because when home sales begin to slow, sellers offer incentives that the official prices don't reflect, such as help in paying buyers' closing or moving costs. Also, as sales volumes in the worst local markets decline, a larger share of the recorded sales tend to come from markets that are still doing relatively well -- a factor that can skew official prices upward.

The difference can be significant. Thomas Lawler, an economist and former vice president at Fannie Mae who has studied prices near his home in Loudoun County, Va., estimates that the average price of similar homes in July -- accounting for concessions -- was down 10% to 15% from a year earlier. The local realtors' organization, he says, reported only a 2.5% drop.

"There are a lot of people who would love to be able to sell their homes at last year's price," he says. "But they can't."

Article in August 20, 2006 Detroit Free Press

KENNETH HARNEY: Millions face payment spikes as loans reset
August 20, 2006

WASHINGTON -- Call it the reset jitters.

Lenders, mortgage investors and financial regulators across the country are concerned about the ability of millions of homeowners to handle the potentially painful payment spikes coming due on loans they took out during the height of the housing boom.

Though estimates vary, some industry experts say that at least a half-trillion dollars worth of loans with reduced initial payment terms are scheduled to reset during the coming year.

Many of these mortgages carry negative amortization features that permit borrowers to pile on additional debt beyond their original balance and make minimal payments for the first several years. Once the initial period is over, however, payments could shoot up by 100% or more.

Other programs allow interest-only payments with no reduction in the original loan balance until the reset point. Then payments can jump by 50% or more in order to amortize the debt balance over a compressed number of years.

Federal and state financial regulators are expected to issue mildly restrictive guidelines for lenders making new loans this fall, but tightened rules won't help homeowners who are heading for payment resets in the coming year and may be blissfully unaware of the financial shocks they face.

John G. Walsh, a senior official at the federal Comptroller of the Currency, recently described his agency's concerns about poorly informed borrowers who don't realize their artificially low monthly payments won't continue indefinitely.

"We've had consumers tell us they didn't know that after making 60 minimum payments" on a payment-option loan, "they would owe more than they did when the loan was brand new. They should certainly understand the basic bargain: The price of a low payment now is a much higher payment later.

"I think it goes without saying," added Walsh, "that someone, at some point, should have explained this" to borrowers.

Lenders active in nontraditional mortgages carrying negative-amortization and interest-only features say they have taken care to make sure their customers comprehend their reduced-payment loans. They also insist that they've reserved these high-risk programs for borrowers with solid credit scores, large down payments and excellent employment histories.

Wall Street analysts have questioned those confident assurances, however. Standard & Poor's, the mortgage bond-rating agency, warned last year that it was observing disturbing numbers of minimum-payment loans being extended to borrowers with subpar credit profiles. Other Wall Street firms noted that given the option to make minimum payments, more than seven of 10 borrowers did so. In the process, those borrowers are racking up heavy additional debt balances and could be heading for payment shocks.

To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, quietly has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company's popular PayOption adjustable-rate mortgages.

The letters explain that "this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly."

A model letter provided to me by Countrywide includes this hypothetical example of what could be ahead for a California homeowner currently making only minimum payments on a $402,000 loan. The current full interest rate on the loan is 7.6%, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term.

If the loan resets at today's rates, the letter explains, the full payment required would be $2,887.50 -- more than double what the homeowner has gotten used to paying. Future reset rates could be even steeper.

Countrywide's helpful advice to its customers who want to prepare for their resets:

Switch their payment option out of the minimum if they can and move to either a 15-year or 30-year standard amortization plan.

Switch to an interest-only option if full payments are not feasible at the moment. At least interest-only payments will not result in still-higher principal debt balances to pay off later.

Explore alternative refinancing options sooner, rather than later.

That's good advice for just about anybody facing big resets in the coming year. Maybe other major lenders will see the benefits of proactively reaching out to their most vulnerable customers before they get smacked with payment shocks they never knew were coming.

Article in August 18, 2006 Wall Street Journal

Ford Plans Sharp Production Cuts
As Part of Accelerated Turnaround

Moves Come as Auto Maker Mulls
More Plant Shutdowns, Deeper Cuts

By JOHN D. STOLL and JEFFREY MCCRACKEN
August 18, 2006

Ford Motor Co. announced plans to aggressively reduce its North American production as part of the effort to accelerate its Way Forward turnaround plan.

The moves come as company is also looking to close more factories and cut salaried jobs and benefits by 10% to 30%, according to people familiar with the auto maker's plans.

In an announcement early Friday, the company said it will cut fourth-quarter production by 21%, or 168,000 units, that would force it to partially shut down plants in the U.S. and Canada in the quarter. The revised plan also reduces the company's previously announced third-quarter plan by 20,000 units.

Ford Chairman and Chief Executive Bill Ford Jr. outlined the decision to cut production in a note to employees, explaining the move is part of broader efforts to accelerate the company's North American turnaround. He said full details of additional actions will be announced in September. "We know this decision will have a dramatic impact on our employees, as well as our suppliers," Mr. Ford said. "This is, however, the right call for our customers, our dealers and our long-term future."

Mr. Ford is under pressure to speed up cost-cutting efforts after the auto maker -- No. 2 after General Motors Corp. in terms of production -- reported a $254 million loss in the second quarter and worse-than-expected July U.S. sales.

The revised production plan is expected to sharply reduce the supply of several models and ease pressure on sales incentives. The plan also reflects expectations for lower industry sales of light trucks and sport-utility vehicles, as high gasoline prices are expected to continue to encourage demand for more fuel-efficient passenger cars and crossovers.

Mark Fields, executive vice president and Ford's president of the Americas, said the "tough-but-important" reduction in production plans underscores the seriousness with which the company is approaching its North American turnaround.

Plant Closures, Salaried-Job Cuts

Ford investors are also bracing for further moves to shore up the company. People familiar with the company's plans said any move, if enacted, would come on top of the company's Way Forward restructuring plan, which called for cutting North American white-collar salary costs by 10% by the end of 2006's first quarter and closing 14 plants by 2012.

The Dearborn, Mich., auto maker could cut North American white-collar costs by about 30% under one scenario, but the final figures could be less if Ford can find savings in other areas, said people familiar with the matter. That amount would encompass reductions in compensation and benefits, including pensions, not just head-count reductions, these people said. Ford first would look to make white-collar cuts through attrition and voluntary departures before looking to layoffs, these people said. The company has about 35,000 salaried workers in the U.S.

White-collar pension cuts could be a way to extend an olive branch to the United Auto Workers, which would have to sign off on new or accelerated plant closures.

Ford is considering further plant shutdowns, these people said, though it isn't clear what plants are in question. Company officials are studying accelerating previously disclosed plant closings in Wixom, Mich., Norfolk, Va., and Windsor, Ontario.

Ford has a revenue team that is studying ways the company can boost sales and a separate cost-cutting team, these people said. The teams also are looking for savings in advertising and marketing budgets and product plans.

Further Reducing Costs

Ford's board is scheduled to meet Sept. 14 to review new plans, and final decisions are expected to be made public a week later, people familiar with the process said. The auto maker is expected to detail some new products at that time to allay concerns among investors that its new-model pipeline is weak. Mr. Ford is scheduled to meet with restructuring teams at the end of August for a review of their plans, according to a senior Ford official.

"The question will be, does this do enough? Does this get across what we need to get across?" said one person familiar with the process. "Whatever it is, it will be sizable enough to be material and needs to be announced."

Ford officials have discussed the need to amend the original Way Forward plan but have given little indication publicly of what will be included. Marcey Evans, a Ford spokeswoman, yesterday declined to discuss the company's plans.

Ford faces increasing competition from other auto makers, particularly Asia manufacturers such as Toyota Motor Corp., which have lower labor and manufacturing costs and have rolled out more popular models.

Under the original Way Forward plan -- which includes reducing its hourly work force by 30,000 -- Ford reduced white-collar worker expenses by the equivalent of 4,000 jobs, many of which were accomplished through layoffs in the first quarter. The reductions include Ford not filling open positions and the dismissal of contract workers as well as cutting employees. In all, Ford cut more than 15% of U.S. salaried worker costs between June 2005 and the end of this year's first quarter, Ms. Evans said.

Company officials have said they believe demand for large and midsize SUVs is heading lower for the long term. A focus for Ford's team studying ways to boost revenue is how Ford should market and advertise the redesigned Ford Expedition and Lincoln Navigator full-size SUVs that the company will roll out this year. Expedition sales are down 38%, while Navigator sales are down 17.9%.

Article in August 18, 2006 Detroit News

Metro area home prices tumble 8%

Glut of Metro homes for sale leads to biggest decline in values since '89.

Dorothy Bourdet / The Detroit News

For the first time in nearly two decades, Metro Detroit families are seeing a significant decline in the value of their homes.

Median home prices in Metro Detroit dropped 8 percent -- by far the biggest decline since 1989 -- in the second quarter of this year, compared to the same period last year, according to figures released this week by the National Association of Realtors.

The region's housing market has lagged the rest of the nation for several years. But while overall home sales were falling, home values remained relatively stable -- until now.

It boils down to supply and demand: too many houses for sale, too few buyers.

"You can no longer count on the value being there when you go to sell your home," said Keith Ruloff, a Realtor with Century 21 Manuel Cole in Redford Township. "Houses are only worth what a ready, willing and able buyer is willing to pay for it."

The median sales price for a single-family home fell $13,500 to $155,700 from the second quarter of 2005 to the second quarter of 2006, ranking Metro Detroit second in the nation for the biggest decline in median home prices, topped only by Danville, Ill.

Data from multiple listing service Realcomp II Ltd. shows sagging home prices in every county in Metro Detroit, with Wayne County showing the biggest drop. Median home prices dropped 9.9 percent in Wayne in the second quarter of 2006, 5 percent in Livingston, 4.7 percent in Macomb and 4 percent in Oakland.

In all four counties, sales were down from a year ago while listings were up. And the average number of days homes for sale stayed on the market jumped from 70 to 108 from June 2005 to June 2006.

The weak housing market has put the relatively few buyers out there firmly in the driver's seat. Sellers are dropping their prices and even offering incentives such as cash toward closing costs.

The drop in home values does not come as a surprise given the prolonged economic downturn in Michigan. The state's jobless rate of 7 percent is among the nation's highest and the auto industry is in the midst of a historic downsizing.

"With so much auto-based industry and with the auto sector suffering it's difficult to say when that job turnaround will occur," said Lawrence Yun, senior economist for the Realtors association.

While Michigan has been leading the housing slowdown nationally, the rest of the country is starting to catch up. Twenty-eight states had sales declines in the second quarter, according to the Realtors association. Overall, median home prices nationwide rose 3.7 percent in the second quarter.

Falling home values cause a ripple effect that spreads to nearly every aspect of home ownership: A home gets a lower appraisal and has less equity, which limits the amount a homeowner can borrow against it. Those banking on their home for retirement see their nest egg cracking. Sellers are increasingly forced to bring money to the closing table to make up for what they still owe on the home.

Homeowners settle for less

Home seller Lesley Harding of Northville Township knows the stress well. The 39-year-old freelance video producer and her husband have been juggling three mortgages: one for their new house, one for the condo they're selling and one for the house Harding's late mother left her family.

Harding dropped the price on her Waterford condo $20,000 after it sat on the market for two years -- even then it didn't sell. She is now leasing it out.

The Farmington Hills home Harding's mother left when she died is also sitting on the market even after the family cut the price by $52,000 to $412,000.

"That's our inheritance, so you want to get as much as you can," she said.

Turnaround signs are scarce

The drops in median home prices simply reflect the slumping Michigan economy, said Furhad Waquad, a Bloomfield Hills Realtor and president-elect of the Michigan Association of Realtors.

But Waquad is optimistic that an infusion of jobs into the state could change the real estate scene for the better.

"Maybe things will turn around in six months," he said.

Right now, signs of a turnaround are scarce.

The state's unemployment rate is still among the highest in the nation. Analysts expect the jobless rate to get worse before it gets better, as autoworkers at General Motors Corp., Ford Motor Co. and Delphi Corp. who took buyouts start joining the unemployment rolls.

"This is a classic example of how expectations can affect a housing market," said Dana Johnson, chief economist for Comerica Inc. "The sharp decline in house prices is really reinforced by all the fears that there could be a fair number of people leaving the state, taking buyouts."

That could mean relief in the housing market may not be as prompt as people hope.

"It's going to be a while before the restructuring difficulties in the auto sector calm down," Johnson said.

"This will pass once things stabilize in the automotive (sector), but I think people are going to have to be a little patient."

Right selling price is key

Despite the bad news, Realtor Larry Chetcuti of RE/MAX Prestige in Dearborn Heights said homes in the $90,000 to $150,000 range are still selling fairly well.

"There's quite a few houses for sale, so they're not getting multiple offers on homes anymore," Chetcuti said. But homes that are priced right are selling.

Few houses are selling for the asking price and many buyers ask for seller concessions, such as paying closing costs, Ruloff said.

While interest rates have been rising, they still remain relatively low, Realtors note. The average interest rate for Michigan is 6.58 percent, slightly above the national average of 6.52 percent, according to Freddie Mac, a government housing agency.

Values within income range

If there is a silver lining with declining home prices, it may be that homes in the Metro Detroit market have not spiraled out of reach of area incomes, economists say.

So when jobs finally come to the state, more people will be able to afford homes.

"Because homes in Detroit -- relative to other major cities -- are affordable, any turnaround in the job market would imply that many would be able to enter into home ownership," economist Yun said.

While median home prices may have slid, there's no need for panic, said economist Johnson.

"I don't sense we're on the precipice of a steep downward spiral," he said.

Article in August 15, 2006 Detroit News

For first time, Detroit's black population falls

Gordon Trowbridge / Detroit News Washington Bureau

After five decades of watching their white neighbors leave the city of Detroit by the thousands, Detroit's African-Americans have begun to follow.

Detroit's black population fell 10 percent from 2000 to 2005, according to population estimates released today by the U.S. Census Bureau.

The decline reverses Detroit's 50-year trend of attracting African-Americans even as the city's overall population fell. And it demonstrates how many of the same factors that attracted whites by the tens of thousands to the suburbs -- good schools and city services -- have begun to draw blacks in increasing numbers.

The shift has broad implications for the city and its suburbs. Detroit's ability to rebound economically may be damaged if blacks abandon the city. And suburban communities that just 10 or 15 years ago had almost no black residents may struggle to adjust to the new diversity.

The change from Detroit's 20th century history is striking. Even as Detroit's population plunged from 1.8 million in 1950 to just over 1 million in 1990, the city's black population grew. But after remaining essentially flat during the 1990s, the black community plunged in the first half of this decade by an estimated 75,000 people. Between 2000 and 2005, Detroit lost enough African-Americans to populate the entire city of Southfield.

The trend is especially striking in places such as Livonia, Warren and Dearborn, which historically have lacked large numbers of blacks -- but often have been the scene of racial tensions.

Miriam Parchman, 37, spent most of her life in Detroit before moving to Warren in March with her four children.

"I was just at the point that I was tired (of the city)," said Parchman, who is black. She said she left a neighborhood plagued by drug dealers and a school system where her children sat in rundown classrooms reading trashed textbooks.

Parchman is hardly alone: Warren's black population grew by 169 percent from 2000 to 2005, to nearly 10,000.

"I know there are a lot of positive things going on (in Detroit), but I am not ready to go back. I really want more for my babies right now," she said.

Blacks larger part of 'burbs

While about 22 percent of Metro Detroit's African-Americans lived in the suburbs in 2000, that grew to an estimated 32 percent by 2005, according to the estimates -- a massive shift, said University of Michigan researcher Reynolds Farley, who has studied Metro Detroit's racial landscape for decades. The numbers suggest Detroit may be at the start of a black exodus rivaling that of whites after World War II, he said.

The figures released today are for the American Community Survey, the Census Bureau's attempt to provide detailed demographic data between once-a-decade censuses. Today's data includes figures for all areas of more than 65,000, including 21 Michigan cities.

The numbers are based on a survey of randomly selected residents and are subject to the same statistical uncertainties as other random samples, such as public opinion polls.

But even with those uncertainties, the trend of black migration to the suburbs is clear, said Kurt Metzger, a demographics expert formerly at Wayne State University and now with United Way of Southeast Michigan.

"This is really going to take a toll on the neighborhoods -- the Palmer Parks and Sherwood Forests," said Metzger. While income estimates will not be available until later, Metzger said it's likely the exodus has been led by middle-class families with children.

"They're looking for any chance to get into another kind of school system," he said.

Will people come back?

Experts worry the black exodus, if it continues, could knock out one of the few remaining strengths of the city's economy: A core of middle-class blacks committed to remaining there.

Andrew Wiese, a San Diego State University researcher who studies city-to-suburb migration, said the experience of other cities suggests that people will return eventually. In Cleveland, St. Louis, Washington and other cities, new city dwellers -- often young whites, singles or couples without children -- have sparked neighborhood revivals.

"Detroit isn't going away," he said. "Detroit's location cannot be reproduced in, say, Birmingham. It still sits on that river, Belle Isle still sits in the middle, it still has those broad river views. Those are things people are paying for elsewhere."

Matt Allen, a spokesman for Detroit Mayor Kwame Kilpatrick, said the city needs a strong African-American middle class, and the city is pursuing programs to retain it, including efforts to better services and tax incentives to retain residents.

Metzger and Farley said they were struck by the growth of the African-American population in Warren, Dearborn and Sterling Heights.

"Those areas have continued to have a reputation for hostility to blacks," said Farley, who has surveyed blacks and whites on racial attitudes on housing preferences.

In Farmington Hills, Mayor Vicki Barnett said local officials have to keep the region's history in mind.

"When you have the kind of segregation we have in the Detroit metro area, you have to address it," said Barnett, whose city saw its black population increase 72 percent since 2000.

Barnett said city officials have tried to reach out to new minority residents, seeking them out to take seats on government boards and commissions.

"I'm not confident we're exactly where we need to be, but we're moving in that direction," she said.

'It's not safe over there'

Among the biggest issues to watch, Metzger said, is whether suburban whites follow the pattern set decades earlier in Detroit. When blacks began moving into all-white neighborhoods in large numbers, those areas rapidly transitioned from majority white, feeding the pattern of racial segregation that persists to this day.

"The first thing we're likely to see is whites leaving those neighborhoods, unless white preferences on these issues have changed," Metzger said.

Julie Wallen, 46, said her family moved from Detroit to the suburbs when she was a child. She understands why blacks would leave, too.

"It's not safe over there," she said.

Now in Warren, she's glad her children got a chance to go to school with students of different races because it will make them more open and understanding.

Still, Parchman, the black newcomer to Warren, said her family has encountered the city's reputation for being unwelcoming to minorities on one occasion, when a classmate made a comment to one of her children.

She said she tries to explain to them that they could encounter ignorance anywhere.

"You can't run from racism, prejudice," Parchman said. "You have to be willing to stand up."

Article in August 15, 2006 Detroit Free Press

A Michigan snapshot
State lags behind nation in population, but sharp rise in minorities adds to diversity
BY AMBER HUNT, MARISOL BELLO and VICTORIA TURK
FREE PRESS STAFF WRITERS

August 15, 2006

Michigan's population increased slightly from 2000 to 2005, despite fears that the struggling economy would fuel an exodus of jobs and people -- but its growth hasn't kept pace with the rest of the country's.

That's according to figures released today as part of the American Community Survey, an annual snapshot of the country and selected communities. Compared with similar figures from 2000, the state's population rose only about 2% -- to 9.68 million.

The new survey paints metro Detroit, especially its suburbs, as more diverse and more educated. But the number of college graduates in the state still trails the national average. And Michigan lags behind most other states in drawing newcomers from out of state.

In metro Detroit, Macomb County had the biggest increase of new residents, with a 5% rise in the 5-year span; Oakland County followed with a 2% gain. But Wayne County lost an estimated 3% of its population. Detroit's population continued to slide, dropping an estimated 7%. The city lost 7% of its black population and 14% of its white population in the 5-year span, underscoring its fall last year from the ranks of the nation's 10 biggest cities.

Unlike past ACS reports, today's includes numbers for places with 65,000-plus populations, allowing a glimpse at trends in southeast Michigan. And the numbers, when compared with 2000 census data, indicate what a lot of metro Detroiters suspect: Many suburbs gained not only population but diversity:

Macomb County's black population grew an estimated 140% in the last five years. It also had big percentage increases of Asians (37%) and Latinos (29%).

Dearborn, Livonia, Sterling Heights, Troy, Warren and Westland all had triple-digit increases in their black populations, ranging from 105% to 227%. In most cases the actual numbers are small, but they nevertheless show the shifting demographics.

Michigan had a 26% increase in its Asian population, the biggest jump of any immigrant group statewide. Locally, Canton (100%) and Dearborn (61%) had the biggest increases of Asians. Canton also had the only double-digit overall population increase of the surveyed Michigan cities, up 19%.

Some of the communities with double- and triple-digit increases in black residents historically were known for racial tension.

Consider Dearborn, where former Mayor Orville Hubbard infamously excluded blacks and often referred to them in derogatory terms. When compared with 2000 U.S. census data, the new study shows a 227% rise in the number of African Americans living in Dearborn, from 1,178 to 3,850 people.

And Sterling Heights saw an estimated 214% increase in its black population -- from 1,387 to 4,349 people.

Mia Redd, a 32-year-old Blue Shield phone representative and former Sterling Heights resident, has noticed the change.

"When my son was in elementary school, there were only eight black kids," Redd, who is black, said Monday on her lunch break at Lakeside Mall. But nowadays Redd, who has since moved to Clinton Township, said she sees more minorities throughout Macomb County.

When compared with the 2000 census, the 2005 survey numbers back up Redd's observations: Macomb County had the biggest increases of black, Asian and Latino populations in the tri-county area.

About the survey

The data the Census Bureau released today are different from that obtained in the long-form questionnaire that went to about 1 in 6 addresses in the 2000 census. The annual American Community Survey will replace the census and track changes in demographic, socioeconomic and housing data more frequently.

The ACS was designed to provide more frequent updates to help governments and other agencies plan and allocate resources. It will replace the 10-year census by 2010.

The new numbers show that only seven states -- including Ohio, Iowa and Pennsylvania -- had smaller population gains than Michigan. North Dakota and the District of Columbia lost residents.

The Michigan population rose at roughly half the pace of the nation overall, which grew at roughly 1% a year, said Kurt Metzger, director of research for the United Way for Southeastern Michigan. The slower rate of deaths than births in the state contributed, he said.

From 1990 to 2000, Michigan's population grew by 6.9%, but the nation as a whole grew by an average of 13.1%.

A significant difference from the 10-year census is that the ACS omits from its counts populations in group settings such as correctional facilities, military barracks and college and university housing.

And that likely skews some of the data in certain cities, such as Ann Arbor, where University of Michigan students living in dormitories weren't counted. As a result, the ACS numbers, when compared with the 10-year census, show a 13% drop.

But some communities, such as Southfield, suspect the ACS-census comparison isn't far from the truth. Although racial breakdown numbers weren't available for Southfield, Oakland County overall showed a trend of whites moving away and minorities moving in. The county had an estimated 3% drop in the white population and a 23% increase in the black population.

Nimrod Rosenthal, community relations director for Southfield, said most incoming residents he sees are young, professional blacks from Detroit.

The white population in Southfield is older. Young blacks -- especially single women, Rosenthal said -- are moving to Southfield for office jobs.

"There are so many offices here, so many businesses," he said. "We are a diverse city."

Wayne County's Westland had a similar swap in whites and blacks, with 17% fewer whites as its black population doubled from 5,500 to 11,500.

"Unfortunately, we see this here and across the country," Metzger said. "Whites and blacks don't live together, not because blacks don't want to. It's because whites don't want to. Oftentimes, as a community becomes a community of color, whites start to leave."

Canton had the biggest increase in overall population at 19%, with increases in whites, blacks and Asians.

In Troy in Oakland County, the population increased only 4%, from 80,959 to 83,958. But the city had a 173% increase in blacks and a 2% drop in whites. Jerry Johnson, 52, is one of the more than 3,100 black residents who moved to Troy over the past five years. He said he moved last year from West Bloomfield for Troy's city services, schools and quiet neighborhoods.

Though his 12-year-old daughter attends a private school in Southfield now, Johnson said he has thought about moving her into public schools and wanted a district where she would excel.

Troy resident Nikole Murphy, who is black, became a minority business owner two years ago when she bought Shore Optical in St. Clair Shores. She said she has had a warm reception but encounters awkward moments.

"I've had guys come in and ask, 'Who's the owner?' It gets kind of funny at times," said Murphy, 37. But, she added: "I was brought up -- people are people. People can't get past the color that God made you, then they're not worth dealing with in the first place."

In Dearborn and Detroit

Meanwhile, Dearborn officials welcomed the news that more than 2,500 blacks reportedly moved into the city. But they questioned the ACS-census comparison that indicated a 3% drop in overall population.

The city is projected to soon pass 100,000 residents, according to the Southeast Michigan Council of Governments, which creates community profiles with population and demographic data. Dearborn tallied 97,374 residents in the 2000 census.

Mary Laundroche, director of the city's Department of Public Information, said the ACS's estimated drop might stem from the survey's lacking an estimate of the city's Hispanic population, which she said is growing.

Still, Willa Johnson, a black woman who moved to Dearborn in June, said she's clearly a minority there. She said she hasn't seen another minority in her nine-story apartment building.

"When I told my family I was moving here, they said, 'Why would you do that?' " said Johnson, 53.

She pointed to Hubbard's legacy -- which Laundroche said is no longer relevant.

"He died 24 years ago," Laundroche said. "That's a long time. ... Dearborn today is a welcoming community with residents from more than 80 different cultures."

Patricia Becker, executive director of the Southeast Michigan Census Council, agreed: "Dearborn is no longer the Dearborn of Orville Hubbard. People now can choose to move where they want to move."

And that apparently means moving away from Detroit.

The city has experienced a steady decline in population -- especially whites -- for decades. Detroit's population hit an all-time high in 1950, about 1.85 million residents. The following decade, the population had dipped by about 1.8 million. It has been steadily declining ever since.

Census figures released last summer showed Detroit had, for the first time in almost a century, slipped out of the top 10 cities in America based on population.

It dropped from 900,892 residents to 836,056, according to ACS data in 2000 and 2005.

"We're acutely aware of the loss as it relates to our schools and neighborhoods," said Matt Allen, press secretary for Detroit Mayor Kwame Kilpatrick.

He said the estimated 14% drop in whites isn't surprising, referring to the "white flight" of the '60s and '70s. "But now we're experiencing the African-American population is dwindling."

The city has about 7% fewer blacks than it had in 2005, he said.

Kilpatrick has a plan in place to try to stem the flow and make the city competitive again, Allen said. Metzger, however, said blacks have been waiting a long time for the tide to change.

"A lot of people had hung on and hung on, and finally had enough," he said.

Article in August 10, 2006 Wall Street Journal

Homeowners Start to Feel The Pain of Rising Rates

Payments on Adjustable Loans
Hit Overstretched Borrowers;
'Budgets Are Out of Whack'

By RUTH SIMON
August 10, 2006

Luisa Cordova-Holmes was looking to lower her monthly payments when she refinanced her $312,000 mortgage in 2004. Instead, she wound up digging herself into a ditch.

For their new loan, Ms. Cordova-Holmes and her husband chose a so-called option adjustable-rate mortgage, which carried an introductory rate of 2.35% and gave her multiple payment choices each month. "I had a lot of financial obligations," says Ms. Cordova-Holmes, an accountant who lives near Detroit.

Two years later, however, the interest rate on her loan has jumped to 8.75%, her loan balance has climbed to $324,000 and her minimum monthly payment has risen to $2,257. She says the terms of the loan weren't clearly spelled out.

Ms. Cordova-Holmes says she would like to refinance, but can't -- in part because her loan carries a prepayment penalty that would force her to shell out thousands of dollars if she did. Instead, she's trying to sell her home. But with Detroit's economy slumping, she hasn't been able to find a buyer. When she and her husband first put the house on the market last summer, they were asking nearly $400,000. Now they're willing to accept as little as $270,000.

"We're in a very bad situation," she says. "The payments are just killing us."

In recent years, homeowners like Ms. Cordova-Holmes have embraced adjustable-rate mortgages -- and such variations as option ARMs, interest-only mortgages and "piggyback" loans, which, respectively, allow borrowers to make a minimum monthly payment, pay interest and no principal in the loan's early years, or finance 100% of the purchase price. The growing popularity of these products has helped fuel consumer spending, as well as double-digit home-price gains and rising homeownership rates.

Yet the downside of the lending boom is starting to show. Rising interest rates are taking a toll on family budgets as growth in home prices flattens -- and, in some areas, prices fall.

Mortgage delinquency rates hit 2.32% in the second quarter after bottoming out at 2.06% in the fourth quarter of 2005, according to an analysis by Equifax/Moody's Economy.com. The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 141% in the past year, according to a recent study by Credit Suisse that looked at loans made to borrowers with good credit. That compares to a 27% rise in such delinquencies for fixed-rate mortgages.

Many borrowers who run into trouble have relatively low incomes or scuffed credit records. But housing counselors say they are also hearing from a growing number of middle- and upper-middle-income borrowers who borrowed heavily to finance spending or buy a house they could barely afford. NeighborWorks Homeownership Center in Sacramento, Calif., says that 38% of the borrowers it's seen this year have "moderate or above-moderate" incomes, up from 24% last year.

In Illinois, the new crop of borrowers includes people with bills for private schools, fancy cars and child care and monthly incomes of $3,500 to $10,000, says Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago. Many of these borrowers took out loans that didn't require them to document their income and overstated their earnings, he adds.

Steven Schwaber, a bankruptcy attorney in the Pasadena, Calif., area, says he's getting more calls from small-business owners who had refinanced into ARMs, tapping their equity in an effort to keep their businesses afloat. "All of the sudden their budgets are out of whack because their house payment went up by 25% or 30%," he says, at the same time fuel prices are rising. Some would have wound up filing for bankruptcy anyway, he adds, but rising interest rates have pushed others over the edge.

Credit-counseling agencies say that in the past few months they've seen a growing number of homeowners pinched by rising mortgage payments. Neighborhood Housing Services of New York City says it has been "flooded" with calls from borrowers who took out ARMs two years ago and whose rates are now resetting for the first time. And Consumer Credit Counseling Services of Atlanta, which works with borrowers nationwide, says it has tripled its housing counseling staff in the past six months to keep up with increased demand.

Until recently, most mortgage-payment problems were an unfortunate byproduct of major life changes, such as job loss, medical problems, divorce or a death in the family. But for the new wave of troubled borrowers, the problems stem largely, or in part, from the structure of their mortgage, housing counselors say.

Uncharted Territory

In the past, the home mortgage "was a steadying influence; it neither rose nor fell over time," says Elizabeth Warren, a Harvard Law School professor who has studied consumer bankruptcies. "All that has changed in the last half-dozen years," she adds. "The mortgage payment is now more variable than any other expense for millions of people. We're working in completely uncharted territory."

Rising mortgage rates are causing problems for first-time home buyers such as Edward Snyder, a product manager who bought his house in St. Paul, Minn., two and a half years ago. Mr. Snyder financed the $210,000 purchase with a $168,000 interest-only ARM that carried a fixed-rate of 6.15% for the first two years and a $42,000 second mortgage with a 9.4% rate that is fixed for the first three years.

Mr. Snyder says he was stretched even before a rate adjustment on his ARM boosted his monthly payments by $200 in May. Since then, he has fallen behind on his water bills, car payments and student loan. "Now, it's a choice of what gets paid late," Mr. Snyder explains. Last month, he received a letter from his lender with the words "rate increase" on the envelope. Mr. Snyder says he hasn't opened it "because it gets too discouraging." This week, he's meeting with a mortgage broker to discuss his options.

"If I had been aware both loans were interest-only, I would have probably turned the loan down," says Mr. Snyder, who says that the terms of the mortgage were never properly explained to him. "I believe this loan is built for failure. There's no means to build up equity."

Roughly $137.5 billion in residential mortgages will face payment resets this year, with an additional $524 billion resetting over the next four years, according to a recent analysis by UBS AG that looked at loans sold to investors who buy mortgage-backed securities. Rising interest rates aren't a problem for most of these borrowers because they can refinance or have the cash to meet higher mortgage payments. Borrowers with troubled credit records may be able to refinance into a mortgage with a lower rate if they've been paying their bills on time.

But other borrowers are running into trouble, in some cases because they didn't understand the risks of their mortgage or wound up at the closing table with a loan that wasn't what they expected. More than 30% of mortgage brokers believe their clients don't understand the mortgage product they selected, according to a recent survey by Macquarie Mortgages USA, a unit of the Macquarie Group. Other borrowers didn't leave a cash cushion to cover higher mortgage payments at a time when gasoline costs and minimum credit-card payments are also rising.

"Often the reason somebody is put into an ARM or an interest-only loan...is because that's the only way the broker or loan officer could get them qualified," says Jordan Ash, director of the Acorn Financial Justice Center, an advocacy group that focuses on predatory lending issues. Acorn is currently negotiating with two large subprime lenders -- who deal with borrowers with blemished credit records -- about changes in underwriting standards and how to deal with borrowers whose interest rates are resetting.

Rising rates create new challenges not only for borrowers, but also for lenders that would prefer not to foreclose. When borrowers miss payments because of a sudden interruption in their income, a lender may structure a repayment plan that allows the borrower to make catch-up payments or do a loan modification that adds the unpaid debt to the loan balance. But if the problem stems from rising mortgage rates, a borrower may have to get a second job or prune spending.

Early Alerts

Some lenders are trying to alert borrowers to a payment reset well in advance, either through their Web sites or with phone calls or letters. They are also offering refinance options, such as switching from an ARM to a fixed-rate interest-only mortgage. A switch could mean higher monthly payments, but it insulates the borrower from future rate increases, says Bill Merrill, director of nonperforming loans at mortgage giant Freddie Mac.

But for some borrowers, "there may not be a solution," says Doug Duncan, chief economist of the Mortgage Bankers Association. "ARMs always have higher delinquency and foreclosures" than fixed-rate loans, he says.

Some borrowers are opting to sell homes they can no longer afford. Last year, James Zito, a retired salesman, refinanced into an option ARM in a deal that allowed him to pull out $50,000 in cash without increasing his monthly payments. Mr. Zito had been pulling out cash when he refinanced every three or four years. But this time, when his mortgage payments began adjusting, he realized he couldn't afford the higher payment, and refinancing yet again wasn't an option.

In June, Mr. Zito sold for $745,000 the three-bedroom, two-bath house in San Jose, Calif., he had lived in for 43 years and bought a smaller home in a retirement community. "I wanted to get out from under the mortgage," he explains. With an option ARM, "your monthly payment increases, and you don't make any headway."

Some California brokers say they are beginning to see a return of "short sales" -- transactions in which the sales price isn't large enough to cover outstanding loans. Patti Vaughan, an agent with Assist 2 Sell in Temecula, Calif., says in recent months she has begun to get calls from borrowers looking to unload houses they can no longer afford. "They've upgraded their houses, put in a pool and bought themselves Hummers and BMWs," she says. "Now they can't get it refinanced and they can't sell."

Article in August 10, 2006 Detroit News

Housing market slumping
Rising interest rates are putting a damper on buying; stubborn sellers having to lower prices.

Martin Crutsinger / Associated Press

WASHINGTON -- The "For Sale" signs are staying out longer, while house prices are easing as sellers try to lure buyers.

The big question now: Will the nation's five-year housing boom turn into a devastating bust that could derail the overall economy?

"We recognize the risk ... and we are watching it very carefully," Federal Reserve Chairman Ben Bernanke told Congress recently.

The Fed's interest rate increases, which have helped push mortgage rates to the highest levels in more than four years, are putting a damper on housing.

The central bank acknowledged that fact Tuesday when it decided against raising a key short-term rate for an 18th time.

The concern is that the already sizable inventory could worsen as millions of Americans with adjustable rate mortgages, taken out when interest rates were at four-decade lows, suddenly find they can't meet new higher monthly payments.

"So far, the correction in housing has been orderly, but there is a significant risk that this orderly correction could become more chaotic," said Mark Zandi, chief economist at Moody's Economy.com.

David Lereah, chief economist for the National Association of Realtors, predicts the sales slowdown is about to bottom-out. He said homeowners are realizing they need to lower prices.

"We are going from a seller's market to a buyer's market," he said. "It looks like the worst is behind us and sales are starting to level off."

That may leave sellers and real estate agents longing for the old days. Many
economists are stopping short of predicting a wholesale bust.

"There is no evidence that prices are going to collapse," former Fed Chairman Alan Greenspan said earlier this year.

Article in August 9, 2006 Wall Street Journal

Toll Brothers Cuts Estimate
For 4th-Period Home Deliveries

MarketWatch
August 9, 2006

Toll Brothers Inc. reduced its estimate of the number of homes to be delivered in the current fiscal fourth quarter while saying it would take write-downs for the value of land options on "deals that no longer work due to today's weaker market conditions and slower sales paces."

Robert Toll, chairman and chief executive, cited an oversupply of houses for sale and a fall-off in buyer confidence as the Horsham, Pa.-based builder of luxury homes disclosed revenue figures for the third quarter ended July 31.

The current housing slowdown "is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors," the executive said in a statement.

Third-quarter revenue came in at $1.53 billion, off 0.5% from $1.54 billion in the year-earlier period, Toll Brothers said.

Based on its current backlog, Toll expects to deliver 2,500 to 2,800 homes in the fourth quarter, down from its previous estimate of 2,900 to 3,300. For 2006, home deliveries are expected at 8,600 to 8,900. Toll Brothers said that its July 31 backlog totaled $5.59 billion, down 13% from the year-earlier $6.43 billion.

Signed contracts were $1.05 billion at the quarter end, down 45% from $1.92 billion. Toll said it would specify the write-downs when it formally reports third-quarter financial results on Aug. 22.

With builders cutting prices and adding incentives to move homes they are close to completing, "many anxious consumers are delaying their purchase decisions as they wonder about the direction of home prices," Mr. Toll said.

"With interest rates still relatively low, the economy basically healthy and household formations still increasing, we believe that once the current oversupply of homes is absorbed and buyers become confident that home prices have stabilized, the market will return to firm footing."

Article in August 7, 2006 Wall Street Journal

As Data Point to Slowdown,
Housing Market May Land
Harder Than Economists Predict

By MARK WHITEHOUSE
August 7, 2006

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."

Article in July 28, 2006 Detroit News

Homebuilders will weather slowdown

Most firms' diversity, 'conservative' debt help in expected harder times, Standard & Poor's says.

Aparajita Saha-Bubna / Bloomberg News

The U.S. homebuilding industry will likely weather a slowdown in housing as their diversified businesses and "conservative" debt levels help counter lower sales, according to Standard & Poor's.

For the 26 builders the credit-rating company ranks, 21 have a "stable" outlook and three have a "positive" outlook, meaning that a rating upgrade is more likely than a downgrade. New York- based S&P said in a report today that it rates about $30 billion of homebuilder debt.

"Most homebuilder ratings should remain stable even though the anticipated soft landing may turn out to be much bumpier than expected," said James Fielding, an S&P analyst, in the report. Many builders "were able to materially diversify their operating platforms and structure conservatively leveraged balance sheets."

The housing market is cooling after setting records in recent years. Sales of new houses probably will fall 9.5 percent this year to 1.16 million from an all-time high of 1.28 million in 2005, David Berson, chief economist of mortgage-finance company Fannie Mae, said in his semi-annual forecast on July 19.

Purchases fell 3 percent during June to an annual pace of 1.131 million from a revised 1.166 million rate in May that was slower than first reported, the Commerce Department said Thursday.

Concern about the slowdown has hurt investors. High-yield debt sold by Hovnanian Enterprises Inc., KB Home and other construction companies have generated losses of about 1.23 percent this year, including reinvested interest, based on indexes compiled by Merrill Lynch & Co. The performance is the worst of 37 industries tracked by the firm.

An S&P index of 16 homebuilder stocks is down 34 percent this year.

An index compiled by the National Association of Home Builders/Wells Fargo to gauge homebuilder sentiment fell to 39, the lowest since December 1991, from 42 in June, the Washington-based association said July 18. It was the eighth decline in nine months.

"The industry may experience a correction over the next year to year-and-a-half that is sharper than expected, but will potentially be shorter in duration by historical standards," Fielding wrote.