Fed's big rate cuts mean now could be the perfect time to refinance

January 31, 2008

By SUSAN TOMPOR
FREE PRESS COLUMNIST

The Federal Reserve took another enthusiastic whack at interest rates Wednesday, slashing short-term rates by a half point to 3%. This was on top of an emergency rate cut of three-quarters of a point last week.

Why are rates falling as fast as snowflakes in January?

"This is aggressive risk management," said Diane Swonk, chief economist for Mesirow Financial in Chicago.

The Fed is out to skirt the first U.S. recession since 2001. After Wednesday's cut, banks lowered the prime rate to 6%. Many consumers will see lower rates for some credit cards, car loans and other consumer loans.

Some fortunate homeowners are saving money by joining the refinancing boom, too.

Chuck Hixson had been looking into refinancing into a fixed 30-year mortgage, but he moved fast the minute he heard news on the radio about the dramatic rate cut by the Fed on Jan. 22.

"I heard it driving to work, and it was like, 'Today's the day,' " said Hixson, 52, who has a 2,500-square-foot home in Farmington Hills.

The 30-year fixed mortgage rate is not directly tied to action by the Federal Reserve. But long-term interest rates have fallen dramatically on recession fears.

Nationwide, the average 30-year fixed mortgage rate hit 5.88% this week, down from 6.71% as of Aug. 1, according to Bankrate.com.

The 30-year rate edged up some from last week's level of 5.57% nationwide.

Anytime the 30-year mortgage rate gets below 6%, consumers take notice.

Hixson, who bought the house in 1985, was able to take his existing home equity line of credit with a rate of 6.5% and refinance it into a 30-year fixed mortgage at 5.625%.

"I was kind of shocked that it was that cheap when I looked into it," Hixson said. He ended up talking two friends into refinancing, too.

This week, the Mortgage Bankers Association reported that its refinancing index was at the highest point since July 2003. Activity remains below those 2003 levels, however.

When homeowners are able to refinance to lower rates, it frees up cash to spend on other goods.

And even in this struggling housing market, there are still some consumers who may be able to take cash out of their homes for remodeling or other big-ticket purchases

"For the overall economy, it's unquestionably a healthy development," said Dana Johnson, chief economist for Comerica Inc.

"Whether it's enough to avoid a recession remains to be seen," Johnson said.

Officially, we are not in a recession nationwide. But the Federal Reserve has launched the fastest round of rate cuts since 1990 to overcome the widespread troubles in housing and credit markets and stop the economic slump that has hit Michigan and the industrial heartland from spreading.

Wednesday's rate cut is the fifth since September. The federal funds rate -- the rate that's used when banks lend one another money overnight -- was 5.25% last summer.

If you're looking for a silver lining, and we've got a lot of clouds here, it is that lower rates give life to economic growth.

In some cases, lower rates can prevent foreclosures. Adjustable-rate mortgages won't soar as high as they would have this spring. That helps many homeowners who had ARMs but have bad credit, too. Often those with bad credit histories can't just refinance to lower rates.

On Wednesday, we learned that U.S. economic growth slowed to an annual rate of 0.6% in October through December, far below forecasts. The annual rate was 4.9% in the third quarter.

Given today's troubles, it is essential to note that refinancing won't help everyone.

"The dilemma is that the 30-year fixed interest rate could go to zero, and there are still some people who couldn't take advantage of it," said Bob Walters, chief economist for Quicken Loans and Rock Financial in Livonia.

In Michigan, falling home values in many areas make it far tougher for people to get equity out of their homes and refinance. Others who have lost jobs will have a tough time finding a lender willing to refinance.

"The borrowers in the driver's seat are those with good credit, proof of income and either money for a down payment or equity in the existing home," said Greg McBride, senior analyst for Bankrate.com.

"If you're missing any of those three pieces, you have some big hurdles to getting approved for a refinance."

No one, obviously, knows how low mortgage rates can go this time around.

Swonk expects the Federal Reserve to cut rates again at its next meeting March 20-21.

Long-term rates, though, could even edge upward, if the U.S. economy picks up steam, thanks to rate cuts and a likely-to-be-passed stimulus package out of Washington.

So it may be wise to look into refinancing now -- especially if you have an adjustable rate mortgage and want to lock in a low fixed rate.

"If you've got a mortgage that can do it, take advantage of it," Swonk said.

"Sleep at night."

Metro home prices fall 13%

Declines reported across country

January 30, 2008

By GRETA GUEST
FREE PRESS BUSINESS WRITER

Home prices in metro Detroit fell 13% in November as compared with the same month in 2006.

That puts it fourth among the nation's 20 largest cities, according to the S&P/Case-Shiller Home Prices Indices data released Tuesday.

Miami has the weakest market, with a 15.1% annual decline.

San Diego and Las Vegas follow close behind, with home price declines of 13.4% and 13.2%, respectively.

These communities are not that unique.

The index shows broad declines in the prices of existing single-family homes across the country.

November marked the 11th month of negative annual returns in prices.

Home prices in the nation's 10 largest cities fell 8.4% in November as compared with November 2006, marking a new record low.

That's the largest price drop since a 6.3% decline was recorded in April 1991.

"We reached another grim milestone in the housing market in November," said Robert J. Shiller, chief economist at MacroMarkets LLC.

"Not only did the 10-City Composite post another record low in its annual growth rate, but 13 of the 20 metro areas, each with data back to 1991, did the same," he said.

As Foreclosures Rise, Mayors Brace for Fallout

By T. W. FARNAM
January 28, 2008; Wall Street Journal

WASHINGTON -- Local governments are scrambling to deal with the rising number of foreclosures that strain city services and soon may take a toll on property-tax revenue.

Stemming foreclosures and managing vacant properties so that years of economic development doesn't unravel was a priority as the nation's mayors gathered in Washington last week. Many localities have set up efforts to reach the 50% of people who never even speak to their lender before their homes are foreclosed. Mayors are eager to help constituents make payments or restructure loans because vacant properties pose costly problems.

Mayors are on the front line," said Douglas Palmer, mayor of Trenton, N.J., and president of the U.S. Conference of Mayors, whose winter meeting ended Friday. "We don't have the luxury of picking and choosing what issues we focus on when people lose their homes, when the grass isn't cut, when property taxes aren't collected and when property values drop."

The cities also are bracing for a drop in tax revenue. A report commissioned by the conference in November projects property values across the country will decline $1.2 trillion this year, leading to a drop in property taxes, a big source of local government revenue. In Ohio, Cuyahoga County Treasurer James Rokakis reports 84,000 reassessments last year driven by requests from Cleveland-area homeowners.

Mayor Brenda Lawrence of Southfield, Mich., told a room packed with fellow city leaders that they should be cutting their budgets now. "I tell you, realistically, to be financially responsible to our residents, we're going to have to make those decisions now," she said.

The mayors also are trying to force lenders to deal with the vacant properties, sometimes before they formally have title. In November, the mayors met with the nation's major lenders, giving them a "hammering," as one mayor put it. Some localities already have turned to the courts to enforce city codes.

"I feel very confident, in terms of our local banks, that there is no question they will step up and respond," said Jerry Abramson, mayor of Louisville, Ky., who was at the November meeting. "When you call Deutsche Bank and they tell you to call this lawyer that's up in God-knows-where, it becomes, you know, a little strained." His city maintains some 1,800 properties, up from 800 a year ago.

Chicago estimates that each vacant house costs the city an average of $34,000 for inspections, court actions, extra law enforcement, visits from city utilities, and sometimes demolition. And there is a toll on law and order as well: Mayor Palmer of Trenton reports his city has an increased crime rate after reaching 40-year lows, driven largely by the theft of copper pipes from empty homes.

Some cities are targeting what they see as the source of the problems. Baltimore sued Wells Fargo & Co. this month, alleging it systematically targeted low-income minority homeowners for loans they couldn't afford, in violation of the Fair Housing Act. In 2005 and 2006, about two-thirds of the bank's foreclosures were in areas of the city that were majority black and 16% were in areas where the population was less than 20% black, according to the lawsuit.

A Wells Fargo spokesman said the company is determined to fight the lawsuit, which, he said, is "not supported by facts or reality." In Cleveland, the city filed a suit in state court alleging 21 lenders had created a "public nuisance."

Chicago has had a program to help residents stay in their houses since 2003, bulking it up in recent months as foreclosures surged. Each week, using court records, the city compiles a list of homeowners who have defaulted on their loans and sends them postcards urging them to get help, said Ellen Sahli, the housing commissioner. It has recruited local ministers to reach homeowners and also has asked lenders to invite their delinquent borrowers to events where they can modify loans on the spot.

Boston has plastered advertisements on bus shelters, billboards and in newspapers, and is airing TV spots directing homeowners to the city's own hot line, said Bill Cotter, a deputy director of Boston's Department of Neighborhood Development. The city also is looking for evidence of fraud by lenders.

Across the Midwest, the problems of abandoned housing are acute. Genesee County Treasurer Dan Kildee said the county owns 8% of the land in Flint, Mich., all formerly abandoned properties acquired through tax foreclosures, using a state law that he helped overhaul. The old process took seven years, but now takes only two.

Midwest officials, and even some from places like San Diego and Connecticut, have come to Mr. Kildee and the Genesee Institute think tank he founded for advice on how to deal with abandoned properties. The key, Mr. Kildee said, is for cities to stop selling tax liens or otherwise liquidating their interest in a property, because such steps put the properties -- and control of the city landscape -- in the hands of speculators.

"Even if a community doesn't own the property," Mr. Kildee said, "local leaders own the problem. The public is going to hold us all accountable for the conditions in our neighborhoods and simply saying this property is owned by some mortgage company or some speculator in some city doesn't get us off the hook."

WHEN A DREAM HOUSE BECOMES A NIGHTMARE

Economy, soft market leave subdivisions unfinished

January 28, 2008

BY ZLATI MEYER
FREE PRESS STAFF WRITER

Sunshine streaks through the small grove of trees behind Tracy and Samir Moussa's Clinton Township home, filling the airy, two-story living room and reflecting off the fine-wood kitchen cabinets. Peer into their backyard, and a detached paver-stone patio beckons.

But across the street, the view isn't what many would expect from a $320,000 suburban dream home. There are no neighbors facing them. Few kids ride by on bikes. A giant muddy expanse stares back at them.

The Moussas are like hundreds of other suburbanites who rushed to be the first in new housing developments, only to later end up being lonely residents. If the thought was to get away from it all, then that's exactly what they've done.

"I think they don't have any money," Tracy Moussa said of the developers of Partridge Creek, the unfinished subdivision they moved into about two years ago. "Truly, if the economy was better, it'd be full. ... I'd hoped that by the five-year point, it'd be full."

Sales of new homes have fallen to the lowest level in 12 years, according to latest data from the U.S. Department of Commerce. New home sales decreased 9% between October and November nationally and by 27.6% in the Midwest.

That drop is reflected in subdivisions like the Moussas' and in sluggish construction in Macomb Township -- where 20 subdivisions have stalled -- and in Oakland Township, where building in two developments has slowed, officials there said.

While the focus in southeast Michigan has been on the foreclosure crisis, subdivisions and condo projects planned during the boom remain incomplete with unpaved streets, weedy landscapes and vacant parcels.

"A mattress was dumped," Tracy Moussa said. "I have to ask them to cut the weeds. ... The values of the homes have gone down."

Robert Waltenspiel has encountered similar problems in his unfinished Forester Square subdivision in Auburn Hills, which his family moved into about two years ago.

He, wife Bo and their two young daughters have one neighbor, but on both sides of the two homes are vacant tracts. Across the small road, a row of planned homes hasn't been built, so they see the garages and backs of townhouses yards away. And despite the subdivision's name, there are no trees near their home.

Bruce Building Co., the developer of Forester Square, did not return phone calls.

"People who lived here were actually going out and weeding," Waltenspiel said. "They didn't turn on the sprinklers to water the public areas, so everything was burnt, and it's a big football area, and the adjourning area was burnt up. It wasn't trimmed. ... It's pretty embarrassing when we have people over."

To developers and builders, the issue is more complex than any one complaint.

"In many respects, we don't create demand; we fill it," said Jim Clarke, president of Robertson Bros., a Bloomfield Hills-based developer building the Milford Lakes development in Milford Township. "You can't stop the spigot fast enough" because of the long planning and building process.

Carl Scurto of Spartan Dicicco, the company that built the Moussas' home, sees advantages to being among the first wave of residents and disadvantages to moving into an already-settled subdivision.

"In an older neighborhood, there's a guy's rusted-out pool; you can't control that," he said. "When you go into a subdivision that's not completed yet, you have choice of prime lots, wooded lots, corner lots. It's part of the business when you're building."

Richard Ives, vice president of Trinity Land Development, one of Partridge Creek's managing partners, countered the Moussas' complaints.

Municipalities don't want sidewalks put in before houses are built because construction equipment ruins them, and the developer is paying about half the landscape maintenance costs, Ives said.

Several residents serve as an advisory group until enough houses in the sub are filled to form a homeowners association.

"The developer is responsible for acquiring land, getting approvals, putting in all the infrastructures, any of the amenities, which we've done," he said, explaining that 360 lots in Partridge Creek were sold to five builders who've built 80 houses -- roughly half of what they would've built in previous years.

Now, with new home sales suffering, many builders are reluctant to construct homes without buyers in place.

To spur sales, builders and developers are resorting to creative incentives, such as free landscaping, discounts of thousands of dollars and free upgrades like marble, hardwood floors and high-end appliances.

For people who are among the first to buy in a development, they, like the idle construction crews, stand angry and isolated.

"I did think it'd be more of a community," Waltenspiel said. "There's not much going on. People aren't congregating. ... We had no idea what we'd be getting into."

Craig Koss, president of Kramer-Triad, the company that manages the subdivision, said he still believes Waltenspiel and other Forester Square residents will get what they expected.

Forester Square is "a great community. It's going to be fine. It's going to be a struggle for a while, but it's going to be fine," Koss predicted.

Still, for homeowners like Bea McGinty, the economy is quickly sapping any confidence that life in her condominium complex will get better.

When the 75-year-old grandmother moved back to Michigan from Florida, she bought a condo in Plymouth's Daisy Square -- site unseen -- because of its proximity to shopping, a godsend for someone who doesn't drive and lives in the suburbs.

Since she moved in a year and half ago, McGinty has been bookended by what she considers blight. The field behind her building is bare, though another row of homes was slated for the spot.

"I don't know what's doing with bare fields. There's no grass. It's an eyesore, ugliness," she said. "At least plot it over, make a few paths, plant a few bushes, put a fountain in, a place for kids to play. ... I'm discouraged and disgusted."

McGinty also sees part of the façade of Daisy Manufacturing Co., the historic BB gun maker, that was to be incorporated into the development.

Also visible to McGinty is resident turnover in her building, where the developer rents a few units.

"If I sold my place now, I'd lose $20,000 because of bad sales and the economy," McGinty said.

Livonia real estate agent and lawyer Carol Hainline said she understands some of the frustration of isolated homeowners.

"The problem I see is people are spending half a million on a house and now they have trash around them; I can see why they're upset," Hainline explained. "What can you do? You're buying a lot in a particular place from a builder. They don't give you a guarantee when you're buying that the subdivision will be built."

Sales of existing single-family homes decrease by 13%

The 2007 decline is the worst since a 17.7% drop in home sales in 1982.

Friday, January 25, 2008
Martin Crutsinger / Associated Press

WASHINGTON -- Sales of existing single-family homes plunged in 2007 by the largest amount in 25 years, closing out an awful year that saw median prices fall for the first time in at least four decades.

The National Association of Realtors reported Thursday that sales of single-family homes fell by 13 percent last year, the biggest decline since a 17.7 percent drop in 1982. The median price of a single-family home fell to $217,800 in 2007, down 1.8 percent from 2006.

It marked the first annual price decline on records that the Realtors have going back to 1968. Lawrence Yun, the Realtor's chief economist, said it was likely the country has not experienced a decline in home prices for an entire year since the Great Depression.

Private economists said the size of the sales plunge and the decline in prices underscored the severity of the housing slump. Last week, the government reported that construction of new homes fell by 24.8 percent in 2007, the second biggest decline on record, exceeded only by a 26 percent plunge in 1980.

"We are closing the book on the worst year for housing possibly since the Depression," said Joel Naroff, chief economist at Naroff Economic Advisors. "I keep thinking a bottom is near, but we haven't gotten there yet."

The year ended on an exceptionally weak note, with total sales of both single-family homes and condominiums dropping by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

David Wyss, chief economist for Standard & Poor's, said he believed sales of existing homes would continue declining until the middle of this year with prices probably falling for all of 2008.

"When you look at the inventory levels, there are just a lot of unsold homes on the market that we have got to get rid of," Wyss said.

The report showed the inventory of unsold homes did fall 7.4 percent to 3.91 million units in December, but part of that probably reflected disappointed homeowners just taking their houses off the market.

The 13 percent drop in single-family home sales last year followed an 8.1 percent decline in 2006 that occurred after sales had set record highs for five straight years.

That housing boom fueled a speculative frenzy in many parts of the country, luring many investors into the market hoping to buy homes and flip them for quick profits as home prices in those areas soared at double-digit rates.

Assessments fall, tax bills may rise

Lower home values hit owners, cities

Friday, January 25, 2008
Mike Wilkinson, Catherine Jun and Jim Lynch / The Detroit News

Property assessments in Metro Detroit last year fell further than they have in a quarter century, sparing only the poorest communities and triggering fears of a painful contraction in municipal services.

Many property owners getting their annual assessments in the mail over the next several weeks will catch an intimate glimpse of the widespread damage done by foreclosures, layoffs and a wobbling Michigan economy.

But for homeowners well aware that their house is worth far less than it was a few years ago, the biggest shock may be when their tax bill arrives in July: Although their assessment went down, many will still see their taxes go up.

"This is the dark side of Proposal A," said Tony Fuoco, who assesses property for five area communities.

The 1994 law tied assessment increases to inflation, insulating homeowners from steep increases in market value. That same protection created a gap between market value and "capped value," allowing inflationary increases even when assessments go down. This year, the taxable value can still go up by 2.3 percent.

Loraine Schobloher, 76, is a retired medical transcriptionist in Troy who relies on pension and Social Security checks to make ends meet. She's upset the assessment on her Parkview Drive home has fallen as her tax bill has grown.

"I'm on a fixed income," she said. "If the taxes keep going up, as it stands now you can't even get rid of your house. You can't win."

Annual real estate studies by area appraisers quantified the value losses that real estate agents and home sellers have known for months. The sales studies help establish property assessments, upon which property taxes are based.

Eight communities in the region saw double-digit drops, including Grosse Pointe Park and Grosse Pointe Woods. Only two communities -- Fenton and Royal Oak Township -- actually saw slight increases. For the counties and municipalities, the declining values will mean flat revenues, a trend likely to continue into 2009 and possibly 2010, said Steve Mellen, the equalization director for Macomb County.

And the drops in residential values mirror declines in other classes of property: industrial, commercial and agricultural. There were small gains in personal property.

"We're looking at (at) least two years for the tax system to recover," Mellen said. He's already told county officials, who are in negotiations with many of the county's employee unions, that they'll "be lucky" to collect as much in 2009 as they do this year.

In Center Line, where residential property values fell nearly 10 percent, city officials know that cuts loom. The only question remaining is how deep.

"Our situation is horrendous," said Center Line Mayor Mary Ann Zeilinski. "We've exhausted any reserve funds we had accumulated over the years."

Summer Minnick, director of state affairs for the Michigan Municipal League, said that drop in values will have a serious impact on municipal coffers. Areas that have a lot of new homes and communities that had more new residents move in recently will lose the most because their Proposal A "gap" is so narrow.

"It's very different from community to community," Minnick said.

But she said the long-term impact on communities will continue long after the economy recovers because assessments will be tied to lower values.

"Cities will be holding the bag on the market for a long time," Minnick said.

Over the next several weeks, property owners will receive their assessments in the mail. Most will find that their individual decrease -- or in rare cases an increase -- will not match their community's decline. That's because the changes are not uniform: In some neighborhoods and price brackets, property values held firm. In many cases, the most expensive homes saw the biggest declines, officials said.

In Detroit, Hamtramck, Highland Park and other communities with less expensive housing stock, the sales showed home values didn't change, seemingly unaffected by the thousands of foreclosures in the communities, said Gary Evanko, Wayne County equalization director.

But foreclosures in Northville, Canton and Plymouth had a bigger impact, where $600,000 homes went into foreclosure and were sold for $400,000.

"That's a big drop," he said.

Upset homeowners will get the chance in the next few months to challenge their assessments. That's when the local boards of review meet to consider adjustments.

Fuoco, who attends the review boards in the communities he works for, knows it could be a trying time as people try to make sense of the seemingly contradictory facts: Assessment down, taxable value up?

"People are going to be expecting a tax break and it's not going to happen," Fuoco said. He anticipates being "bombarded" at the boards of review. "It's going to be an education issue."

Before Proposal A, a decline in property value meant a decline in taxes. Conversely, an increase in value produced a bigger tax bill.

"The tough boards of review were before Proposal A," said Gary Evanko, director of Wayne County's equalization department. "It fueled the whole tax revolt."

Now, homeowners have protections during rising markets and municipalities during declining ones.

In Berkley, homeowners will take, on average, a 5.2 percent hit on their assessment. But many will still pay more. All told, the city budget will likely decline by $180,000, finance director David Sabuda said.

"We're watching the bottom line closely but we've got to prepare for the worst case scenario," Sabuda said.

To cut costs, the city is considering bulk purchasing of gas and oil with neighboring communities as well as leaving many city positions unfilled. Personnel make up about 70 percent of the general fund budget, he said. "We're looking at everything," he added.

While falling home values have created a buyer's market, the growing disparity with their tax levy is sobering some homebuyers, observed Jolie Levine Warpool, a Realtor in Oakland County.

"Somebody is going to be scared to death their taxes are going to jump up big time," she said.

That reality is keeping Joel Warren, 28, of Commerce Township from closing on homes that, based on their ticket price, are considered a steal. He and his wife have been looking for a home in South Lyon to raise their growing family.

One foreclosed home he was eying is listed at $240,000, down from $300,000 when it last sold in 2002. Once purchased, however, the taxes would remain at the 2002 level.

"That could be a difference of hundreds of dollars a month," Warren said. "It's hard to swallow."

Falling value, rising taxes

How can taxes rise when houses are worth less?

Under 1994's Proposal A, homeowners are protected from steep increases in the market value that can inflate tax bills. The taxable value of a property can rise only at the rate of inflation or 5 percent, whichever is lower. That is called the "capped" value of the home. The taxable value is the lower of either capped value or market value. Over time, a substantial gap can grow between the market value of a home and its capped value as both rise.
In cases where the homeowner has been in the same home for more than a dozen years, the gap between market value and capped value is wide and the taxable value rests with the capped value. Even in years of declines, if the capped value -- even with the inflationary increase -- is below the market value, the taxable value can still increase. This year that amount is 2.3 percent.
But for homes bought more recently, the decline could trigger a reduction in taxes. For example, if the market value of a home bought in 2001 falls below the capped value, the taxable value switches from the capped value to the market value, which is lower.

Source: Detroit News research

Nation's struggles threaten Michigan

But some say it's far from hopeless

January 23, 2008 Detroit Free Press

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

Beyond the gyrations on Wall Street lies a very real fear that Main Street Michigan is headed for more trouble as the national economy struggles.

The state has been losing jobs for seven years, probably stands to lose more this year, and predictions of a partial recovery in 2009 are based on the premise of no national recession this year, an increasingly dubious assumption.

"I don't think there's any doubt that the national weakness will bruise Michigan yet again," Dana Johnson, senior economist for Comerica Inc., said Tuesday.

Even so, the outlook Tuesday was far from hopeless.

The Federal Reserve trying to ride to the rescue with interest rate cuts will mean immediate relief for consumers and companies with adjustable rate loans.

"Having the Fed step in and take this ... action creates a level of hopefulness that they're taking significant steps to improve the economy," said Tom Shafer, president of Consumers Bank Southeast Michigan.

Johnson agreed that the economic stimulus applied by the Federal Reserve could soften any economic decline.

"There's still a real shot that this weak patch won't degenerate into a recession," Johnson said. "But if it does, I think it won't be a deep and difficult recession."

Even so, Michigan may have to brace for more pain. The likelihood that consumers will hold off on car buying because of falling stock prices and other worries would be bad news for Michigan's signature industry.

Those other worries include gasoline prices rising above $3 a gallon and the continuing slump in housing markets.

Fears of a recession have seen investors pummeling the stocks of many of Michigan's leading employers. General Motors, Ford, Dow Chemical, Pulte Homes and Kellogg, saw their stocks trading Tuesday at or near their 12-month lows.

Tough times also are hard on the state treasury. This month, state Treasurer Robert J. Kleine and other budget authorities issued lower estimates for tax revenues this year because of lower predictions of consumer spending.

Meanwhile, the federal government confirmed this month that Michigan's 7.6% unemployment rate for December remained the highest in the country. The national rate in December was 5%.

University of Michigan economists, in their annual forecasts of Michigan's economy in November, predicted the state would lose 60,000 payroll jobs this year after losing nearly 80,000 in 2007.

Yet how much more pain a national recession could inflict on Michigan is a matter of debate. Shafer suggested Tuesday that Michigan firms already have done most of the cutting they need to and won't necessarily trim their workforces much more.

"The message to Michigan is a little different ... because our businesses have been working in a very difficult environment for a protracted period of time," he said.

Even that assessment was tempered by realism of what a national recession could mean for the state.

"We want the rest of the nation to be strong because buying cars still makes a difference in Michigan," he said.

Overdue association fees by short-sellers hold up condo sales

January 20, 2008

By RUBY L. BAILEY
FREE PRESS STAFF WRITER

It took weeks, but real estate agent Caroline Lynch got two lenders to agree to take an $89,000 offer on a Howell condominium even though the homeowner still owed $132,000 on the mortgage. All that remained was to negotiate a discount on the $9,500 in delinquent association fees and charges from an attorney representing the association.

But neither the association nor its attorney would budge, said Lynch, who owns a brokerage firm bearing her name in Brighton.

The association and the attorney "were the only ones saying this can't happen because they need 100% payment," said Lynch, who added that two prospective purchasers walked away rather than pay the fees. "They're killing sales. It's just a nightmare."

Short sales -- sales in which mortgage holders agree to take less than they are owed to avoid foreclosing on the property -- are a last resort for homeowners trying to get out from under a mortgage they can no longer afford without the scar of foreclosure on their credit report. Sellers lose all equity.

Short sales often take longer to close, since banks often require mounds of paperwork and can refuse an offer. But condominium owners have an added hill to climb to get to the closing table for a short sale: delinquent monthly association fees.

Those fees are separate from the mortgage payment, but must be paid since, by law, the association can file a lien against the property. Associations use the fees to cover maintenance, amenities and some utilities.

It may sound like hardball, but the associations say they have no choice but to insist on full payment because the remaining homeowners would have to pay higher monthly fees if debts were forgiven.

Condos don't compromise

There are an estimated 20,000 community associations in Michigan, according to Community Association Institute (CAI), which represents community organizations. Nationally, 57 million people live in homes or condominiums with associations, according to the group."Their income is solely from the co-owners," said Robert Meisner, a Bingham Farms attorney representing 100 community associations in metro Detroit. "If they take a beating from one place, they're going to have to get it someplace else," he said, referring to the money.

Some associations may negotiate fees in individual cases, but Meisner said they have little sympathy for mortgage lenders who granted bad loans or buyers who bit off more mortgage than their salaries could cover, many through adjustable rate mortgages that are resetting at higher rates and increasing monthly payments.

"There really isn't any reason for the association to compromise," said Meisner. "The co-owner knowingly entered into a mortgage situation. Why shouldn't they," meaning association officials, "be paid 100% of the fees that they are owed?

"Realtors were making a ton of money," Meisner said. "Mortgage companies were making a ton of money. All of a sudden, because the cookie is crumbling, they expect the condo association to take a bath on it. I don't see any reason why they should."

Associations need the cash

Homeowners too cash-strapped to pay their mortgages will likely let the monthly fees lapse, real estate agents said. But many sellers don't realize that the same association that can dictate the exterior paint colors, the height of a fence or the size of a flagpole also can stop the sale of the property if monthly fees are not paid.

Late charges and attorney fees compound unpaid monthly fees and associations can pursue the property owner for the money even if the condo goes into foreclosure. If a court action ensues, the homeowner will be responsible for court and attorney costs as well, according to the state's Condominium Act.

"The homeowners are not aware of the impact of not paying the association dues or the effect of that on the sale of that property," said La Trenda George, a real estate agent for Re Reality LLC in Farmington Hills. George said a recent condominium sold through a short sale only after the lender reduced the price by $4,000 to cover 100% of the monthly payments owed to the association.

Michelle Winbush, 41, faces a short sale and delinquent fees on her Southfield condominium. Her employer, a spa, went out of business right after she bought the home three years ago. She held on for as long as she could with a job that paid less, but fell behind on her mortgage payments and the $160 monthly association fees.

Winbush, who moved to Los Angeles this year to begin a new career as a flight attendant, is hoping the lender will cover the delinquent association fees, but if not, "I don't have the money to give" the association, she said.

Some lenders are not willing to cover the fees and some condo owners are simply abandoning the properties, area agents and attorneys said. Those foreclosed properties further depress property values and hike monthly maintenance fees for remaining homeowners by associations desperate to cover their budgets.

"You got associations that are struggling to be able to pay their bills because of defaults," said Mark Makower, a state CAI board member and attorney. The state chapter represents 600 community associations in southeast Michigan. "They simply do not have the funds. Everybody wants to know, 'What do we do?' "

Makower suggests mortgage companies factor in monthly fees when approving a mortgage and that the fees be escrowed, like insurance payments or property taxes. Factoring in the fees could reduce the amount a buyer can qualify for, but could help assure the buyer is better able to afford the property -- including the monthly fees, Makower said.

The answer can't come soon enough for real estate agent Cindy Robinson. Robinson recently received an urgent call from a Highland Township condominium association. Her client, a young beautician who has listed her home in a short sale for $99,800, moved from the building. And the association had a question: " 'Who's going to pay for these fees?' "

"All we're trying to do is sell it. What a mess."

Lenders Rethink Home-Equity Loans

As Delinquencies Rise, Some Companies Are Walking Away
Instead of Foreclosing, While Others Get Stingy With Borrowers

January 16, 2008; WSJ
By RUTH SIMON

Rising delinquencies and falling home prices are putting home-equity lenders and borrowers in a tightening bind.

As home values continue to sink, mortgage companies are increasingly walking away from delinquent home-equity loans rather than pushing borrowers into foreclosure. At the same time, some lenders, in an effort to protect against future losses, are looking at scaling back home-equity lines of credit held by certain borrowers who are still making payments.

Mortgage companies typically begin sending foreclosure notices when a borrower is more than 90 days behind on payments and can't come up with a plan to resolve the problem. But in many cases, the companies have concluded that they are better off not foreclosing on borrowers who can't make payments on their home-equity loans and other types of second mortgages.

"More often now than ever before we are writing off the loan" when borrowers fall behind on home-equity payments, says Bob Caruso, Bank of America Corp.'s national servicing executive. "The customer still owes the money, but it is no longer an asset on our books." That doesn't let the borrower off the hook: The lender keeps the lien in place, however, in the hopes that it will receive some money when the property is sold.

This approach can make it less likely that borrowers will lose their homes if they can't make their second-mortgage payments. But it can also complicate efforts to work out a resolution to the borrower's loan problems -- and the borrower may still have to contend with the loan down the road, such as when he refinances or sells the property, for example.

Home-equity lending exploded during the housing boom as homeowners took advantage of rising home values and tapped their equity to fund spending. Others flocked to so-called piggyback loans, which allowed them to finance as much as 100% of a home's value by combining a mortgage with a home-equity loan.

With home values falling, lenders began last year to cut back on originations of new home-equity loans. 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.

The dollar value of home-equity loans outstanding stood at $1.1 trillion in the third quarter of 2007, according to the Federal Reserve.

Most borrowers continue to make their home-equity payments. But delinquencies are climbing. Some 4.65% of fixed-rate home-equity loans were delinquent in the fourth quarter of 2007, up from 3.11% a year earlier, according to Equifax and Moody's Economy.com. Delinquencies on home-equity lines of credit nearly doubled, to 2.01% from 1.07%, during this period. "The loss rates are climbing at all lenders," says Frederick Cannon, an analyst at Keefe, Bruyette & Woods.

Moody's Economy.com estimates that losses on home-equity loans outstanding as of June 30, 2007, could ultimately total $58 billion -- on top of $278 billion in losses on mortgages.

When companies write off these loans, it reflects the grim economic realities facing lenders and investors who own home-equity loans. To foreclose, the holder of the home-equity loan must buy out the owner of the first mortgage. But when home prices fall, the property's value often isn't enough to cover the first mortgage, any past-due interest or fees, and the costs associated with foreclosure. That means in situations where there is a first mortgage, the holder of the home-equity loan can actually wind up deeper in the red by foreclosing.

"You can make a horrible decision by choosing to foreclose," says Steve Bailey, a senior managing director with Countrywide Financial Corp. It "can be a worse decision than doing nothing."

But such moves can complicate efforts to resolve borrowers' problems. "The seconds don't have any incentive to resolve anything," says Babette Heimbuch, chief executive of FirstFed Financial Corp., based in Santa Monica, Calif., which makes loans through its banking subsidiary. "It's very frustrating."

In addition to walking away from delinquent loans, some banks are hoping to stave off future problems by reducing the amount of credit available to certain borrowers with lines of credit. Washington Mutual Inc. late last month notified about 3,200 of its customers with home-equity lines of credit that it was reducing the maximum amount they could borrow. The borrowers "have experienced an adverse change in their financial situation, as evidenced by a substantial credit-score reduction," a company memo said.

The memo added that in January, additional reviews would "result in additional decreases for borrowers with recently declining credit scores, as well as those with additional risk factors," such as declining home values.

A Washington Mutual spokeswoman says the action "was taken as part of our normal course of business" and that the company has "programs that have been in place for years that increase, decrease, block and suspend lines of credit based on a number of factors," including the borrower's payment status, credit history and property value.

Citigroup Inc.'s Citibank unit says that under the borrower's credit agreement, it is permitted to freeze home-equity advances or reduce credit limits if the home's value has declined below the original appraisal, or if it reasonably believes the borrower won't be able to make the required payment. Such adjustments are increasing in the current market environment, a company spokesman says. David Stevens, who runs the mortgage operation at Long & Foster Real Estate, based in Fairfax, Va., says he's received several calls from borrowers whose home-equity lines have been reduced because of falling property values. "It's a very prudent move, given the circumstances in the market today."

USAA Federal Savings Bank recently told one customer it was suspending his ability to borrow on his home-equity line after a review showed that the value of his home had declined since the line was originated and because of information on his credit report. "As with many other creditors, we are reviewing all home-equity lines of credit to ensure our credit exposure is commensurate with current market conditions and taking action where necessary," the bank said in a letter sent to the borrower. A USAA spokesman says he can't comment on the specific situation without more information, but adds that such reviews are done on a "case-by-case basis."

Such moves could become more common down the road. Wachovia Corp. doesn't currently make such adjustments, but "there is a reasonable probability" that it could do so in the future "based on what we're seeing in the marketplace," says Walter Davis, head of retail credit.

National City Corp. says it is closely monitoring the housing market and its credit portfolio, and may reduce the credit lines of some borrowers on a "case-by-case basis" in markets where home values have declined, a spokeswoman says.

In some cases, servicers are telling borrowers they will take 10 cents on the dollar to settle their claim, says Micheal Thompson, director of the Iowa Mediation Service, which runs a hotline for homeowners in financial distress. In other cases, they are selling these loans at large discounts to third parties, says Kathleen Tillwitz, a senior vice president at DBRS, a ratings agency.

Coming up with a plan that will get borrowers back on track is easiest if both the mortgage and home-equity loan are held by the same party. Countrywide will sometimes "whittle down" the payment on the second mortgage to come up with an amount that the borrower can afford to pay for both mortgages, or even eliminate that payment, Mr. Bailey says. The company doesn't publicize such efforts, he adds, because that might encourage "people not to make their payment and see what happens." In either case, "the borrower still owes the principal," Mr. Bailey says.

Solutions can be harder to come by when the two loans were made by different lenders and are held by different parties. "The people in the first position will say, 'Until you get a deal with the second, why should I make a deal with you?'" says Iowa's Mr. Thompson. Second-mortgage holders are often reluctant to approve a short sale or deed in lieu of foreclosure that could wipe out their claims, he adds.

FirstFed says it encourages borrowers in financial distress to contact the owner of their home-equity loan and sometimes offers to buy out a home-equity loan with no current value for a small sum -- $2,000, for example -- so that the entire mortgage can be restructured.

But the company says such offers are often rejected. "It's not worth their while to take the $2,000" because of the costs associated with evaluating the offer and releasing the borrower from the lien, says Ms. Heimbuch, the company's CEO. "The second forces you into foreclosure."

Housing Crisis Looms Larger in Campaign

January 11, 2008 WSJ
By ALEX FRANGOS

PONTIAC, Mich. -- The sour housing market is taking on added significance in the presidential race as candidates look for votes in foreclosure-heavy states such as Michigan, Nevada and Florida.

With an eye toward Michigan and Nevada next week, New York Sen. Hillary Clinton mentioned the foreclosure crisis in her New Hampshire victory speech and was scheduled to talk about it with voters last night in Las Vegas. Former Arkansas Governor Mike Huckabee talks about it in a new television advertisement on the economy that he is airing in Michigan.

"You can't have 44 foreclosures a day in a city like Las Vegas and not have somebody come out and ask some questions about it," says Marcus Conklin, a Nevada Democratic state assemblyman who is leading a committee examining the mortgage issue. He hasn't endorsed a candidate.

Economic hot buttons like globalization and job outsourcing may resonate with voters, but it is the housing market that is directly affecting more voters' wallets. Price declines are limiting homeowners' ability to move or to tap home-equity loans. Job losses are heavy in housing-related industries. Several states, including Nevada, are expected to see government budget coffers suffer as the local economy reels.

Yet candidates must be careful in pitching housing proposals. "The candidates need to thread a very small needle, showing they have sympathy for those cheated out of homes, but not offering a government handout to businesses or individuals who deliberately took on huge risks," says Elizabeth Warren, a Harvard Law School professor. Ms. Warren has consulted with several Democratic camps but isn't on staff with any of them.

The top three Democratic candidates have called for various measures that move beyond the current administration's effort to get lenders to voluntarily modify troubled loans. The Democratic plans share elements, including the creation of a federal fund to help homeowners refinance onerous mortgages, legal protections for lenders to free them to alter individual mortgage terms, and tighter regulation of lenders to prevent future crises.

But the plans from Democrats contain some differences, which could become accentuated in Nevada, and later, in big states such as California. Both Mrs. Clinton and John Edwards have said that if the mortgage industry doesn't voluntarily agree to enlarge and lengthen the terms of a plan backed by Treasury Secretary Henry Paulson and agree to a foreclosure moratorium, they would force the lenders to do so through legislation.

Barack Obama opposes making laws to force such moves. An Obama adviser says that a mandatory moratorium and rate freeze -- which could force lenders to hold loan interest rates below market levels -- could deter them from re-entering the market and would delay the return of liquidity.

There could also be legal issues, the adviser says. "There would certainly be some serious constitutional issues to consider from the government trying to directly change the terms of millions of mortgage contracts after the fact," the adviser says. Mr. Obama thinks the industry should make these changes voluntarily.

Republicans for the most part support President Bush's approach on the issue, to get lenders and mortgage-bond investors to agree voluntarily to modify some troubled loans. They haven't unveiled separate plans like the Democrats, but two candidates, Mitt Romney and John McCain, have indicated that more might need to be done should the situation worsen, a view echoed by Mr. Paulson earlier this week.

"There's clearly an additional need to consider other measures," Mr. McCain said Wednesday. "I will know within a very short period of time whether these policies are succeeding or not," he said of Mr. Paulson's plan to persuade lenders voluntarily to modify some troubled mortgages. Mr. Romney has called for the creation of a business cooperative that would pool the bad loans in one entity that would then be able to handle individual solutions with homeowners. Romney's aides also say he favors increased funding for a government chartered housing-services agency called NeighborWorks America.

Mr. Huckabee mentions the housing market in his new ad. But he hasn't proposed government intervention. He said in Iowa that he fully supports the administration's voluntary plan.

Messrs. Obama and Edwards support a bill currently in the Senate to amend bankruptcy law to allow judges to alter the terms of a mortgage. Advisers say such a move would give troubled homeowners more leverage in getting lenders to alter loan terms before filing for bankruptcy.

Clinton advisers say that while the senator isn't opposed to such a move, she believes other measures should be taken to help distressed homeowners before they get to the point of a bankruptcy hearing. "You don't want courts sorting out two million people," says Lawrence Benn, Mrs. Clinton's deputy economic director, referring to rough estimates of the number of home-foreclosure notices that have been sent nationwide. "There needs to be something in an earlier stage than bankruptcy."

Mr. Obama has a proposal that others don't: Giving the majority of homeowners who don't itemize deductions on their federal tax returns a separate home-interest deduction to ease the burden on troubled mortgage holders. "Virtually no one facing foreclosure is an itemizer," says Obama economic adviser Austan Goolsbee. The move would be equivalent to reducing the interest rate on a typical mortgage by 0.75 percentage point and would cost the Treasury $5 billion to $8 billion a year, according to Mr. Obama's campaign.

But doing nothing more could bring peril from voters. Mark Pisco, 55 years old, a homebuilder from Milford, Mich., came to see Sen. John McCain speak Wednesday at an airplane hanger in Pontiac. He was somewhat disappointed with Mr. McCain's economic message, which centered on job retraining and technology, not more urgent help for housing and the economy. "It's a long-term plan. It doesn't do anything in the middle of the Michigan recession," he says.

Last year was the first in decades that Mr. Pisco, a longtime Republican, didn't build a single new home. He hired fewer workers as his business was limited to renovations. "It's a very tough time," he says. To prevent future crises, the government needs "tighter regulation on the banking industry," he says. Lenders "actually put people in trouble by giving those subprime loans. They created this disaster. They buried us," he says.

Housing industry wobbly; pickup projected

Countrywide shares sink; KB Home results abysmal

January 9, 2008 Detroit Free Press

FREE PRESS STAFF AND NEWS REPORTS

Shares of Countrywide Financial Corp., the nation's largest mortgage lender, sank to an all-time low Tuesday as a major homebuilder offered a grim outlook for the industry and the Bush administration signaled it is growing more concerned about rising mortgage defaults.

The New York Stock Exchange temporarily halted trading of Countrywide before the company issued a statement denying rumors that a bankruptcy filing was imminent.

KB Home reported a fourth-quarter loss of $772.7 million versus a loss of $49.6 million in the same period in 2006 and said there are no indications that the housing market is stabilizing.

On Tuesday, President George W. Bush conceded, "It's going to take a while to work through the downturn," and Treasury Secretary Henry Paulson said he is concerned about additional home defaults. Paulson added the administration is exploring expanding a deal it brokered with lenders last fall to include relief to people who borrowed at conventional rates as well as those with subprime, adjustable-rate loans.

Still, the National Association of Realtors said Tuesday it expects the sales pace of existing homes to pick up significantly in the second half of the year and projected U.S. existing home sales would increase 0.9% this year to 5.7 million.

In hard-hit southeast Michigan, Gerry Banister, a real estate agent with Re/Max Showcase Homes in Birmingham, said Tuesday that buyers and sellers are starting to feel optimistic. In the past two weeks, he has seen a marked increase in traffic on his Web site from people interested in listings for homes and condos.

"People want to be positive and want to get back in, whether it's buying a house or a car," Banister said.

Mortgage help not easy to get

Monday, January 7, 2008

Nathan Hurst / The Detroit News

SOUTHFIELD -- Some Metro Detroit homeowners struggling with rising mortgage payments say promises of help from lenders are turning up empty.

Some homeowners who are still paying their adjustable-rate mortgages on time -- but are struggling to do so and are worried about keeping up when the payments adjust even higher -- are finding that their mortgage company won't help them until they actually fall behind.

In short, the time-honored advice to take action before you get in trouble, and contact your lender to work out a solution, doesn't appear to hold true in these days of soaring foreclosures and tighter credit. Lenders aren't required to bail out homeowners when their mortgage rates and payments adjust upward, even though they've been under enormous pressure from lawmakers and consumer groups to do so.

In December, President Bush called on lenders to relax their rules and negotiate lower interest rates to help homeowners avoid foreclosures. Critics said Bush's plan was both limited in scope and voluntary, and said many homeowners stuck in a bad situation wouldn't get the help they needed. It appears the critics were right.

"We're seeing a lot of homeowners who are doing exactly what the banks are asking them to do and being told there's no help for them," said Pava Leyrer, a mortgage broker in Grandville and former president of the Michigan Mortgage Brokers Association. "They're being told that because they haven't missed a payment yet, the bank can't do anything."

The predicament has consumers in a Catch-22: They're being told that even with spotless credit, they can't get help. Instead, they must miss payments, and even then assistance from the lender isn't a certainty.

Lenders maintain they're doing what they can for struggling homeowners -- such as delaying an interest rate adjustment or lowering the interest rate cap on a homeowner's ARM. They also look at each person's situation to determine if they can refinance an ARM to a fixed-rate loan.

But they admit that today's tight credit market is making it more difficult to help.

"The rules for writing mortgages have changed," said Robert Rahal, president of Shore Mortgage in Birmingham, which sells only federally backed home loans. "In many cases, lenders are having to cut back on who they offer new loans for, and the refinance sector is feeling the pinch as well."

Two jobs just to keep up

Dan Przewlocki of Memphis is one homeowner caught in that pinch.

Przewlocki purchased his four-bedroom, three-bath colonial on 15 rural acres in Saint Clair County for $310,000 three years ago with an adjustable-rate mortgage through Washington Mutual, the Seattle-based bank and mortgage lender.

Przewlocki, a plant maintenance worker and National Guard reservist, purchased the home using a product called an Option ARM. That type of loan, geared toward those with fluctuating paychecks, establishes a low monthly payment -- that usually covers only interest -- and gives a consumer the option to pay more during months when income is higher.

"I figured it would be a good plan for me," Przewlocki said. "I wanted to pay more while I was working my regular job and less when I'm on active duty, since my pay is less."

For the first year, his ultra-low teaser rate of 2 percent meant payments were affordable, and Przewlocki said he was easily able to pay down the principal on his loan. He was expecting his first adjustment -- which boosted his interest rate to 6.5 percent -- but said a more recent increase to 7.625 percent has made his home nearly unaffordable.

"Things are extremely tight," Przewlocki said. "I'm working a second temp job just to pay the interest down."

Przewlocki said he knew in October that keeping up with the mortgage would be a problem. So he contacted Washington Mutual in hopes of either refinancing to a fixed-rate loan or modifying the terms of his current ARM.

And when he received a letter from the lender in November touting mortgage refinancing as a way to deal with higher adjusting payments on his loan, Przewlocki figured the company would be willing to help.

Just seven days later, Przewlocki received a letter saying he couldn't refinance his loan. When he called to ask why, he was told that because he hadn't yet missed a payment, there wasn't anything the company could do.

"Essentially, I'll have to ruin my credit before they'll modify my loan," Przewlocki said. "I was told blatantly on the phone, 'Skip a payment and maybe we can do something.' But I've got perfect credit. I shouldn't have to do that."

Multiple Washington Mutual spokesmen and women declined to comment on Przewlocki's case, citing company policy that bars them from making statements about specific consumer accounts.

But company executives said they're doing all they can to help troubled homeowners. Initiatives have included setting up a hotline for those concerned about making their mortgage payments, halting the sale of risky subprime mortgages that are more likely to default and committing $2 billion toward helping subprime borrowers refinance into more stable loans.

"Our firm belief is that early intervention combined with expanded options is instrumental to helping our customers find ways they can overcome financial obstacles to keep their home," said David Schneider, president of Washington Mutual's home loans division, in an early December statement to investors.

"We view foreclosure as a last resort and encourage our customers to contact us as soon as they anticipate difficulty in making payments on their mortgage so that we can discuss their various options."

Credit counselors step in

Still, because of the credit crunch and tougher mortgage rules, lenders are finding it increasingly difficult to help homeowners, especially those who are upside down on their homes, which means they owe more on their loans than their home is worth. That's especially prevalent in markets such as Michigan where home prices have declined sharply.

The new tighter lending standards, prompted by the subprime mortgage meltdown, require homeowners to either have some equity in their home or come up with a down payment before they can refinance from an ARM to a fixed-rate loan.

Natasha Swoish, manager of bankruptcy counseling and education services at GreenPath Inc., a Farmington Hills-based credit counseling service, said consumer trouble with lenders has caused a growing number of borrowers to seek help through outside agencies like hers.

"Homeowners are having to look at a number of different options," Swoish said. "In many cases, there are ways to work with lenders but they are working with many more people needing help these days."

Swoish advises homeowners to call a consumer credit counseling agency or other financial adviser that may be able to mediate between a borrower and lender.

Crisis squeezes lenders too

Business considerations also limit lenders' ability to provide philanthropic loan modifications, said Rahal, the Shore Mortgage president.

Modifying the terms of a loan to include a too-low interest rate could cause the bank to actually lose money on the mortgage, he said, and that wouldn't make the bank's investors very happy.

"In many cases, these loans are producing at most a razor-thin margin for the lender," Rahal said. "For lenders that are already on the edge, every drop in an interest rate for a loan can be a step closer to death."

In addition, many home mortgages are bundled and sold to investors, who expect a certain amount of return for the risk of carrying the loans. Banks working with such investors try to avoid lowering interest rates that could make the mortgages more difficult to sell.

Still, lenders are trying to work with the flood of customers trying to refinance, said Mike Kruczek, chief lending officer at Dearborn Federal Credit Union. "We're seeing a lot of people approaching us worried over their home loans," Kruczek said. "In most cases, there's a solution."

Countrywide Financial, a large national lender that has been at the center of the subprime market meltdown, said it has made significant strides in helping troubled mortgage payers. In November, it said it modified the terms of 12,565 home loans and worked out other foreclosure avoidance measures with another 2,000 homeowners.

Upside down, at a dead end

Getting help can become even more convoluted when a homeowner's lender goes under or is sold, as is the case for Donnell and Heather Freeman of Southfield.

The Freemans are barely making their $2,600-a-month mortgage payment. They purchased their four-bedroom, three-bath colonial with a two-car garage two years ago for $190,000 with a mortgage from American Home Mortgage, which has since entered bankruptcy.

Heather Freeman, who works as a customer service representative for DTE Energy, said she and her husband have been scrounging for overtime at work to make their house payment, which has more than doubled in less than two years under the terms of their ARM.

They tried contacting American Home Mortgage in December to modify the terms of their loan, but because the company is transitioning to new ownership, the Freemans were told they would have to look for help elsewhere.

Because the value of their home is only about $165,000, according to a recent assessment, they would need to pay thousands of dollars up front, money they don't have, for a more favorable mortgage.

"There's help being offered everywhere, it seems, but not for me in my situation," Heather Freeman said. "I have top tier credit, and I want to stay in my house. I shouldn't have to throw one away for the other."

A shaky house of cards: How the failure of subprime mortgages hurts the overall economy

January 6, 2008

By JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

Given the huge piles of consumer and business debt out there, many U.S. residents seem to think easy credit is their birthright. That cozy feeling that a loan is always within reach is getting rudely shaken. An international credit crunch is upon us. The subprime mortgage crisis spawned it, but everything from home-equity loans to business lines of credit may be touched before it's over.

Sectors as disparate as auto-parts suppliers and developers of riverfront condos in Detroit are feeling the pinch of tighter credit, battering an already weak Michigan economy. "The unwinding of debt is all encompassing. It's from the little homeowner out there to the big corporation," said Larry Moss, senior vice president for the Raymond James investment firm in Birmingham.

The credit crunch overlaps with other negative trends, most noticeably the poor housing market and weakening consumer spending. The fear is that tighter credit and weaker spending will reinforce and amplify each other, creating a downward spiral leading to a recession.

"Once you get in that cycle, then it becomes really, really scary," said Amiyatosh Purnanandam, a professor of finance at the Ross School of Business at the University of Michigan who has studied tight-credit periods.

Key to survival

Credit -- the ability to get a loan -- will determine much of the course of economic activity in 2008. Among much else, credit or the lack of it will determine whether several auto suppliers survive a trip to bankruptcy court, whether condominium projects along Detroit's east riverfront get built, and whether millions of consumers take a vacation, buy a car or purchase a house.

For Ray Parker, a Detroit commercial real estate broker, the weakening economy has meant some personal tightening up. Parker recently refinanced his Southfield condominium with a new mortgage. He got a shock when the home appraisal came in $20,000 below what he had paid for his condo because of a real estate market battered by the subprime crisis.

"I'm trying to pay my credit cards off in case things don't get much better in the real estate business. They have not been great," he said.

Easy credit is a distinctly modern phenomenon. In the tight-money era of the 19th Century and early years of the 20th, farmers, tradespeople and ordinary working folks found credit hard to come by. An old joke defined a banker as a man who would lend money only to those wealthy enough not to need it.

After World War II, however, the G.I. Bill helped millions of U.S. families buy houses with government-backed mortgages. Banks eager to grow began to look for new customers and new ways to lend money.

The advent of computers opened new possibilities in mass marketing of credit cards in the 1980s and '90s. Niche marketing -- creating a loan product or line of credit for every conceivable borrower -- became the norm.

Today, it's the rare U.S. adult who doesn't carry at least some debt: a mortgage, a car loan, a student loan, a home-equity line of credit or credit card debt. And the amount of that debt is rising rapidly.

Ten years ago, consumer debt in the United States, excluding home mortgages, totaled $1.24 trillion. Today, Americans have roughly doubled the amount of non-mortgage debt they carry, to $2.5 trillion, or $8,300 for every man, woman and child in the country.

This easy credit helped make consumers the drivers of the U.S. economy, with consumer spending accounting for an estimated 70% of economic activity in the nation.

But at a price: A typical homeowner's debt burden including mortgages and other types of credit now stands at about 18% of disposable income, up from under 14% in 1980, according to the Federal Reserve Board.

For businesses, too, credit is lifeblood. Lines of credit and, for larger corporations, commercial paper, bonds and other forms of borrowing are as essential as any raw materials.

"I don't think businesses ever got to the point where credit was thrown at them the way consumers did," said Justin Moran, a Grosse Pointe banking consultant, "but certainly the so called middle market, small business credit, is a growing phenomenon."

That's why the current credit crisis has so jarred the U.S., and global, financial system. In an economy greased by relatively easy credit, the inability to lend or borrow on the usual terms threatens not just consumers, but industry after industry.

Suppliers socked

Take auto suppliers. The credit crunch has come at a bad time for auto suppliers trying to leave bankruptcy. Troy-based Delphi Corp. and Rochester Hills-based Dura Automotive Systems Inc. expected to leave Chapter 11 by the end of 2007. But they have delayed their exits until this year because they've had trouble securing financing.

Only making things worse, U.S. vehicle sales are expected to drop below 16 million this year, perhaps even hitting a 10-year low, prompting banks to become more cautious when it comes to lending in the automotive sector.

"The widespread belief that there's going to be a very slow six months in the first half of 2008 is making people nervous," said Jim Gillette, an auto analyst with CSM Worldwide.

Relaxed standards

In theory, bankers make loans only to credit-worthy borrowers.

"We used to say, the best way to train a loan officer is to make him collect his bad loans," Moran said.

But through the years, lenders occasionally relaxed standards to such a degree that billions of dollars were risked on shaky loans, triggering an eventual collapse. The savings and loan debacle of the late 1980s proved one such episode, which devastated commercial real estate markets in Detroit and elsewhere.

This time around, the slack standards allowed millions of high-risk borrowers to get easy home mortgages. When this so-called subprime market collapsed beginning about a year ago, ordinary working people bore the brunt.

By some estimates, nearly 2 million U.S. residents will lose their homes to foreclosure this year, with more foreclosures coming in 2008 as low-rate adjustable mortgages reset to higher and less affordable rates.

But the damage from the credit crunch, while concentrated in the subprime mortgage market, has spread far beyond it. Already, borrowers with good credit ratings are paying higher fees and having to put more money down to get a standard mortgage.

Linda Ross, a veteran real estate agent with Hall & Hunter in Birmingham, said that just a few years ago bankers would lend homebuyers whatever amount they wanted. Recently, though, she had a client who, even with a secure job and a salary in the range of $60,000 a year, couldn't get a mortgage without having a parent co-sign the loan.

"They've really tightened up because they've gotten stuck with all those houses," Ross said of lenders.

The credit crunch, combined with the slump in home sales, has delayed many planned residential developments, like the east riverfront condominium developers in Detroit. Those projects, including those being developed by sports and business leaders Dave Bing and Jerome Bettis, were supposed to have groundbreakings in 2006, but skepticism by banks has delayed construction until this year at the earliest.

How it happened

How did a home mortgage problem seep into the auto supplier and other unrelated industries?

It begins with what happens to a home mortgage once the loan is made. Banks and other lenders typically bundle up hundreds or thousands of their mortgage loans and sell them to an agency or company such as Fannie Mae or Freddie Mac, which create an investment security, or bond, backed by the underlying mortgage payments.

The creators of these bonds then sell them to major pension funds, insurance companies and other investors handling billions of dollars. Wall Street went one step further by spinning off a whole range of exotic investment vehicles tied to these underlying mortgage assets.

As the subprime loans began to fail a year ago, many of these major investors realized that the mortgage-backed assets they held in their portfolios were not worth what they thought. So financial giants like Merrill Lynch, Citigroup, UBS and others began to take billion-dollar write-offs, fire their chief executives and otherwise scramble to stay ahead of the debt bomb.

With so much uncertainty over which assets are still good and which are fatally weakened by the subprime disaster, these major lenders have begun to tighten up credit lending of all kinds.

Purnanandam of U-M has looked at the impact of a previous credit crunch in the late '90s on the U.S. steel industry. The impact was two-fold: A general economic slump meant fewer orders for steel producers, and then bankers' skittishness about lending meant fewer dollars lent to steel companies to carry them through the rough spot.

Auto analyst John Casesa of Casesa Shapiro Group told the Financial Week news service in December that the credit crunch is hurting Cerberus Capital Management, the private-equity owner of Chrysler, and might seep into Chrysler's operations.

Other credit sources

Nervousness on the part of lenders is pushing many business borrowers toward alternative sources of credit.

As home values drop, it is becoming harder for people who want to start businesses to get the money they need through home equity loans. So they're turning to places like Ann Arbor's Center for Empowerment and Economic Development, which offers commercial loans of as much as $35,000.

"What we're also seeing is not only people coming to us, but that the banks are coming to us to ask us to participate in the loan," said Michelle Richards, executive director of the Ann Arbor group.

And there's no question that the economic outlook is worsening. Moody's Investors Service reported in December that it had given negative outlooks or reviews for possible downgrade to over 90% of homebuilders, 32% of restaurant companies and 33% of building material companies.

The real threat is that this lending squeeze will so choke off new investment and consumer spending that the nation's economy tips into a recession. If that happens, the easy credit of the past few years could morph into something a whole lot more painful.