Home sales, prices decline

January metro Detroit figures are worse than last year's

BY GRETA GUEST • FREE PRESS BUSINESS WRITER • February 26, 2008

Home sales and prices continued to trend down nationally in January, according to figures released Monday.

Sales of existing homes in January fell 0.4% compared with December and were off 23.4% below the pace in January 2007.

The National Association of Realtors said that a seasonably adjusted annual rate of 4.89 million units were sold in January, compared with the 4.91 million sold in December and the 6.44 million sold in January 2007.

The national median existing home price fell by 4.6% to $210,100 from last January.

The fall-off for home sales in metro Detroit was much steeper, according to figures compiled for the Free Press from register of deeds offices in the tri-county area.

• In Wayne County, home sales fell 34% to 2,208 in January compared with January 2007.

• In Oakland County, home sales fell by 27% to 1,117.

• In Macomb County, sales dropped 40% to 864.

• In the city of Detroit, sales plunged 41% to 1,053.

Total housing inventory rose 5.5% at the end of January to 4.19 million existing homes for sale, or a 10.3-month supply at the current sales pace.

The national Realtors group said that as limits for FHA loans increase that should stimulate sales growth this year.

"We should see some movement of pent-up demand by this summer, but higher loan limits need to be implemented fully and promptly to have maximum benefit," said Richard Gaylord, president of the Realtors group.

Nation's housing prices see largest decline in 20 years

By GRETA GUEST • FREE PRESS BUSINESS WRITER • February 26, 2008

Prices of existing homes plummeted nationally through 2007, ending the year down 8.9% -- the largest decline in 20 years, according to data released this morning.

In comparison, during the 1990-91 housing recession home prices fell 2.8%, according to the S&P/Case-Shiller Home Price Indices.

“We reached a somber year-end for the housing market in 2007,” said Robert J. Shiller, a Yale University professor and chief economist of MacroMarkets LLC. “Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates.”

In metro Detroit, home prices fell 13.6% through the end of December as compared to a year ago.

But some of the markets that had the greatest price runups during the housing boom are now suffering the biggest drops. Miami remains the weakest market in the country with home prices falling 17.5%, followed by Las Vegas and Phoenix with 15.3% drops and San Francisco with a 10.8% drop.

Charlotte, Portland and Seattle are the only three metro areas with positive annual growth rates, the index found.

Home Sales Give Some Relief

By KELLY EVANS and JOHN FLOWERS

February 26, 2008; Wall Street Journal

Sales of existing homes in the U.S. fell slightly in January, offering a bit of relief from the huge declines of recent months, but analysts said prices must fall further to help clear the oversupply of houses on the market.

The continued weakness in housing pushed down Lowe's Cos.' fiscal fourth-quarter net income by 33%, according to the home-improvement retailer. Lowe's Chairman and Chief Executive Robert A. Niblock said the next several quarters will be challenging "as industry sales are likely to remain soft."

The National Association of Realtors said home resales slipped a seasonally adjusted 0.4% last month from December to an annual selling pace of 4.89 million units. That was 23.4% below the pace recorded a year earlier. Condominium and co-op sales slumped but sales of single-family homes rose 0.5%, the first monthly increase in 11 months.

At January's sales pace, it would take 10.3 months to sell the houses currently on the market. That is up from 9.7 months in December.

The overall median sales price for existing homes in the U.S. was $201,100 in January, down 4.6% from $210,900 a year earlier. Housing experts say that potential buyers are waiting for prices to drop further before jumping back into the market.

Mr. Niblock said Lowe's sales were below expectations "as we faced an unprecedented decline in housing turnover, falling home prices in many areas and turbulent mortgage markets that impacted both sentiment related to home-improvement purchases, as well as consumers' access to capital."

On top of the housing-market downturn, the fourth quarter is typically the weakest for home-improvement retailers as colder weather curtails building and renovation projects.

For the quarter ended Feb. 1, net income at Lowe's slumped to $408 million, or 28 cents a share, from $613 million, or 40 cents a share, a year earlier. Net sales slipped 0.3% to $10.38 billion as same-store sales declined 7.6%.

In November, Lowe's projected earnings of 25 cents to 29 cents a share on a 3% increase in revenue, with same-store sales declining 3% to 5%.

Gross margin fell to 34.9% from 35.4%.

Lowe's forecast fiscal first-quarter earnings of between 38 cents and 42 cents a share on revenue growth of 2% and a same-store sales decline of between 5% and 7%. The company also expects fiscal 2008 earnings to be between $1.50 to $1.58 a share on revenue growth of 3% and a same-store sales decline of 5% to 6%.

Analysts' mean estimates were for first-quarter earnings of 43 cents a share on revenue growth of 4% to $12.61 billion, and 2008 earnings of $1.74 a share on revenue growth of 5% to $50.75 billion.

Home Depot Inc., the U.S. market leader in home-improvement products in terms of revenue, is scheduled to report earnings today.

The home-sales data, which some interpreted as suggesting the worst may be over for the housing market, were credited with helping fuel gains on Wall Street yesterday. In 4 p.m. composite trading on the New York Stock Exchange, Lowe's rose 91 cents, or 3.9%, to $24.50. Home Depot gained $1.05, or 3.8%, to $28.82.

Home Resales, Prices Decline

February 25, 2008 WSJ

By JEFF BATER

WASHINGTON -- Existing-home sales fell for the sixth month in a row during January as consumers stood on the sidelines watching prices slide for property.

Home resales fell to a 4.89 million annual rate, a 0.4% decrease from December's revised 4.91 million annual pace, the National Association of Realtors said Monday. Originally, the NAR estimated sales at 4.89 million in December.

The median home price was $201,100 in January, down 4.6% from $210,900 in January 2007. The median price in December was $207,000. Falling prices have kept would-be buyers from signing off on property as they wait in hope for still-lower price tags.

"Inventories are high, so it's not surprising prices are declining," NAR economist Lawrence Yun said.

Lenders have tightened their standards on home loans, contributing to the credit crunch that is restraining the U.S. economy. Those tighter standards have priced marginal buyers out of the market and made purchasing more difficult and costly for prime borrowers.

"Subprime loan and other risky mortgage products have virtually disappeared from the marketplace, and over the past five months, this has been reflected in soft but fairly stable home sales," Mr. Yun said.

The January resales level was above Wall Street expectations of a 4.81 million sales rate for previously owned homes.

The average 30-year mortgage rate was 5.76% in January, down from 6.10% in December, according to Freddie Mac.

Inventories of homes increased 5.5% at the end of January to 4.19 million available for sale, which represented a 10.3-month supply at the current sales pace. There was a 9.7-month supply at the end of December, revised from a previously estimated 9.6 months.

Regionally, existing-home sales in January were mixed. Sales fell 3.6% in the Northeast, 2.1% in the West, and 0.5% in the South. Demand rose 3.4% in the Midwest.

Metro home sales up by 15%

Detroit leads gains with almost double amount of closings over same period last year.

Friday, February 15, 2008
Louis Aguilar / The Detroit News

Sales of residential and condominium units in Detroit nearly doubled in January, compared with the same month a year ago, and the region overall got a nearly 15 percent bump, according to real estate data firm Realcomp.

The city of Detroit led the gainers, posting a 45.5 percent increase in the month, with 736 closings.

Seven Realtors who deal primarily in downtown Detroit area property said they have enjoyed some of their recent best sale months in December and January. Sales of houses and condominiums in Detroit jumped by a 33.9 percent in December 2007, compared to December 2006. No other market in the Metro Detroit area came close to that kind of increase last year, according to Realcomp.

Realtors credit tumbling prices, low interest rates and sales of foreclosed properties or properties hoping to avoid foreclosures.

"We're actually seeing revived interest this month in the units that haven't been drastically reduced. That's really good to see because January traditionally isn't the busiest month," said Ryan Cooley of O'Connor Realty in the Corktown neighborhood adjacent to downtown Detroit. "Interest rates are low. If you haven't been impacted by the mortgage situation, it's a good time to buy."

Among other January results:

• Livingston and Wayne counties also posted double-digit percentage growth. Livingston sales jumped 32.6 percent and Wayne 24.1 percent.

• Oakland County, usually the driver in residential real estate, has yet to see a significant bounce in sales. The county saw the lowest increase of all counties in Metro Detroit, with a 3.4 percent jump to 752 closings.

• Macomb County recorded a slight increase of 8.7 percent, or 436 closings.

Hope in avoiding foreclosure

2,600 pack Cobo to hear about options at forum

Wednesday, February 13, 2008

Kim Kozlowski / The Detroit News

DETROIT -- Connie Fields is one month behind on her mortgage payment, and she's scared.

Her husband has been out of work for a year and has been unable to find stable work. She works part time in between home-schooling two of their three children. Together, the couple save everything they can to pay their $841 mortgage, but in less than a week, they'll be two months behind if she can't come up with the payment.

That's why Fields was among more than 2,600 homeowners at risk of foreclosure who reached out for help at a daylong forum at Cobo Center.

"I don't want to lose my house," Fields said. "I don't want to live on the streets. I don't want to live with six people in a two-bedroom home with my mother."

Representatives from more than 50 mortgage companies, nonprofit organizations and government agencies spoke with residents about refinancing their homes, slashing interest rates or using other strategies to catch up on their mortgages and make them more affordable.

The forum was held as six of the nation's largest lenders announced their participation in Project Lifeline, a national outreach that could grant homeowners a reprieve of up to 30 days in the foreclosure process if they are more than 90 days delinquent on their mortgage but have not yet addressed the problem.

Both efforts aimed to encourage homeowners to contact their mortgage company and provide updated financial information so that options can be examined, since half of all people who lose their homes to foreclosure never contact their lending institutions.

"We don't want to take someone's home," said Jerry Durham, first vice president for home preservation at Countrywide Financial, one of the six mortgage companies that signed on to the national plan and was represented at the Detroit forum.

"We're in the homeownership business, not the foreclosure business. We want to look and see what opportunities we can create to keep people in their homes.

"Help and hope are available," he added.

Michigan's sluggish economy has left thousands of people without jobs and the income to keep up with their mortgage payments, putting the state among the highest in the nation for home foreclosures.

Though people often are scared to contact their mortgage companies, Durham said there are numerous options for homeowners seeking to avoid foreclosure.

Homeowners who qualify for the national program will be mailed letters encouraging them to contact their lenders to try to get a pause in the foreclosure process.

It was unclear how many letters will be sent to Michigan residents by the six lenders, which include Bank of America, Citigroup, Chase, Washington Mutual and Wells Fargo.

The local forum, coordinated by Attorney General Mike Cox's office, was a repeat of a successful one in December that 4,300 people attended.

It tried to reach homeowners who were behind on their mortgages but not yet in the foreclosure process.

Mortgage firms to cut many a break

Month of relief not enough, some say

February 13, 2008

By TODD SPANGLER
FREE PRESS WASHINGTON STAFF

WASHINGTON -- Six of the nation's largest mortgage companies promised Tuesday to offer struggling homeowners a month's protection from foreclosure, a pause the companies say will give them time to renegotiate loans and slow the rising tide of home losses.

Metro Detroit has been among areas hardest hit by the foreclosure crisis, suggesting the plan could be of great help there -- if it's not too late. Wayne County's foreclosure rate, in fact, was the nation's worst in 2007, according to a report being released today by RealtyTrac Inc., which tracks foreclosures, and Michigan ranked third among all states.

"The worst is just beginning, we all know that," Treasury Secretary Henry Paulson said Tuesday, referring to the subprime market, where some analysts predict as many as 2 million loans would reset interest rates by the end of this year.

The Bush administration has been working with the financial institutions that made Tuesday's announcement.

It came about two months after mortgage companies banded together to freeze interest rates on some subprime loans -- more risky, adjustable rate mortgages typically offered to borrowers with poor credit or cash flow problems to justify the lower or fixed interest rates on prime loans.

But Tuesday's aid package targets a much broader range of prime mortgages and even home equity loans, offering the starkest proof yet that the crisis has spread beyond the volatile subprime market.

"There needs to be a correction" in home values, he added. "This is something we're working our way through."

On Tuesday, Paulson announced the details of the industry initiative to keep the foreclosure crisis from swamping prime markets, where it could further crush home values and, in turn, spark a recession by destroying wealth and tighten credit markets.

Bank of America, Chase, Citigroup, Countrywide, Washington Mutual and Wells Fargo, who together service about half of the country's mortgages, will send letters to borrowers at least 90 days delinquent on their mortgages, telling them to contact them if they are interested in staying in their homes.

The homeowner must contact their loan servicing company within 10 days of receiving the letter.

Then, if he or she is willing to share information on income and expenses, and agrees to credit counseling, the borrower could be eligible for a 30-day stay in foreclosure proceedings while the company reviews the loan to see if it can be modified.

The program does not cover loans in bankruptcy or where the sale date of a foreclosed home is less than a month away.

"It shows the tremendous fear these banks have for what's going on in the economy," said Jerome Goldberg, a Detroit attorney. "A 30-day freeze is not going to do it. People need some real room to work out this crisis."

Lorraine Carley, 48, of Wayne said: "I think it's wonderful. I think this economy needs everything it can get to boost it."

Dean Baker, codirector of the Washington-based Center for Economic and Policy Research, a research group, called the plan "positive, but limited."

"Given the high and rising rate of foreclosure, it would be appropriate for the government to finally move beyond such voluntary steps and to adopt measures that actually guarantee some security to homeowners," Baker said.

Modify loan and save your house

But know that fix is only short-term

February 12, 2008

BY SUSAN TOMPOR
FREE PRESS COLUMNIST

On paper, Ann Todd is one strapped homeowner who took on the challenge of the credit crunch -- and won. But we don't know whether hers is a short-term victory or a long-term solution.

Todd, 31, began hounding her lenders this summer before her adjustable rate mortgage payment was set to spiral out of control. She was one of the lucky homeowners who actually convinced a lender to agree to a loan modification. Now, she and her husband, Mike, pay about $1,300 a month -- instead of what would have been $1,700 a month -- on their Shelby Township home.

But there is a catch that could snag hundreds of thousands of homeowners who are lucky enough to get a break on loan terms. Some homeowners who get deals will only be buying more time for the housing market to get better. And, depending on the negotiations, the fix might only be for two or five years.

"I worry that Michigan isn't going to recover -- or at least recover enough so people won't be back to square one," said Todd, who got a two-year deal from her lender and owes more on the house than it's worth.

Michigan has been hit with a triple whammy -- declining home values, a high jobless rate that has contributed to high foreclosures and adjustable rate mortgages that are set to go up in 2008 and 2009.

Economists predict that foreclosures are likely to continue to go up this year in Michigan and nationwide.

When home prices were rising at a fast clip, homeowners easily built more equity in the house. Then, even borrowers with bad credit could refinance to fixed rates to avoid high resets for adjustable rate mortgages.

Now, many homeowners in Michigan and elsewhere have little or no equity in the house and cannot refinance to a traditional fixed rate.

Some homeowners are starting to get some relief.

Interest rates have fallen dramatically, so adjustable rate mortgages that reset this year won't skyrocket as much. Some payments might go up $100 a month instead of what would have been $350 or more a month.

Avoiding foreclosure

Lower rates can keep some people in their homes.

"The majority of foreclosures and loan modifications taking place started out with adjustable rate resets that blindsided the homeowner with an unaffordable payment increase," said Greg McBride, senior financial analyst for Bankrate.com.

Yet lower rates won't fix all the problems.

Some troubled borrowers already have seen their mortgage payments go up and they've missed payments. Others lost jobs or income. Or they had bad credit when they first got that mortgage.

Mark Zandi, chief economist and cofounder of Moody's Economy.com Inc., said a weaker job market and continued falling home prices mean that foreclosures will continue to go higher in 2008.

That's why we're seeing the mortgage industry -- and government -- work to craft plans to help troubled borrowers.

All efforts attempt to buy some homeowners some time for the housing market to recover.

"You're kind of hoping that things will rebound or stabilize," said Keith Leggett, senior economist at the American Bankers Association in Washington, D.C.

The Todds' lender agreed to a loan modification that involved freezing the mortgage rate at 6.375% for two years.

Come 2010, though, they're going to have to refinance that mortgage. And how well this works will depend on whether housing values in Michigan actually go up and whether the Todds shore up their own financial foundation. The couple plan to put extra money toward the mortgage.

Declining values pose problems

The Todds paid $166,900 for the 1,500-square-foot house in Shelby Township in 2005. They owed $163,000 on the house. But the house was appraised at $153,000 this fall.

The couple had no equity in the home. They would have needed about $15,000 or more -- considering closing costs, fees and the fallen home value -- to refinance to a fixed rate.

"Nobody would do the loan," said Todd, a social worker for Macomb County. She began researching options in July, months before the rate would reset in December.

Audrey Acquisti, president of the Michigan Mortgage Brokers Association, said as recently as November she had trouble working with lenders to get some homeowners a loan modification.

Now, she said lenders are more willing to try to help avoid foreclosures.

Modification might help

Under a loan modification, a lender might agree to offer a homeowner a low rate for a set time. Or the mortgage could be modified so that the payments are stretched over more years.

A modification can be used by somebody who wouldn't qualify for a refinancing for some reason, such as if the value of the home has fallen and the homeowner has little or no equity.

The fees also are lower with a modification than a refinancing.

Clearly, all homeowners will not be helped by a loan modification.

"Does a loan modification really benefit somebody if the value of the property has fallen so sharply in relation to the loan?" Leggett asked.

The answer is probably not if the property isn't likely to ever be worth as much as somebody owes on it.

In other cases, some homeowners would not be able to keep up the payments even if the interest rate is frozen for a short time.

Tracy Morgan, vice president of communications and business development for the nonprofit Homeownership Preservation Foundation in Minneapolis, said homeowners should not automatically assume that they cannot avoid a foreclosure.

Based on her group's counseling statistics, about 25% of the homeowners the group had counseled during the fourth quarter were viewed as good candidates for workouts. Another 24% of homeowners counseled might be good candidates if they improved their financial situation.

Carmen Fernandez, foreclosure counselor for the nonprofit group Southwest Housing Solutions in Detroit, said lenders are more willing to do loan modifications for clients who can sustain their home financially -- and consistently pay the monthly mortgage at the renegotiated terms and beyond.

Todd says don't stop when someone says no.

"No isn't a good answer for me," she said.

Days of zero-down mortgages over

Michigan is too risky, analysts say

February 10, 2008

By GRETA GUEST
FREE PRESS BUSINESS WRITER

Kelly and Nicole Shannon had to rush to close on their three-bedroom Westland home, but they made it just under the wire to get a mortgage without a down payment.

The days of zero-down mortgages, which helped to fuel the real estate boom, are coming to an end in Michigan. The mortgages helped many buyers who lacked savings become homeowners in the past few years, but zero-down mortgages now are seen as a risky lending practice as defaults rise and housing prices fall.

The change means thousands of "for sale" signs in metro Detroit aren't going to disappear anytime soon as tougher loan qualification requirements reduce the pool of potential buyers, leading to further erosion of home prices.

Iraq war veteran Kelly J. Shannon Jr., 24, said he and his wife had been renting a townhouse for three years. The huge array of homes at falling prices was motivation.

"It was like a candy store, and we could pick out anything we wanted," he said.

The Shannons ended up getting their first home in Westland for $34,000 off the original listing price of $162,900.

They were set to close Feb. 15 on their 1,190-square-foot house across the street from an elementary school. But their broker at Citizens First Mortgage called last week and said if they didn't close by Jan. 31, they would lose the zero-down option.

The rush to close on zero-down deals is the result of a letter that mortgage backer Fannie Mae sent to lenders in December reiterating its rule that requires a minimum 5% down payment on homes sold in declining markets.

Many counties in Michigan and other states are considered declining markets by mortgage companies and banks. That means mortgage brokers cannot sell the zero-down loans to Fannie Mae and Freddie Mac, the two largest backers of home mortgages in the United States. They buy home loans from lenders and banks and sell them as securities on Wall Street.

Foreclosures in Michigan rose 68% in 2007, fueling the nation's third-highest foreclosure rate last year.

"It has essentially wiped out most of our zero-down products for people buying conventional mortgages," said Greg Pompura, president of Elk Financial in Southfield. "It is a battle every day to try and finagle a loan for people."

Where Michigan stands

Since the subprime-mortgage bust last year, Fannie Mae and Freddie Mac are among the few remaining buyers for loans that banks and mortgage companies write. If a loan doesn't conform to the companies' standards, banks must carry it on their books, which few banks prefer to do.

Troy-based Flagstar Bank lists 20 Michigan counties, including Wayne, Oakland and Macomb, as declining. CitiMortgage lists nine Michigan counties as declining as of Jan. 18.

"I don't know of anyone who is not enforcing a declining-market policy right now," said Linda Terrasi, senior vice president of Flagstar. "What you are going to find is like the olden days, where you will need to have 5% down."

The declining-market rule doesn't apply to Federal Housing Administration, or FHA, loans, so people still can try for zero-down mortgages if they can obtain seller concessions, mortgage experts say.

There are other things potential buyers can do to buy a home with little or no money down, Terrasi said. FHA still requires 3% down, including some closing costs, but there are ways to work around that.

And if you are planning to buy a foreclosed home from the U.S. Department of Housing and Urban Development, also known as a HUD home, FHA offers a $100-down program in Michigan with $2,500 to go toward repairs. It must be an owner-occupied home, a rule that blocks investor purchases, she said. Congress is considering lowering down payment requirements on FHA loans and raising the loan limits.

Bob Walters, chief economist for Quicken Loans in Livonia, said consumers should talk to lenders before counting out a zero-down mortgage. People with credit scores below 640 would face the biggest challenges, he said.

"The opportunities have been diminished, but they are not completely gone," Walters said. "We are seeing a lot less people buying homes with no money down. I can't put a percentage on that, but it is significant."

Brad German, spokesman for Freddie Mac, said reminding lenders of the policy was in response to the deteriorating credit market and increased risk in the mortgage market.

"This has been a longstanding policy, but it is now having more of an impact because more markets have seen prices declining," German said.

Lenders' fears

Skittish lenders don't want to make a loan on a property whose value might fall in a matter of months, leaving the homeowner owing more than the home is worth.

Since January, banks have reported $146 billion in losses on U.S. mortgage securities, Bloomberg News says.

About 55% of banks had tightened their lending standards for home mortgages in January, up from 40% in October, according to a Federal Reserve Bank survey released Monday.

"Lenders got pretty loose with their money in the past couple of years. They are retightening their standards," said John Mechem, spokesman for the Mortgage Bankers Association. "No down ... is going to be a very difficult loan to obtain in the future, if it ever comes back. There is not a lot of appetite for that kind of risk right now."

Real estate agents and mortgage brokers bemoan the tighter lending practices at a time when home prices have fallen to open the market for first-time buyers. They are struggling to find buyers for the thousands of foreclosed homes on the market, especially with the large inventories of owner-occupied and new homes for sale.

"I think it's an overcorrection to get rid of zero-down mortgages. Now the pendulum is swinging too far the other way," said Drew Sygit, a certified mortgage and equity planner for Meadowbrook Mortgage in Bloomfield Hills.

"We are missing an opportunity to slow down the depreciation we are facing. You have a lot of people who would buy right now because the prices are declining," he said. "They know it's a great time to buy, but they don't have the money."


Michigan's declining market

Banks consider much of Michigan to be a declining market, which means homebuyers can finance only up to 95% of a home's appraised value.

Lenders issue lists to mortgage brokers indicating which counties in various states are considered to have declining home prices.

• Michigan counties considered declining as of Dec. 6 by Flagstar Bank are: Barry, Bay, Calhoun, Clinton, Eaton, Genesee, Ingham, Ionia, Jackson, Kent, Lapeer, Livingston, Macomb, Monroe, Muskegon, Newaygo, Oakland, St. Clair, Washtenaw and Wayne.

• Michigan counties on CitiMortgage's Jan. 18 list are: Genesee, Lapeer, Livingston, Macomb, Monroe, Oakland, St. Clair, Washtenaw and Wayne.

How mortgage choices have changed

Here's a comparison of consumer choices for mortgages in 2005, at the height of the real estate boom, and now, according to Greg Pompura, president of Elk Financial in Southfield.

2005
• A buyer with a credit score above 600 could buy a home with no money down.
• There were no less than a dozen programs to choose from with a range of adjustable-rate mortgages, many with low-interest teaser rates.
• A buyer with a credit score of 700 or more could buy a home with a combo loan, with 80% of the home price being paid by the primary mortgage and 20% coming from a secondary mortgage as a down payment. This loan structure allowed the buyer to avoid paying private mortgage insurance, or PMI.
• These 80/20 loans easily could be done for amounts up to $650,000.

2008
• The options left for zero-down loan plans are minimal.
• If the credit score is under 600, the PMI is priced high.
• The subprime loan market has disappeared.
• Federal Housing Administration, or FHA, loans still are a viable option with minimum down payments 3%, including some closing costs, but mortgage amounts are limited to $226,100 in Wayne and Oakland counties.
• In the jumbo market, for loans more than $417,000, 10% down is a minimum and the combo mortgage is nonexistent.
• The market for second, home-equity mortgages has been curtailed drastically.

The Rise of the Mortgage 'Walkers'

By NICOLE GELINAS
THE WALL STREET JOURNAL ASIA

February 11, 2008

Fitch Ratings, while telling investors recently to expect additional "widespread and significant downgrades" on $139 billion worth of subprime loans, has cited a new factor in their "worsening performance."

"The apparent willingness of borrowers to 'walk away' from mortgage debt," the analysts noted, "has contributed to extraordinary high levels of early default" on loans issued during the 18 months before the mortgage bubble burst. It expects losses to reach 21% of initial loan balances for subprime mortgages issued in 2006 and 26% for those issued in early 2007.

Such behavior, where not precipitated by willful fraud, shows that American homebuyers supposedly duped by their lenders aren't so dumb. They're perfectly capable of acting rationally without political interference.

While mortgage fraud has abounded in recent years, voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans' part. To be sure, until recently, mass-scale voluntary foreclosures were unthinkable. But markets have changed, and people are changing their behavior in response.

A decade ago, most Americans started off with enough equity in their homes to make foreclosure irrational from a financial standpoint. Consider: If you made a 20% down payment on a house, prices would have to fall by 20%, almost immediately, before you lost all your money and had much incentive to walk away. This scenario was unlikely, particularly since an independent appraiser had assigned a clear value to the home. Foreclosure was remote, absent a personal financial crisis, for another reason: Every month your mortgage payment would reduce your debt and increase your equity, giving you more room for prices to fall.

But over the past few years -- until last spring -- banks and the mortgage-backed securities investors who bought the loans the banks packaged weren't demanding substantial down payments; they were happy with 5% or even nothing down. They also didn't worry about whether or not borrowers were building up equity. "Interest-only" loans, quick mortgage refinancings to cash out any equity, and other inventions often led to just the opposite.

Now the bloom is off the residential mortgage-backed securities (RMBS) rose. And some borrowers, even those who can theoretically afford to keep their homes, realize they owe much more than what comparable houses in the neighborhood are selling for -- and think that prices won't rebound anytime soon. So they're walking away, according to anecdotal reports as well as recent statements by top executives of both Wachovia and Bank of America.

In most cases, once a homebuyer splits, the mortgage-securities investors are stuck with the loss. In some states, including California and Arizona, this provision is the letter of the law. In others, the bank forgives the balance of the loan -- a common practice that's unlikely to change now, given the criminal and civil investigations banks are already sweating through.

Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives.

Yes, this behavior is new -- but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.

Borrowers acted rationally in response to market forces and incentives during the bubble: Buy a house because prices always go up; you can't lose. Many are acting rationally now: Mail the keys back and un-borrow the money, because prices are sinking fast while the debt isn't. When the house was purchased not as a first home but as a rental investment, the decision is even easier. Politicians keep saying that Americans need protection from their big, bad lenders -- but that protection is already there.

Of course, there's a price. Mortgage "walkers" will take a hit to their personal credit rating. Yet this once-forbidding punishment may be discounted. That's because, just as when markets change their behavior, people change, when people change their behavior, markets change also.

If hundreds of thousands of people with decent work histories are going to have less-than-stellar credit because of foreclosures this year and next, they won't suffer so much as in the past. Many walkers are going to want to buy houses again some day; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment). Investors searching for yield likely won't bypass what could be a large pool of borrowers.

* * *

This rapid transformation shows that the continuing political hand-wringing over what to do about failed mortgages isn't needed. It's beginning to dawn on lenders and their agents -- who assumed that borrowers who could afford to do so would make payments no matter what -- that they could be stuck owning hundreds of thousands of houses at a minimum. This realization will pressure the companies administering those mortgage loans to renegotiate more quickly with borrowers in cutting loan balances. Thus, some version of the "Paulson plan" would have happened without Treasury Secretary Henry Paulson's pressure on the capital markets in December.

Nobody is going to debtors' prison. Nobody is going to have to toil for 30 years and sacrifice their kids' future to pay off burdensome loans that they're stuck with forever because they overreached. (Even if banks and mortgage administrators pursue judgments for post-foreclosure loan balances, there's always bankruptcy as a last resort.)

As for Sen. Hillary Clinton and her proposed "moratorium on foreclosures": She may soon find that borrowers, not just lenders, are screaming to let them act within their contractual rights.

Credit crisis may leave you cut off

February 6, 2008 Detroit Free Press

By SUSAN TOMPOR
FREE PRESS COLUMNIST

Michigan homeowners who think they're going to buy a new car, remodel the house or send the kids to college simply by tapping an existing home equity line of credit should pay careful attention to this latest twist in the credit crunch.

If the value of your house has fallen, as it has in many metro Detroit neighborhoods and across the country, your lender could shut off that credit line.

Thanks to the fallout in the housing industry and the credit crunch, homeowners now must be aware that their lender could one day freeze their access to an existing home equity line of credit.

David Stoyka, a homeowner in Grosse Pointe Farms, got one of those unexpected home-equity letters.

The lender, Countrywide Financial Corp., told Stoyka that he can no longer draw on his home equity line of credit and he cannot use checks that he had previously received with that account. Stoyka owes about $16,000 after initially borrowing $25,000 on the home equity line of credit.

"Now we got a note saying we can't borrow any more," Stoyka said.

Countrywide Financial Corp., the nation's largest mortgage company, sent letters to about 122,000 customers nationwide last week informing customers that they cannot borrow against their existing home equity credit lines.

Other lenders could turn to this strategy, too.

The reason? Lenders are finding ways to reduce their losses.

Yes, they're allowed to do that

Lenders say the fine print in the loans permits them to put a freeze on home equity credit lines -- if the home's value has declined significantly from the original appraisal or if the lender believes that the borrower doesn't have a reasonable chance to make the required payment.

"Customers affected by this analysis will be notified by mail," Countrywide said in its statement. "Customers who do not receive a letter may continue to use their home equity lines of credit."

Other lenders are reviewing their options.

National City Bank said it is continually monitoring the risk in its home equity credit portfolio.

"In the future, we may take action on a case-by-case basis," said Bill Eiler, a spokesman for National City.

Comerica Inc. said it continues to review its home equity portfolio and the overall real estate market to ensure that its lending policies are appropriate, given the current economic environment.

Chase is reviewing what to do with existing accounts, but it has not done a major mailing, said Mary Kay Bean, a spokeswoman for Chase in Detroit.

Bank of America Corp., which has agreed to acquire Countrywide, said it doesn't have a comment at this time on adjustments to existing home equity lines of credit. As of Oct. 1, LaSalle Bank became part of the Bank of America family.

Pain down the line

For homeowners who have credit lines, it may be smart to watch the mailbox or talk to a lender before making any big plans.

Stoyka's letter from Countrywide said: "We appreciate that you have handled your home equity responsibly, and want to make sure that you know this change is being made simply because your home's value has declined."

Stoyka, 41, bought his Grosse Pointe Farms home for about $250,000 in April 2003 and took out the home equity line of credit as a way to get a 20% down payment on the home. This strategy, promoted by some lenders, is known as a piggy-back loan. It enables some borrowers to finance as much as 100% of a home's value by combining a mortgage with a home-equity loan.

Home prices have been sinking in Stoyka's upscale suburban neighborhood. Stoyka said he's aware of some homes in the area that sold in the past six months or so for $205,000 and $217,000.

Fortunately, he and his wife, Lea, did not have immediate plans to tap into the additional available line of credit.

"Financially, it really won't affect us," said Stoyka, a senior account executive at Marx Layne & Co., a marketing and public relations firm in Farmington Hills.

At least, it won't immediately.

They have a 12-year-old son and had considered using a home equity line of credit to help pay for college. But now they question whether that strategy could even work.

"I don't see in six years it being an option for us," he said.