$34 million in lost property taxes forces cuts in county services

Foreclosures drain cash from counties

BY STEVE NEAVLING • FREE PRESS STAFF WRITER • October 16, 2008

The growing mortgage crisis is costing Wayne, Oakland and Macomb counties a combined $34 million next year in tax revenue and forcing officials to trim money for police officers, firefighters, libraries, parks, health agencies and services for seniors and lower-income families.

Next year's estimated 5% drop in property values across metro Detroit -- the largest in decades -- also is likely to eat away more than $9 million in revenue for Wayne, Oakland and Macomb's three community colleges and $2 million for the SMART suburban bus system.

Foreclosures and sluggish home sales are dragging down real estate values, and hence, the property taxes that are governments' core source of revenue.

Add to that high fuel and health care costs, rising unemployment rates, cuts in state funding and the abrupt collapse of financial markets, and local governments are facing one of their worst crises in decades.

"We're getting killed on the revenue stream, and there's almost nothing we can do about it," said Macomb County Commissioner Andrey Duzyj, D-Warren. "It's a huge problem."

Macomb County is facing its worst fiscal hardship in at least four decades, as officials grapple with a projected record $34-million deficit next year and a $44 million shortfall in 2010. The main culprit is a combined projected $14-million loss in property taxes during the next two years.

To shrink the budget hole, the county is releasing jail inmates early, and this year, slashed recreation programs, removed books at its library and increased service fees. Officials are expected to resort to massive layoffs, cuts in sheriff's deputies and a reduction in salaries and benefits for county employees by next month.

In Wayne County, up to 160 sheriff's deputies received layoff notices this month to help offset a projected $15-million loss. All departments also were forced to cut 10% from their budgets.

Property values in Oakland County are to drop for the first time in 40 years next year, forcing officials to eliminate 152 jobs through early retirement and to close a sheriff's boot camp for nonviolent offenders.

"When property values are bottoming out like they are now, it makes it very difficult to balance a budget," said Tom Hickson, director of legislative affairs for the Michigan Association of Counties. "With the lack of revenue coming in, we are getting to the point where counties may have to cut services that are mandated by the state."

Sliding property values also are cutting sharply into revenues for cities and townships. In Warren, for example, officials expect a $4-million loss in tax revenues next year. That may mean fewer police and firefighters, and a more difficult time serving the growing senior population, city officials said.

"Property values are going to continue to decrease as the economy spirals out of control," Warren Mayor Jim Fouts said. "It's going to be a very, very difficult time for governments."

And on the state level, officials expect to lose tens of millions of dollars in property tax revenue next year to fund schools.

Budget planners fear the mortgage crisis will continue for several years until the economy rebounds and foreclosures decline.

Officials in Oakland and Macomb counties are bracing for record foreclosures this year, with a combined 18,000 families expected to lose their homes. Wayne County couldn't provide an estimate, but officials said foreclosures could easily exceed 20,000.

"When you have a glut of houses that no one is buying, prices go down," Deputy Oakland County Executive Robert Daddow said. "It's hurting everyone."

Metro home sales up, but prices plunge

Foreclosures fuel trend

BY GRETA GUEST • FREE PRESS BUSINESS WRITER • October 14, 2008

Driven down by sales of foreclosed homes, median sale prices fell 34% in metro Detroit in September compared with a year ago, dipping below $10,000 in the city of Detroit.

The median price on a house or condo sold in Detroit last month plummeted 57%, to $9,250, from $21,250 a year ago, according to figures released Monday by Realcomp, a multiple listing service based in Farmington Hills.

Foreclosures represented two-thirds of sales in Detroit in September, and they boosted sales by 81% as buyers laid claim to 1,019 homes.

For the wider metro area, the median sale price was down 34%, from $129,000 a year ago to $85,000 last month.

"There's tons of properties out there that investors are snapping up and that skews the numbers," said Joy Santiago, a Southfield-based real estate broker. "You can't say in the city of Detroit that the values are down, because many areas are strong, like Indian Village and Palmer Woods. They are a little bit more stable."

Sales are picking up, she said.

"People have to start realizing there are awesome deals out there, and it is just the time to purchase," Santiago said. "September for me, in the past 10 years, has been slow, but it was my best September ever."

Dan Elsea, president of brokerage services for Real Estate One in Southfield, said the prices are evidence of heavy investor activity in Detroit.

"We are seeing that low end of the market sell quicker. If you have a $75,000 house in the city of Detroit, there are not a lot of buyers for it," Elsea said. "But if you have an $8,500 house, it sells very quickly."

He said that if investor activity is factored out, the true price depreciation in metro Detroit, excluding the city, is at a rate of 1% a month since last September.

Realcomp reported that 5,818 sales of houses and condos in the metro area were concluded during September, up 57% from 3,703 sales in the same month a year ago. The figures consist of closed sales reported by Realtors who subscribe to the service.

More than 37% of the September sales in the metro area were foreclosures, according to Karen Kage, Realcomp president.

But have we hit bottom yet?

"It is near impossible for me to say we are near done," Kage said.

Wayne County sales were up 73%, to 2,278, from 1,320 in September 2007; Oakland County sales rose 51%, from 941 to 1,422; Macomb County sales were up 58%, from 478 to 754, and Livingston County sales were up 45%, from 138 to 200.

And pending sales in September were up 75%, to 7,832 from 4,472 in September 2007. Pending sales are those with signed purchase agreements that have not closed.

With the credit crunch and falling prices, more pending deals are falling apart at the closing table. In September, 1,265 properties went back on the market that were either pending or withdrawn from the market. That compares with 732 properties put back on the market in September 2007, Kage said.

"It's not the best news ever," Kage said of the falling sales prices. "We have said all along that until we weed out some of the inventory, we will not see prices rise."

Realcomp also reported that housing inventory in metro Detroit dropped 16%, to 63,453 homes and condominiums on the market, as compared with 75,932 listings in September 2007. That's a 10.9-month supply at the current sales pace, far above a normal market of a three- to six-month supply.

Foreclosed and forgotten

Buyers, beware: Bargain home could bring big repair bills

BY GRETA GUEST • FREE PRESS BUSINESS WRITER • October 12, 2008

Kelly Phillips was in the market for a house this spring and she figured a foreclosed home would make the best buy.

Phillips, 29, a second-grade teacher, and her husband, Scott, were expecting their first child and wanted to be close to her parents in Macomb Township. They found what they thought was the perfect house right in the same subdivision.

The price was right at $135,000 and the bank accepted the couple's offer. But in the weeks between the offer and closing, an unchecked leak in the basement spread toxic black mold throughout the entire lower floor.

Because of the damage, the Phillipses were able to get out of the deal.

"The houses were in such disarray. We went through some houses that looked like people left in the middle of the night," Kelly Phillips said. "One house had kids' toys. Another had ketchup and mustard sprayed all over the walls."

After looking at nearly 40 foreclosed homes in Macomb County, she decided she didn't want a deal that bad. The Phillipses ended up buying a house for $155,000 in Clinton Township from a couple that had moved out of state for work.

"With me being pregnant, I couldn't emotionally take it anymore. The banks just weren't taking care of them," she said.

While searching for a great deal on a foreclosed home sounds like a good idea to many potential home buyers, the reality might surprise them.

The typical foreclosed home now on the market in metro Detroit is going to have some blemishes, said Deborah Ronayne, a Realtor with Keller Williams Realty in Novi.

"These houses sit, sit, sit, and no one takes care of them," she said.

Tricia Raymond, a foreclosure expert with Keller Williams Realty in Troy, said that banks had been listing foreclosures at an as-repaired price, but are now using the as-is price, a big difference.

As-repaired is usually a higher, more optimistic price, assuming the bank will make the fixes. As-is is usually lower because the buyer has to make the repairs.

"This year, many banks began pricing the homes at or below the as-is value, especially the more expensive ones," Raymond said. "I think it was because they were getting tired of having expensive houses get flooded or have a lot of damage by being vacant too long and then ending up as a moldy house that they took a bath on after paying a year or two of taxes."

Raymond said that now some foreclosed homes are seeing multiple offers and the banks are recovering more value.

Some of the more common problems Ronayne has seen in foreclosed homes include busted-up kitchens, holes punched in drywall, mold and water damage.

She said utilities are generally turned off unless there is a showing to a prospective homeowner. All it takes is a big rain to cause water damage in a basement when the power's been cut to the sump pump.

Ronayne took the Free Press on a tour last week of five homes that banks repossessed. The homes ranged from a $41,067 tear-down in Farmington Hills to an $850,000 unfinished home in an upscale Northville Township subdivision.

They all had one thing in common: They needed lots of work.

• House 1: A Farmington Hills three-bedroom, two-bath home in a nice neighborhood. The 1,596-square-foot house is a steal at $124,900 -- that is, if the buyer is willing to fix busted cabinets in the basement, replace the buckling wood parquet floor in the kitchen and remove black mold in the basement.

Someone even stuck a plug-in air freshener in the basement. "Like it's going to help," Ronayne said.

"It didn't have to be like this," Ronayne said. "This wasn't a bad place, but most people don't want to tackle what is in that basement."

• House 2: A 1,525-square-foot home near Middlebelt and 13 Mile Road in Farmington Hills priced at $41,067.

It sits on a large corner lot.

Some of the windows are boarded up, but peering inside the grimy kitchen window shows that the walls are missing and the kitchen has been stripped of its cabinetry and appliances. It has water damage.

"This just looks like a teardown," Ronayne said.

• House 3: A 2,792-square-foot home near 12 Mile and Haggerty in Farmington Hills priced at $224,900. It's part of a well-maintained, quiet neighborhood. It has four bedrooms, two baths and a large deck.

On the downside, the wood deck is deteriorating. A broken window near the front door is letting moisture in and mold is beginning to form. It has water damage in the basement, holes punched in the drywall and beat-up walls in bedrooms.

"This is just a good example of why these houses aren't moving," Ronayne said.

• House 4: A four-bedroom, two-bath home priced at $239,900. It sits on 5 acres with a horse barn and paddock in Brighton Township. The 2,000-square-foot home includes a finished walk-out basement.

The kitchen appliances are gone and there is some mold in the basement and water damage to the living room ceiling.

• House 5: A 4,800-square-foot home in the Stonewater subdivision in Northville Township priced at $850,000. It has four bedrooms and three bathrooms.

This one, however, was not finished before the builder ran out of money. It needs flooring, woodwork, doors, fixtures, lighting and landscaping. The average home in this subdivision sells in the $1.2-million range.

Ronayne notes that Stonewater was one of the first areas in metro Detroit to get hit with foreclosures. Two years ago, 31 houses, or 12% of all homes in the subdivision, were in foreclosure. She estimates that the house needs at least $100,000 to $150,000 to finish.

"It's just not going to move at that price. They don't understand -- they just need to cut their losses," she said.

Gary Marowske, president of Flame Heating, Cooling and Electrical in Warren, said some problems he finds on inspections are things the typical investor in foreclosed property may overlook.

One of the biggest problems is simple neglect. When people are behind on the mortgage, they probably are not maintaining the appliances. Because furnaces and air-conditioning systems are expensive, Marowske advises that the heating system be checked for carbon monoxide leaks.

"Get the right inspections, do your homework and make sure you know what you are buying because usually you get what you pay for," he said.

Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'

More Defaults and Foreclosures Are Likely as Borrowers With Greater Debt Than Value in Their Homes Are Put in a Tight Spot

OCTOBER 8, 2008
By JAMES R. HAGERTY and RUTH SIMON

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.

The majority of homeowners still have equity, and even among those who don't, many continue to make their mortgage payments on time. The financial-bailout legislation could at least "keep things from getting much worse" by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.

Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis, according to First American CoreLogic, a data firm in Santa Ana, Calif.

Stephanie and Jason Kirschenman thought they were being prudent when they agreed in late 2004 to buy a new four-bedroom home in Lodi, Calif., for $458,000. They put a substantial 20% down and chose a loan with a fixed interest rate for the first 10 years. Two years later, they took out a second mortgage to pay off some bills.

At the time, the home was appraised for about $550,000. But a mortgage broker recently estimated its value at well below the $380,000 the family owes on it, says Ms. Kirschenman. "We were quite shocked," she says.

The Kirschenmans, who both work for a company that makes trailer hitches, thought about sending the keys to the lender. But their financial planner, Christopher Olsen, helped persuade them to stick with the house, noting that they could still afford the payments.

Others aren't so lucky. Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.

Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years -- down 44% in a year -- says the publication Inside Mortgage Finance.

One reason is that as home values slip, growing numbers of would-be borrowers lack sufficient equity to refinance. The falling values also make mortgage lending look riskier to banks, spurring them to tighten credit standards.

Most mortgages in default were issued in 2006 and 2007, when lending standards were loosest and the housing market was peaking. Many who bought then made small down payments or none, so they had little equity in their homes from the start.

The performance of loans made earlier is getting worse, too, as price declines deplete the equity people built up. In Las Vegas, 6% of home loans made in 2004 are now 30 days or more overdue, up from 3.7% a year earlier, according to research firm LPS Applied Analytics.

In July, Congress enacted legislation designed to help borrowers who owe more than their homes are worth by allowing them to refinance into a government-backed loan, provided their mortgage company forgives part of their principal. It's not clear how many borrowers the program will help, because before reducing the principal, lenders would almost always try first to freeze or reduce borrowers' interest rate to make payments more affordable, says Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.

In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.

Even so, some borrowers fret that declining prices and tighter lending standards could make it hard for them to tap their equity.

Steven Schneider, a mortgage broker in Miami, bought his home at the end of 1992. When he refinanced about four years ago, he pulled out $150,000 in cash that he intended to use to build an addition. The transaction raised his total debt to about $350,000, at a time when his home had a value of about $650,000.

Recently, Mr. Schneider pulled out roughly $90,000 by tapping a home-equity line of credit. He says he put the funds in a money-market account that yields less than the 5% interest rate on the loan. "I was afraid they were going to shut down" access to the credit line, says Mr. Schneider. He figures his home, once valued at $750,000, now is worth about $600,000.

How much pain homeowners feel varies greatly from place to place. The most severe drops in home values are in parts of California, Florida, Nevada, Arizona and other areas where speculation pushed prices up and builders far overestimated demand.

Within metro areas, neighborhoods with short commutes are holding up better than others. And in many parts of Texas and North Carolina, home prices have continued to rise slowly, have leveled off or have declined only modestly.

On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.

The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.

Housing markets don't tend to turn around quickly. The price slump in California in the early 1990s, for instance, was a long grind. According to the S&P/Case-Shiller home-price indexes, Los Angeles prices peaked in June 1990 and didn't bottom until March 1996. They didn't get back to their 1990 peak until 2000.

Authorities declare war against mortgage fraud

Metro Detroit has been devastated by the crime, say police, FBI

BY JOHN GALLAGHER • FREE PRESS BUSINESS WRITER • October 8, 2008

Law enforcement agencies Tuesday launched an all-out war against mortgage fraud in metro Detroit, acknowledging that the crime has devastated southeast Michigan.

Acting U.S. Attorney Terrence Berg announced the formation of a task force involving federal, state and local agencies. The group will take on the financial crimes that often leave neighborhoods pockmarked by abandoned and foreclosed homes.

"We are all victims," Andrew Arena, FBI special agent in charge at the Detroit office, said Tuesday. "I think it's an understatement to say that mortgage fraud has had a profound impact on the economy of the state of Michigan."

Mortgage fraud began to flourish a few years ago in the easy-money, anything-goes mortgage market that flooded the nation with bad loans. Bad housing loans bundled into exotic securities are at the root of the economic crash that has brought down Wall Street financial houses, prompted Congress to approve a $700-billion bailout and rippled to economies worldwide.

In that inflated credit atmosphere, many varieties of mortgage fraud arose.

Some, akin to identity theft, saw criminals file a false deed to an owner's home and then sell the house. In other types, phony buyers and sellers colluded to establish an inflated sale price for a house, get a big mortgage based on that, and then walk away with the cash.

Bernard Youngblood, Wayne County's register of deeds, estimated Tuesday that perhaps 25% of the home foreclosures in metro Detroit involve mortgage fraud.

"It's huge," Youngblood said of the problem. "It's a lot easier than putting a knit hat over your head and going in and holding up a 7-Eleven."

The agencies involved in the task force include the Internal Revenue Service, the Federal Deposit Insurance Corp., the Michigan Attorney General's Office, several agencies of Wayne, Oakland and Washtenaw counties, and three major lenders -- Flagstar Bank, JP Morgan Chase Bank and Bank of America.

Concern about mortgage fraud in southeast Michigan goes back at least to 2005, when three Wayne County agencies set up their own task force. Those task force agencies -- the Register of Deeds, the Sheriff's Office and the Wayne County Prosecutor's Office -- will be in the new multiagency force.

The local task force opened nearly 700 case files on complaints, got almost 40 convictions of people who were involved in fraud, and returned about 150 homes to their rightful owners after the properties were stolen through fraud.

The new task force will enable local, state and federal agencies to coordinate their actions, share information and proceed along a common front against the criminals.

Berg said people who engage in mortgage fraud range from petty thieves, drug dealers and members of biker gangs to insiders at financial institutions who gave in to temptation in the period of easy money.

"With metro Detroit being at the top of nearly every list in terms of mortgage fraud and home foreclosures, we need a full-court press that brings all the federal, state, and local law enforcement agencies, the regulators and the major banks together to go after the big mortgage fraud players," Berg said.

But stopping mortgage fraud is not easy, Youngblood said.

"These things are extremely sophisticated, and it takes a sophisticated group of law enforcement officials to get involved with them," he said. "These are jigsaw puzzles that have to be put together."