S. Fla. housing market continues decline

South Florida's housing market continued to deflate in November, with home prices down slightly in Broward and Miami-Dade amid weak demand from buyers.

For anyone trying to sell a house, Monday's report from the Florida Association of Realtors brought little good news. Sales of single-family homes were down 59 percent in Miami-Dade and 34 percent in Broward over a year ago, while condo sales dropped almost as much: down 59 percent in Miami-Dade and 23 percent in Broward.

But for someone looking to buy a house in South Florida, the closely watched numbers brought encouragement: Single-family home prices are dropping, down 4 percent over a year ago in both markets. The condo sector offered a mixed report: Prices dropped 17 percent in Broward, according to the Realtor sales reports, but were up 3 percent in Miami-Dade.

''We are definitely in a declining market,'' said Jeff Kaufman, a senior vice president at SunTrust Mortgage in Sunrise. Starting this week, his loan officers will require larger down payments from some buyers to guard against declining home values.

Market watchers say South Florida's real estate market won't revive until buyers cut prices more in order to boost demand and start reducing the large inventory of unsold homes.

The Debt Crisis, Where It’s Least Expected

THE Indiana Children’s Wish Fund, which grants wishes to children and teenagers with life-threatening illnesses, got an early Christmas gift nine days ago. Morgan Keegan, a brokerage firm in Memphis, made an undisclosed payment to the charity to settle an arbitration claim; the Wish Fund said it had lost $48,000 in a mutual fund from Morgan Keegan that had invested heavily in dicey mortgage securities.
Coming less than two months after the charity filed its claim, and as a reporter was inquiring about its status, the settlement is a rare consolation for an investor amid all the pain still being generated by the turmoil in the once-bustling mortgage securities market. Before the Wish Fund reached its settlement, its mortgage-related losses meant that nine children’s wishes would go ungranted.

Against the backdrop of all the gigantic numbers defining the subprime debacle, the Wish Fund’s losses look like small potatoes. The crisis has generated almost $100 billion in losses or write-offs at the world’s largest financial institutions, cost a couple of Fortune 100 chief executives their jobs, wiped out billions of dollars in stock market value and hammered the reputations of the nation’s top credit rating agencies. Reports of the devastation that foreclosures are wreaking on borrowers also bring home the effects of this remarkable financial mess.

Still, the Wish Fund’s experience is instructive because so little has emerged about the losses that investors have incurred in these securities, perhaps because few holders have wanted to disclose them. Some investors may still not know how much they have been hurt by the crisis.

As this debacle unfolds, accounts of investor losses in mortgage securities will come to light. And Wall Street’s role as the great enabler — providing capital to aggressive lenders and then selling the questionable securities to investors — will be front and center.

Richard Culley, a blind lawyer in Indianapolis, founded the Wish Fund in 1984; since then, it has granted 1,800 wishes to children ages 3 to 18. The fund has roughly $1 million in assets and is not affiliated with the national Make-A-Wish Foundation. Local medical centers submit names for potential recipients.

The Wish Fund’s foray into mortgage securities began in June, when Terry Ceaser-Hudson, the executive director, consulted her local banker, Steve Perius, about certificates of deposit coming due in the charity’s account. She said the banker, with whom she had done business for 20 years, suggested that she invest the money in a bond fund offered by Morgan Keegan. The firm is an affiliate of her banker’s employer, Regions Bank.

Ms. Ceaser-Hudson’s banker put her in contact with a Morgan Keegan broker to help her make a decision. Mr. Perius did not return a phone call seeking comment.

“I thought I was making a lateral move from the C.D.’s into this fund,” Ms. Ceaser-Hudson said. “The broker said he’d put some thought into this and he had something perfect for the Wish Fund that was extremely safe.”

That broker was Christopher Herrmann, and when Ms. Ceaser-Hudson met him at her banker’s office, she quizzed him about the risks in the Regions Morgan Keegan Select Intermediate Bond fund, which he recommended.

“The first thing I said to him when I sat down was, ‘I want to make sure that I understand this: you’re telling me that this is as safe as a money market or C.D., because we cannot afford to lose one single penny,’” she recalled. “He said, ‘This has been good for years,’ so I thought, ‘O.K.’”

On June 26, the Wish Fund put almost $223,000 into the Morgan Keegan fund. The charity’s timing could not have been worse. That same week, two Bear Stearns hedge funds, with heavy exposure to mortgages, were collapsing. Turmoil in the mortgage market, which had been percolating since late winter, was about to explode.

AT the helm of the Morgan Keegan fund was James C. Kelsoe Jr., a money manager at the brokerage firm’s asset management unit, based in Birmingham, Ala. A longtime bull on mortgage securities, Mr. Kelsoe rode that wave and earned a reputation as a hotshot money manager. As of June 30, he also oversaw six other Morgan Keegan bond funds, which included about $4.5 billion in assets.

One of Mr. Kelsoe’s major suppliers of mortgage securities was John Devaney, 37, a flashy mortgage trader and founder of United Capital Markets, a brokerage firm in Key Biscayne, Fla. During the mortgage boom, Mr. Devaney built up a net worth of $250million, he told The New York Times in an interview early this year.

However much both men initially prospered from doing business together, some investors who wound up holding Morgan Keegan’s mortgage securities were less fortunate — the Wish Fund, for example.

More than two weeks after Ms. Ceaser-Hudson invested in the Morgan Keegan fund, she received her first brokerage statement. She said she was stunned to learn that within days of its initial investment in the bond portfolio, the Wish Fund had lost $5,000. By late September, with the credit markets frozen and the net asset value of the bond fund plummeting, Ms. Ceaser-Hudson ordered the stake to be sold. She received about $174,000, representing a loss of 22 percent within 90 days.

On Nov. 2, she filed an arbitration case against Morgan Keegan, contending that Mr. Herrmann’s investment recommendation was unsuitable for the Wish Fund and that he had breached his duty to it. A spokeswoman for Morgan Keegan said that neither Mr. Kelsoe nor Mr. Herrmann would comment for this article. “Jim Kelsoe is fully focused on managing his fund portfolios during these volatile market conditions,” said the spokeswoman, Kathy Ridley.

The Morgan Keegan fund, which had assets of about $1 billion in March, is down almost 50 percent this year. It was weighted with risky and illiquid mortgage-related securities.

For example, at the end of September, the intermediate fund in which Ms. Ceaser-Hudson invested had almost 17 percent of its assets in mortgage-related securities — including collateralized mortgage obligations, home equity loans and pools of mortgages that were again combined into collateralized debt obligations. Mortgage exposure in the six other portfolios that Mr. Kelsoe manages ranged recently from 5 percent to 14 percent.

For several years, Mr. Kelsoe’s embrace of mortgage securities paid off for his clients. His fund was started in March 1999 and generated positive returns each year until 2007. Through the end of 2006, it had an average annual return of about 4.5 percent, after taxes.

Mr. Kelsoe’s love affair with mortgage debt paralleled that of Mr. Devaney, one of those colorful and cocky Wall Street figures who appear during market booms only to sink from sight in the ensuing busts.

Living in a home on the Intracoastal Waterway, Mr. Devaney surrounded himself and his family with Renoirs and Cézannes. Outside floated his 142-foot yacht called Positive Carry, a reference to borrowing money at a lower rate than you receive on your investment. He also owned the house that was used as the setting for the Al Pacino film “Scarface.”

In addition to running United Capital, Mr. Devaney also oversaw United Real Estate Ventures and several hedge funds with roughly $650 million under management as of early this summer. In July, he halted redemptions in the hedge funds as the market swooned for his favorite mortgage securities.

A 2004 profile of Mr. Devaney in US Credit magazine said that he considered Mr. Kelsoe one of his most valued customers. United Capital Markets, the article said, was most often a buyer of bonds from Wall Street and mortgage issuers; the firm had far fewer clients to whom it sold those securities. One of the biggest buyers was Mr. Kelsoe and his mutual funds.

“I have found John to be very aggressive in his ability to find interesting trading ideas,” Mr. Kelsoe was quoted as saying of Mr. Devaney in the profile.

Mr. Devaney did not return a phone call seeking comment.

Thomas A. Hargett, a lawyer at Maddox Hargett & Caruso in Indianapolis, represented the Wish Fund in its arbitration claim against Morgan Keegan. He declined to discuss the settlement struck by the firm and its former client. But he did say that “at the end of the day, your everyday broker and many investment professionals did not understand the risk associated with these complex derivative mortgage investments.”

The independent directors who served on the Regions Morgan Keegan mutual funds’ board also may have misjudged the risk.

The board includes Jack R. Blair, nonexecutive chairman of DJO Inc., an orthopedic equipment company; Albert C. Johnson, an independent financial consultant; W. Randall Pittman, chief financial officer of Emageon Inc., a health care information systems company; Mary S. Stone, a certified public accountant and University of Alabama professor; and Archie W. Willis III, a former first vice president at Morgan Keegan who is president of Community Capital, a financial advisory and real estate development company.

Another director, James Stillman R. McFadden, is chief manager of McFadden Communications, a commercial printing concern that does work for Regions Bank, government filings show. Between 2005 and June 30, 2007, Mr. McFadden’s firm received $2.46 million in revenue from the relationship, or 5 percent of his company’s sales during the period.

Because most of the directors did not own shares in the devastated bond funds, they have not been hurt by their sharp decline. Among the six independent directors, only two owned shares in the funds as of last September: Mr. McFadden owned between $1 and $10,000 worth, while Mr. Willis owned between $10,001 and $50,000 worth, according to regulatory filings.

The Morgan Keegan spokeswoman said that none of the directors would be available to discuss their oversight or ownership of the funds.

Now that the Wish Fund’s complaint has been settled, Ms. Ceaser-Hudson can carry on the organization’s work.

Among the wishes that the charity recently granted were a family trip to Yellowstone National Park for an 8-year-old girl, Mary Ann, and her family and a meeting earlier this month between 14-year-old Samantha and Miley Cyrus, the Disney television star who plays Hannah Montana. (The Wish Fund did not release last names of recipients.)

In mid-December, Ms. Ceaser-Hudson set up a shopping spree, complete with limousine transportation, for Sabe, a 3 1/2-year-old handicapped boy with leukemia. Last April, Andrew, 17, got his wish to meet Peyton Manning, the Indianapolis Colts quarterback, and to attend a team practice. The teenager, who had cancer, died a week after his wish was granted.

“What we do try to do is make every single wish a quality wish, no matter what the cost,” Ms. Ceaser-Hudson said. “We try to make it something the family and child will always remember.”

Sales of New Homes Worse Than Expected

The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.

The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.

New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.

"It was ugly," declared Richard Yamarone, economist at Argus Research. "It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year," he said.

The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.

By region, sales fell in all parts of the country, except for the West.

In the Midwest, new-home sales plunged 27.6 percent in November from October. Sales dropped 19.3 percent in the Northeast and fell 6.4 percent in the South. In the West, however, sales rose 4 percent.

Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.

"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's Economy.com. "Sales and home prices are in a free fall. The downturn is intensifying."

The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less.

On Wall Street, the Dow Jones industrials, after an erratic session, managed to squeeze out a small gain even as the grim home sales report added to some investors' angst. The Dow closed up 6.26 points at 13,365.87.

Would-be home buyers have found it more difficult to secure financing, especially for "jumbo" mortgages -- those exceeding $417,000. The tighter credit situation is deepening the housing slump. Unsold homes have piled up, which will force builders to cut back even more on construction and look for ways to sweeten the pot to lure prospective buyers.

"A lot of borrowers are being disqualified for loans. If you can't qualify for a mortgage the game is over. For those who do qualify, it takes longer to get loans," said Brian Bethune, economist at Global Insight.

The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did home prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.

Problems in housing are expected to persist well into 2008 -- a major election year.

The housing and mortgage meltdowns have raised the odds that the country will fall into a recession. And, the situation has given Democrat and Republican politicians_ including those who want to be the next president -- plenty of opportunities to spread blame around.

The economy's growth is expected to have slowed sharply to a pace of just 1.5 percent or less in the final three months of this year. Former Federal Reserve Chairman Alan Greenspan recently warned that the economy is "getting close to stall speed." The big worry is that the housing and credit troubles will force individuals to cut back on spending and businesses to cut back on hiring and capital investment, throwing the economy into a tailspin.

To help bolster the economy, the Federal Reserve has sliced a key interest rate three times this year. Its latest rate cut, on Dec. 11, dropped the Fed's key rate to 4.25 percent, a two-year low. Many economists are predicting the Fed will lower rates again when they meet in late January.

"The risks are as high as they've ever been during this expansion that started in late 2001 that the economy will fall into a recession," said Bethune. "The odds are now nudging up close to the 50 percent mark."

Credit Crisis? Just Wait for a Replay

What if it’s not just subprime?

As 2007 ends, it seems that the financial world shakes every time a company reveals some new exposure to the disastrous world of subprime mortgage lending.

But just how different was subprime lending from other lending in the days of easy money that prevailed until this summer? The smug confidence that nothing could go wrong, and that credit quality did not matter, could be seen in the many other markets as well.

That was particularly true in the corporate loan market. Loans were cheap, and anyone worried about losses could buy insurance for almost nothing. It was not an environment that encouraged careful lending.

“The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets,” Ted Seides, the director of investments at Protégé Partners, a hedge fund of funds, wrote in Economics & Portfolio Strategy.

“Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit,” he added. “Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it.”

There are differences, of course, and they may be critical in averting a crisis. To start, there are virtually no defaults in corporate lending now, and even if Moody’s is accurate in its forecast that defaults will quadruple in 2008, the default rate on speculative loans and bonds would still be below the long-term average. That hardly sounds like a crisis.

And there is no reason to think that fraud was a big factor in the corporate loan market, as it seems to have been in subprime.

But the history of junk bonds provides a warning that defaults start to rise a few years after credit gets very easy. By that standard, says Martin Fridson of the research firm FridsonVision, a new wave of defaults is overdue. Already, even without defaults, he says, about a tenth of high-yield bonds are trading at distress levels — levels that provide yields of at least 10 percentage points more than Treasuries.

If a recession does occur, one can easily foresee a wave of defaults in junk bonds and their bank-loan cousins, leveraged loans. With highly leveraged structures supported by some of those loans, the surprises could be greater. It is sobering to realize that the issuing of leveraged loans set a record in 2007, even though the market contracted sharply late in the year.

If this was the year that many readers — not to mention financial reporters — learned what C.D.O., M.B.S. and SIV stood for, 2008 could be the year of C.D.S. and C.L.O. (For those who came in late, those abbreviations from 2007 are shorthand for collateralized debt obligations, mortgage-backed securities and structured investment vehicles. The new ones are credit default swaps and collateralized loan obligations — a special kind of C.D.O. backed by corporate loans.)

We have learned in the last month that credit insurers took big risks in backing C.D.O.’s and other exotic things. Some are scrambling to raise more capital to stay in business. One, ACA, may well go out of business.

But if the credit insurers turn out to have had inadequate reserves, what are we to make of the credit default swap market? Mr. Seides calls it “an insurance market with no loss reserves,” and points out that $45 trillion in such swaps are now outstanding. That is, he notes, almost five times the United States national debt.

Many of those swaps cancel each other out — or will if everyone meets their obligations. The big banks say they run balanced books, in which they sell insurance to one customer and buy insurance on the same borrower from another customer. But if some customers cannot pay what they owe, this could be another shock for bank investors. As it is, financial stocks have underperformed other stocks by record amounts this year.

One of the more remarkable facts about the subprime crisis is that total losses to the financial system may be about equal to the amount of subprime loans that were issued. On the face of it, that appears absurd, since many such loans will be paid off, and those that default will not be total losses. But, Mr. Seides said in an interview, “the financial leverage placed on the underlying assets was so high” that the losses multiplied, as the profits did when times were good.

“When there is more leverage” and things go wrong, he said, “there are more losses.”

The corporate credit market is vastly larger than the subprime market, and there are plenty of dubious loans outstanding that probably could not be refinanced in the current market. If some of those companies run into problems, defaults could soar and fears about C.L.O. valuations and C.D.S. defaults could spread long before there are large actual losses on loans.

There are other areas of potential weakness in 2008. Commercial real estate is one area where some see disaster looming. Others worry that some emerging markets could run into big problems because many borrowers there have taken out loans denominated in foreign currency and could be devastated if local currencies lose value.

It was the greatest credit party in history, made possible by a new financial architecture that moved much of the activities out of regulated institutions and into financial instruments that emphasized leverage over safety. The next year may be the one when we learn whether the subprime crisis was a relatively isolated problem in that system, or just the first indication of a systemic crisis.

Home prices up, down, depending on source

South Florida home prices have fallen harder than in any major metropolitan area, according to one report. Other measures painted a brighter picture.

In the past year, South Florida home prices have:

A) Fallen 12.4 percent.

B) Stayed flat.

C) Risen 3 percent in Miami-Dade, declined 5 percent in Broward.

Answer: All of the above, depending on which survey you believe.

According to a widely followed national home price index released Wednesday, prices of homes in Miami-Dade, Broward and Palm Beach counties fell 12.4 percent in October from last year. The Standard & Poor's/Case Shiller index says the South Florida region posted the worst decline of 20 major metropolitan areas it follows.

But Florida Association of Realtors sales data say median prices for single-family houses in Miami-Dade and Broward remained virtually flat at around $354,000 since October 2006 even as the number of homes selling plummeted. Palm Beach prices declined 5 percent. November numbers are out Monday.

And the federal government says Broward house prices as of Sept. 30 were down 4.7 percent from a year ago, while Miami-Dade's prices were up 3.45 percent.

The discrepancies boil down to the very different methods the groups use to calculate their numbers. Each method provides a snapshot -- and only a snapshot -- in a very diverse real estate scene whose more than 1.2 million properties stretch from upscale waterfront communities and suburbs to inner-city neighborhoods. Analyzing just how bad the market is occupies cocktail chatter and boardroom debates, and these differing data highlight the difficulties of figuring out exactly what is going on.

The Realtors organization collects information from the database that real estate agents use to list homes for sale, the Multiple Listing Service. The group calculates the median price -- the point at which half the homes sold for more, half for less -- of all the homes sold during a particular month.

The Case-Shiller index, named for economists Karl Case and Robert Shiller, examines price changes of the same house over time. For each house that has sold twice, a computer model assigns a weight based on several factors -- for example, how long between sales and whether the home appears to have been remodeled. It does not include condos.

And the government's Office of Federal Housing Enterprise Oversight analyzes home values reported on new mortgages and refinancings -- but only for mortgages of less than $417,000, the maximum amount covered by Fannie Mae and Freddie Mac.

To veteran real estate analyst Michael Cannon, all methods are unsatisfying. ''Wall Street does not understand real estate,'' Cannon said of the Case-Shiller index. Computer models, he said, can't possibly account for all the variables that affect a home's sale price or an overall real estate market.

And the Multiple Listing Service that Realtors use accounts for only about 42 percent of the market, said Cannon, whose commercial real estate column is published in The Miami Herald. (Others estimate the listing service covers two-thirds of the market.) More importantly, especially in a market that is seeing so few sales, the median price of the homes and condos that sold in any given month paints an incomplete picture.

So what is happening out there? Cannon, whose firm analyzes property valuations for banks, developers and government, says prices are declining from the overvalued peaks seen between 2003 and 2005 in certain segments. But, ``overall, we have not seen any major decline.''

Homeowners who bought at the peak are probably losing money if they have to sell, but for the most part, homeowners are still ahead.

''That's why I call it a rollback, not a crash,'' Cannon said. ``If there was a crash, you'd see tremendous price discounts being offered. You see all these sales pitches, but overall you don't see sellers panicking.''

That analysis rings true to Ron Shuffield, president of Esslinger Wooten Maxfield, one of the largest real estate brokerages in Miami-Dade and Broward.

The average asking home price in Miami-Dade, he says, has dropped 44 percent since June 2005, from more than $1 million to about $600,000. The median selling price, he said, has fallen around 8 percent in that time. ''Our sellers are becoming very realistic,'' Shuffield said.

Homes selling for less than $300,000 are barely budging, and the number of homes for sale in that price range is voluminous. Shuffield attributes that to first-time and low-income buyers having trouble paying their mortgages, many of them sub-prime or adjustable. But homes over $1 million are selling well.

Shuffield also notes that while EWM's sales in the last 90 days are down 75 percent from two years ago, the number of rental deals are up 54 percent. ''So many people are just afraid to buy,'' he said.

Foreign buyers, taking advantage of the weak dollar, will also keep prices from dipping much lower. ''The fact that we live in an international place gives us an advantage over probably every other market in the nation,'' he said. ``We have buyers from every corner of the globe.''

Nationally, the Case-Shiller index of 20 metropolitan areas fell 6.1 percent. Among the 20 metropolitan areas used in the broader index, 11 posted record monthly declines and all 20 declined in October compared to September.

After South Florida, the Tampa region posted a year-over-year loss of 11.8 percent. Detroit, Las Vegas, Phoenix and San Diego also posted double-digit year-over-year declines.

Only three areas -- Charlotte, N.C.; Portland, Ore.; and Seattle -- posted year-over-year home price appreciation in October.

Miami leads nation in plunging home prices

Greater Miami's home prices fell at an annual rate of 12.4 percent, according to the latest national numbers released Wednesday.

Home prices fall for 10th month in row

U.S. home prices fell in October for the 10th consecutive month, declining a record 6.7 percent compared with a year ago, according to the Standard & Poor's/Case-Shiller home price index.

Miami is in the worst position of the top 20 metropolitan areas, with an annual decline of 12.4 percent. Following Miami is Tampa with a 11.8 percent decrease, Detroit down 11.2 percent and San Diego down 11.1 percent.

The only metro areas that saw an increase were Seattle with a 3.3 percent increase and Portland with a 1.9 percent increase.

''No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim,'' said Robert Shiller, who helped create the index, in a statement Wednesday.

The S&P/Case-Shiller home price index tracks prices of existing single-family homes in 10 metropolitan areas compared with a year earlier. A broader index of 20 metropolitan areas fell 6.1 percent.

Officials Falling Behind on Mortgage Fraud Cases

The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said.

Reports of suspected mortgage fraud have doubled since 2005 and increased eightfold since 2002. Banks filed 47,717 reports this year, up from 21,994 two years ago, according to statistics from the Federal Bureau of Investigation and the Financial Crimes Enforcement Network of the Treasury Department. In 2002, banks filed 5,623 reports.

“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,” said Chuck Cross, vice president of mortgage regulatory policy for the conference of state bank supervisors, an organization of regulators and bankers. “There’s too many cases, not enough agents.”

Mortgage fraud covers crimes like false statements on mortgage applications and elaborate “flipping” schemes that involve multiple properties and corrupt appraisers, title companies and straw buyers.

In one common flipping plot, someone buys a house, has it appraised for more than its true value and sells it to a straw buyer for the inflated price, pocketing the difference. The straw buyer lets the house fall into foreclosure, leaving the bank with the loss.

The cases coming into view reflect the recent boom in mortgages with limited borrower documentation and lax scrutiny.

Law enforcement agencies say they are overwhelmed, especially because investigating and prosecuting fraud can be complex and time consuming. The officials say career criminals and organized-crime rings have increasingly turned from other crimes to mortgage fraud because it offers lower risks and high profits.

“I could hire a dozen investigators and a dozen prosecutors and only scratch the surface,” said David McLaughlin, a senior assistant attorney general in Georgia who coordinates prosecutions of mortgage fraud.

Losses involving federally insured banks totaled $813 million in the 2007 fiscal year, more than double the $293 million lost in the 2002 fiscal year.

These figures most likely represent “the tip of the iceberg,” said the Mortgage Bankers Association, an industry group, because they do not cover mortgage brokers, who arrange more than half of new mortgages. The industry estimates the total loss this year at $4 billion.

Mortgage fraud can damage whole neighborhoods. Derrick Duckworth, a real estate broker in southwestern Atlanta, has watched “about 40 percent” of the houses in his neighborhood, Adair, become vacant as a result of mortgage fraud. The remaining residents cannot sell their houses because of the abandoned buildings and the neighborhood’s reputation for fraud, he said.

“The other day, someone broke into my neighbor’s crawl space and stole her copper plumbing,” he said. “Last week, we had an 18-year-old shot on the street.”

Fraud is especially common with subprime mortgages, the high-price loans for borrowers with poor credit. Lenders and investigators trace part of the foreclosure crisis to mortgage fraud.

For local law enforcement agencies, fraud is increasing as regulatory budgets are tight and other crimes seem more pressing, said Tom Levanti, a fraud investigator in New York.

“You only have a certain amount of resources,” Mr. Levanti said, “and in New York, you need to spend them on counterterrorism, protecting citizens, reducing violent crime. Mortgage fraud cases are long and time consuming, and the victims are usually financial institutions that can write off the loss. So as a police department, return on investment has to be thought about.”

Lenders say they have good relationships with investigating and prosecuting agencies.

“But law enforcement is just absolutely overwhelmed,” said Corey Carlisle, senior director for government affairs for the Mortgage Bankers Association, which has lobbied for more money to fight fraud. “Lenders say they have to market their cases to law enforcement,” meaning showing extraordinarily high sums or multiple criminals.

John Arterberry, executive deputy chief of the fraud section in the Justice Department, said federal prosecutors and the F.B.I. had made progress on mortgage fraud. Mr. Arterberry cited sweeps in 2004 and 2005 that resulted in more than 150 defendants charged in each sweep.

The bureau has 1,210 open mortgage fraud inquiries, up from 436 in 2003. Last year, those cases led to 204 convictions.

“We have limited resources and have to put them where they do the most good,” Mr. Arterberry said. “We’re able to zero in on hot spots and organized efforts.”

This progress is too slow for Kristine Baugh, who said her neighborhood in Dallas had not recovered from a mortgage fraud that left in six vacant houses on her block. Ms. Baugh, a real estate broker, said she discovered what she believed was a fraud scheme in 2005, when six properties sold for far more than she felt they were worth and remained vacant until being foreclosed.

Suspecting fraudulent appraisals, she gathered documents on the sales and took them to the F.B.I., the district attorney and local officials. With neighbors, she sued an investor who she said was behind the fraud.

Years later, there have been no arrests in the case. The residents ran out of money and dropped their civil suit after the investor filed a countersuit. “Our neighborhood is still in shambles,” Ms. Baugh said. “The properties deteriorated and have to be kept up by the city. They’re a health hazard.”

The swimming pools at the vacant sites are breeding grounds for mosquitoes and potential West Nile virus sources, she said.

Such cases are likely to multiply, said Constance Wilson, executive vice president of Interthinx, which develops fraud detection tools for the lending industry.

“The cases we’re seeing today are from 18, 24, 36 months ago, when the market was still good,” Ms. Wilson said. “Now we’re going to see an increase in mortgage fraud, because all those loan officers, brokers and appraisers who were making six-figure incomes, now their back is against the wall. If that loan doesn’t close, they can’t make their home payment.

“So you have a desperation cycle,” she said. “There’s a lot of push for them originate volume.

“The consequences are that people are getting away with it. It’s damaging the entire real estate market. It’s devastating to victims. Not just lenders but consumers. It’s devastating to entire communities.

“When it’s this prolific,” she said, “we just don’t have enough law enforcement or enough prosecutors for all the cases out there.”

Mortgage Crisis Hits Home, Especially Around Holidays

Somewhere between deciding when to take her SAT exams and reading “Lolita” for the first time, Meghan Werner has learned more than any teenager should about the consequences of the subprime mortgage debacle.

Her father, Philip Werner, a contractor, had struggled to find work, and like millions of Americans, he took out a high-interest mortgage that he could not afford. Meghan, 17, has tried to help him through the legal process that is likely to end next week with the public auction of the only home she has ever known.

On a recent evening, with an old steel and iron stove heating their living room, Meghan and her sister, Katlyn, 16, flipped through photographs of easier times, when their father had more work, and when the family, now split by divorce, was whole. Mr. Werner, 55, sat on the well-worn leather couch where many nights, tormented by worry and guilt, he fell asleep in his clothes.

Time has run out. They have no one to borrow money from to save the house, and no one to move in with after they lose it. They have been scouring the classified ads for an apartment, but realize they might be forced to move into a shelter. The girls are also concerned that if they do move to a shelter, they will be separated from their father.

The troubles they face are daunting, but during the holidays, small indignities seem to hurt more. “This is the first Christmas in 22 years where we don’t have a tree,” Mr. Werner said, pointing to an empty corner by the living room window. On neighbors’ lawns, elaborate tableaus lighted up the snow.

The Werners have hung stockings, but will skip the presents. “It’s the last Christmas in this house,” Mr. Werner said.

He found the house, an old resort cottage on a half-acre of wooded land populated by blue jays and foxes with a patch of tiger lilies, in 1986. The place was private, and the schools were good. When he and his wife divorced in 2002, Mr. Werner sold the house to an investor for $170,000. “I had $35,000 left on the mortgage,” he said.

He and his children stayed on as tenants. In 2005, when he was making a decent living painting highway lines, Mr. Werner repurchased the house for about $250,000. He said his divorce had left him with bad credit, but he found a loan for about $300,000 through an acquaintance who was a mortgage broker. The loan, through New Century Financial, required no cash down payment and came with an 8 percent interest rate that adjusted to 11 percent, Mr. Werner said.

Mr. Werner could manage the payments, but then lost his job.

For this family, a recent proposal by the Federal Reserve to restrict the granting of high-interest or exotic loans to borrowers with weak credit came too late. According to estimates by the Center for Responsible Lending, a nonpartisan research group, about a fifth of borrowers who took out subprime mortgage loans in 2005 and 2006, as Mr. Werner did, will lose their homes to foreclosure. The center estimates that in New Jersey, more than 30,000 families who have such loans will lose their homes.

New Century Financial, one of the largest subprime lenders, filed for bankruptcy protection in March.

The proposal by the Federal Reserve would require lenders to verify the income and assets of borrowers. Mr. Werner said that he negotiated the loan over coffee at a diner, and that he never had to provide proof of his income. “It was a no-document loan,” he said, referring to what is sometimes called a stated income loan, or a “liar’s loan.”

Sometime in the last two years, life here slowed to a dismal crawl. The girls started missing school. Mr. Werner stopped working on an addition to the house. “There are days we argue in this house over nothing,” he said.

Meghan visited the sheriff’s office with her father this month. A woman there told them they would have 10 days to buy back their home if it was sold to the bank. None of them believes they will be able to find the money.

The girls cling to their memories: fireflies and barbecues out back in the summer; the time their father mistook a bear for Zeus, the family dog. Mr. Werner said he would miss sitting in his living room, looking out the window at the children playing.

Two days before Christmas, a neighbor gave the Werners a small artificial tree. They decorated it with candy canes.

“I bought my first home when I was 25,” Mr. Werner said. “What I’ve lost is not just the home and my dream. I’ve crushed my kids, and I’ve got to start over again. I’m not able to leave them anything.”

This Is the Sound of a Bubble Bursting

TWO years ago, when Eric Feichthaler was elected mayor of this palm-fringed, middle-class city, he figured on spending a lot of time at ribbon-cuttings. Tens of thousands of people had moved here in recent years, turning musty flatlands into a grid of ranch homes painted in vibrant Sun Belt hues: lime green, apricot and canary yellow.

Mr. Feichthaler was keen to build a new high school. He hoped to widen roads and extend the reach of the sewage system, limiting pollution from leaky septic tanks. He wanted to add parks.

Now, most of his visions have shrunk. The real estate frenzy that once filled public coffers with property taxes has over the last two years given way to a devastating bust. Rather than christening new facilities, the mayor finds himself picking through the wreckage of speculative excess and broken dreams.

Last month, the city eliminated 18 building inspector jobs and 20 other positions within its Department of Community Development. They were no longer needed because construction has all but ceased. The city recently hired a landscaping company to cut overgrown lawns surrounding hundreds of abandoned homes.

“People are underwater on their houses, and they have just left,” Mr. Feichthaler says. “That road widening may have to wait. It will be difficult to construct the high school. We know there are needs, but we are going to have to wait a little bit.”

Waiting, scrimping, taking stock: This is the vernacular of the moment for a nation reckoning with the leftovers of a real estate boom gone sour. From the dense suburbs of northern Virginia to communities arrayed across former farmland in California, these are the days of pullback: with real estate values falling, local governments are cutting services, eliminating staff and shelving projects.

Families seemingly disconnected from real estate bust are finding themselves sucked into its orbit, as neighbors lose their homes and the economy absorbs the strains of so much paper wealth wiped out so swiftly.

Southwestern Florida is in the midst of this gathering storm. It was here that housing prices multiplied first and most exuberantly, and here that the deterioration has unfolded most rapidly. As troubles spill from real estate and construction into other areas of life, this region offers what may be a foretaste of the economic pain awaiting other parts of the country.

Cape Coral is in Lee County, across the Caloosahatchee River from Fort Myers. In the county, a tidal wave of foreclosures is turning some neighborhoods into veritable ghost towns. The county school district recently scrapped plans to build seven new schools over the next two years. Real estate agents and construction workers are scrambling for other lines of work, and abandoning the area. As houses are relinquished to red ink and the elements, break-ins are skyrocketing, yet law enforcement is resigned to making do with existing staff.

“We’re all going to have to tighten the belt somehow,” says Robert Petrovich, Cape Coral’s chief of police.

FLORIDA real estate has long been synonymous with boom and bust, but the recent cycle has packed an unusual intensity. The Internet made it possible for people ensconced in snowy Minnesota to type “cheap waterfront property” into search engines and scroll through hundreds of ads for properties here. Cape Coral beckoned speculators, retirees and snowbirds with thousands of lots, all beyond winter’s reach.

Creative finance lubricated the developing boom, making it easy for buyers to take on more mortgage debt than they could otherwise handle, driving prices skyward. Each upward burst brought more investors — some from as far as California and Europe, real estate agents say.

Joe Carey was part of the speculative influx. An owner of rental property in Ohio, he visited Cape Coral in 2002 and found that he could buy undeveloped quarter-acre lots for as little as $10,000. Nearby, there were beaches, golf courses and access to the Caloosahatchee River, which empties into the Gulf of Mexico.

Builders were happy to arrange construction loans, then erect houses in as little as six months. Real estate agents promised to find buyers before the houses were even finished.

“All you needed was a pulse,” Mr. Carey said. “The price of dirt was going up. We took that leap of faith and put down $10,000.”

Backed by easily acquired construction loans, Mr. Carey’s investment allowed him to buy three lots and top off each with a new home. He flipped them immediately for about $175,000 each, he recalls. Then he bought more lots, confident that Cape Coral and Fort Myers — the county seat across the river — would continue to blossom. From 2000 to 2003, the population of the Cape Coral-Fort Myers metropolitan area grew to nearly 500,000 from 444,000, according to Moody’s Economy.com.

“Jobs were very plentiful,” Mr. Carey said. “The construction trade was up, stores were opening up, and doctors were coming in. It kind of built its own economy.”

In 2003, Mr. Carey became a real estate agent. The next year, he opened a title company. Then he teamed up with seven others to open a local office for Keller Williams Realty, the national realty chain. They hired 40 agents.

By 2004, the median house price in Cape Coral and Fort Myers had shot up to $192,100, according to the Florida Association of Realtors — a jump of 70 percent from $112,300 just four years earlier. In 2005, the median price climbed an additional 45 percent, to more than $278,000.

Lots that Mr. Carey once bought for $10,000 were now going for 10 times that. During the best times back in Ohio, he once earned about $100,000 in a year. At the height of the Florida boom, in 2005, he says he raked in $800,000. “If you just got up and went to work,” he says, “pretty much anybody could become an overnight millionaire.”

National home builders poured in, along with construction workers, roofers and electricians. But as a kingdom of real estate materialized, growth ultimately exceeded demand: investors were selling to one another, inflating prices. When the market figured this out in late 2005, it retreated with punishing speed.

“It was as if someone turned off the faucet,” Mr. Carey said. “It just came to a screeching halt. When it stopped, people started dumping property.”

By October this year, the median house price was down to $239,000, some 14 percent below the peak. That same month, he and his partners shuttered his real estate office. In November, he closed the title company. On a recent afternoon, he went to his old office in a now-quiet strip mall to take home the remaining furniture. He was preparing to move to the suburbs of Atlanta.

While speculators may find it easy enough to pack up and move on, they are leaving behind an empire of vacant houses that will not be easily sold. More than 19,000 single-family homes and condos are now listed on the market in Lee County. Fewer than 500 sold in November, meaning that at the current rate it would take three years for the market to absorb all the houses.

“Confusion abounds because nobody knows where the bottom is,” says Gerard Marino, a commercial Realtor at the Re/Max Realty Group in Fort Myers.

Commercial builders are unloading properties at sharply reduced prices, sometimes even below construction costs, which further adds to the glut.

“It’s our goal to clear out the inventory,” James P. Dietz, the chief financial officer of WCI Communities, a Florida-based home builder, said in an interview two weeks ago. “We have to generate cash to make payroll.” Last week, Mr. Dietz announced he would leave WCI at the end of this year to pursue a career in the vacation resort business.

AT Pelican Preserve, a gated community set around a 27-hole golf course in Fort Myers, WCI has halted building, leaving some residents staring at mounds of earth where they expected to see manicured lawns. Half-built condos sit isolated in a patch of dirt, cut off from the road.

“It bugs the hell out of my wife,” says Paul Bliss, 61, whose three-bedroom town house is next to a half-built home site. “She looks out and sees that concrete slab.”

But the builder makes no apologies. “There was such a falloff in demand that it made no sense to build new units,” says Mr. Dietz, adding that the pause in construction “doesn’t in any way detract from the property.”

Throughout Lee County, a sense of desperation has seized the market as speculators try to unload property or lure renters. On many lawns, a fierce battle is under way for the attention of passers-by, with “for rent” signs narrowly edging out “for sale.”

In Cape Coral, foreclosure filings in the first 10 months of the year reached 4,874, more than a fourfold increase over the same period the previous year, according to RealtyTrac, an online provider of foreclosure information.

Elaine Pellegrino and her daughter, Charlene, see no way to avoid joining that list.

Seven years ago, Ms. Pellegrino and her husband bought their three-bedroom house in northwestern Cape Coral for $97,000, without having to make a down payment.

The land was mostly empty then. But as construction crews descended and a thicket of new homes took shape, values more than doubled. The Pellegrinos’ mailbox brimmed with offers to convert that good fortune into cash by refinancing their mortgage. They bit, borrowing against the inflated value of their home to buy two businesses: an auto repair shop and a lawn service.

“We were thinking we were on the way up,” Ms. Pellegrino says.

But last December, Ms. Pellegrino’s husband died unexpectedly, leaving her with the two businesses, both deeply in debt, and $207,000 she owed against her home, which is now worth about $130,000, she says.

Disabled and 53 years old, Ms. Pellegrino does not work. She says she lives on a $1,259 monthly Social Security check. Her daughter, a college student, receives $325 a month for child support for one child. Charlene Pellegrino has been looking on the Web for office work for months, but with so many people being laid off, she has come up empty, she says. They have not paid their mortgage in four months.

“What can we do?” Charlene Pellegrino asks, as dusk nears and her driveway lights glow into a void. The rest of the block lies in shadows, with little light emanating from surrounding homes.

“We’re probably going to lose the house,” she says.

But not anytime soon. The Pellegrinos have joined a new cohort offered up by the real estate unraveling: they are among those waiting in their own homes for the seemingly inevitable. The courts are so stuffed with foreclosures that they assume they can stay for a while.

“We figure we have at least six months,” Elaine Pellegrino says. “We haven’t heard a thing from the bank for a long time.”

AS construction and real estate spiral downward, the unemployment rate in Lee County has jumped to 5.3 percent from 2.8 percent in the last year. With more than one-fourth of all homes vacant, residential burglaries throughout the county have surged by more than one-third.

“People that might not normally resort to crime see no other option,” says Mike Scott, the county sheriff. “People have to have money to feed their families.”

Darkened homes exert a magnetic pull. “When you have a house that’s vacant, that’s out in the middle of nowhere, that’s a place where vagrants, transients, dopers break a back window and come in,” the sheriff adds.

The county’s Department of Human Services has seen a substantial increase in applications for a program that helps pay rent and utility bills for those in need. Half the applicants say they have lost jobs or seen their work hours reduced, said Kim Hustad, program manager.

At Grace United Methodist Church in Cape Coral, Pastor Jorge Acevedo normally starts aid drives this time of year for health clinics in places like India and Africa. This year, the church is buying Christmas presents for about 50 children in the congregation, many who are are in families suffering through job losses.

At Selling Paradise Realty, a sign seeks customers with a free list of properties facing foreclosure and “short sales,” meaning the price is less than the owner owes the bank. Inside, Eileen Rodriguez, the receptionist, said the firm could no longer hand out the list. “We can’t print it anymore,” she says. “It’s too long.”

In late November, more than 2,600 of the 5,500 properties for sale in Cape Coral were short sales, says Bobby Mahan, the firm’s owner and broker. Most people who bought in 2004 and 2005 owe more than they paid, he says. “Greed and speculation created the monster.”

As much as anything, the short sales are responsible for the market logjam. To complete a deal, the lender holding the mortgage must be persuaded to share in the loss and write off some of what is due. “A short sale is a long and arduous process,” Mr. Mahan says. “Battling the banks is horrendous.”

Kevin Jarrett is stuck in that quagmire. In 1995, freshly arrived from Illinois, he put down $1,000 to buy a house in Lehigh Acres, in eastern Lee County.

Three years later, Mr. Jarrett left his mental health-counseling job and began selling real estate. He bought progressively nicer homes, keeping the older ones to rent, while borrowing against the rising value of one to finance the next.

Mr. Jarrett acquired a taste for $100 dinners. He bought a powerboat and a yellow Corvette convertible. (In a photograph on his business card, Mr. Jarrett sits behind the wheel, the top down, offering a friendly wave.) Last summer, he paid $730,000 for a 2,500-square-foot home in Cape Coral with a pool and picture windows looking out on a canal.

But Mr. Jarrett hasn’t closed a deal in three months. He is on track to earn about $50,000 for the year, he said. Yet he needs $17,000 a month just to pay the mortgages, insurance, taxes and utility bills on his four properties — all worth less than half what he owes. Rental income brings in only about $3,500 a month.

Mr. Jarrett has not paid the mortgage on two of his properties in six months and is behind on the others as well, he says. His goal is to sell everything, move into a rental and start over.

He is supplementing his income by selling MonaVie, a nutritional juice that retails for $45 a bottle. He recently dropped health insurance for his family, saving about $680 a month. He is applying for a state-subsidized health plan that would cover his 9-year-old daughter. “I’m in survival mode,” he says.

Many others are in similar straits, and the situation has had a ripple effect on the local economy. Scanlon Auto Group, a luxury car dealer, says it has seen its sales dip significantly — the first time that’s happened in 25 years. Rumrunners, a popular Cape Coral restaurant with tables gazing out on a marina, says its business is down by a third, compared with last year.

Furniture dealers are folding. Hardware stores are suffering. At Taco Ardiente in Lehigh Acres, business is down by more than three-fourths, complains the owner, Hugo Lopez. His tables were once full of the Hispanic immigrants who filled the ranks of the construction trade. The work is gone, and so are the workers.

AT the state level, Florida’s sales tax receipts have slipped by nearly one-tenth this year, and by 14 percent in Lee County. That is a clear sign of a broad economic slowdown, said Ray T. Kest, a business professor at Hodges University in Fort Myers.

“It started with housing, the loss of construction jobs, mortgage companies, title companies, but now it’s spread through the entire economy,” Mr. Kest says as he walks a strip of mostly empty condo towers on the riverside in downtown Fort Myers. “It now has permeated everything.”

In recent years, Bishop Verot Catholic High School in Fort Myers had raised as much as $200,000 by selling goods at a dinner auction. Michael Pfaff, a Cape Coral mortgage broker, used to donate a weekend cruise on his 40-foot catamaran. But Mr. Pfaff’s business has all but disappeared, and he recently sold the boat. This year, the school canceled the auction and is deferring building maintenance.

The county school district’s decision to cancel construction of new public schools reflects a broader diminishing of resources. Developers have to pay so-called impact fees to the district to help fund new facilities. Two years ago, the district took in $56 million in such fees. Next year, it expects only $25 million.

New schools are no longer needed anyway, says the schools superintendent, James W. Browder. Many families connected to construction and real estate have moved away, so school enrollments are growing more slowly than expected. This could generate a snowball effect all its own: the new schools were to cost as much as $60 million each to build, so canceling them could mean further job cuts for the already reeling building industry.

Mr. Browder points out an upside of the housing downturn: Hiring people has become easy. In recent years, the school system struggled to find bus drivers, given the abundance of jobs at twice the pay driving dump trucks in home construction. “Now, we get 14 applicants for every job,” he says.

The county government depends on property taxes for a third of its general funding. Since taxes are assessed based on the previous year’s real estate values, it has yet to feel a dent. But agencies are under significant pressure to pare back in anticipation of a dip in next year’s funds.

Tax-cutting advocates cheer this prospect. Governments have gotten fat on the boom, they say. A constitutional amendment facing Florida voters in January would expand tax caps for many residences statewide.

“All the local governments were drunk with money,” says Mr. Kest, the finance professor. “Now, they’re going to have to cut back and learn how to manage.”

But local officials counter that they are already being forced to contemplate significant changes that could affect everyday life. The county’s public safety division, which operates ambulance services, says it could be obliged to cut staff. The county’s Natural Resources Department recently delayed a $2.1 million project to filter polluted runoff spilling into the Lakes Regional Park — a former quarry turned into a waterway dotted by islands and frequented by native waterfowl.

People who were priced out of the earlier boom here could wind up the winners. “We had an affordable-housing crisis,” says Tammy Hall, a Lee County commissioner. “The people who were here for a fast buck are gone. You’re going to see normal people go back into that housing.”

When Andrea Drewyor, 24, moved to Cape Coral from Ohio this year to take a teaching job, she found a brand-new two-bedroom waterfront duplex in a gated community with a fitness center, a swimming pool and a Jacuzzi — all for $875 a month in rent.

At night, most of the units around her are dark. The developer can moan.

Not Ms. Drewyor.

“I like not having a lot of people living here,” she said. “This place is awesome.”

Taxes Reassessed in Housing Slump as Prices Decline

LOS ANGELES — Home owners across the nation are looking to county governments to reassess the values of their homes in the face of flattening and falling prices that have befallen scores of markets. Downward assessments, done at the request of homeowners or pre-emptively by government, appear to be most pronounced in areas where the housing market was exploding just a few years ago, or where economic conditions are poorest.

In Maricopa County, the largest in Arizona, a “large percentage” of the one million single-family home owners will see their houses reassessed at lower rates in February, said Keith Russell, the county assessor. In Phoenix, the largest city in the county, housing prices fell 8.8 percent over the last year, according to the S&P/Case-Shiller index, which monitors the residential housing market.

Among the roughly 200,000 parcels in Lucas County, Ohio, 7,083 owners requested reassessments in 2007, about 10 times the yearly average, said Anita Lopez, the assessor, who ran for office on a campaign to adjust assessments.

“Citizens know the market is slow if not declining,” Ms. Lopez said, “and they are informed and feel comfortable in challenging their county values. People here can’t sell their homes, they have less money, and they don’t understand why the government is asking for more money in a declining housing market.”

Local governments, which rely heavily on property taxes, will have to find ways to replace lost revenue or face having to cut services, lay off staff members or delay projects. The possibility of those losses has alarmed officials in areas already facing large numbers of foreclosures and slumping sales, products, in part, of the mortgage credit crisis that has rippled through the country. [Sunday Business.]

“Government has been the beneficiary of increasing home prices,” said Relmond Van Daniker, the executive director of the Association of Government Accountants. “And now they are on the other side of that, and they will have to reduce expenses.”

While every state and local government has its own methods for assessing home values for tax purposes — some do it annually, some every five years, and everything in between — many counties are hearing from residents that they would like their homes reassessed, or have taken steps to bring the taxes down of their own volition.

While in some areas, a county or city is required to make whole any loss in revenues to schools, public education is a frequent beneficiary of property tax revenues. “They are obviously concerned,” Ms. Lopez said about her county’s school systems.

No one has aggregated the total number of counties reassessing home values, and many counties take at least a year to catch up to the marketplace. In some places where reassessments are rising, the numbers have yet to approach historical heights.

For example, in 2007 roughly 1,800 homeowners asked for reassessments in Los Angeles County, far above the average of about 500, yet far below the tens of thousands of homeowners in Los Angeles who looked for tax adjustments during some years of the downturn in the 1990s. But elected officials and property tax experts said that the numbers were notable and that they expected them to grow in 2008.

In San Bernardino County near Los Angeles, tens of thousands of owners of the 860,000 homes will have their assessments lowered in the coming year, said Bill Postmus, the assessor, rivaling the numbers during the California real estate crash of the 1990s.

“You should see more of this activity,” said Chris Hoene, director of policy and research at the National League of Cities. “It is mostly in areas most likely to be seeing some decline, like Southern California, Florida, and big cities in the Midwest,” rapid growth areas that are now seeing the other side of the curve.

The United States Conference of Mayors recently released a report showing that the value of taxable residential land had declined by $2.9 billion in California from 2005 to 2008 based on current tax rates, and by hundreds of millions of dollars in other major cities. “We are hearing a lot about this housing market change and its effect on city revenues every day,” Mr. Hoene said

Cities where home values have fallen the most are the obvious first place to look for residents clamoring for reassessments, but that is not always the case. Some states, like California, Michigan and Nevada, have statutory caps in property tax increases, which mean the market value of single family homes almost always exceeds the assessed tax values, except in a major downturn.

However, even in California, if a home buyer made his purchase during a market top in the last several years, he might be in the position of qualifying for lower assessed values. For instance, in Santa Clara County, where pricey Palo Alto and San Jose are located, 17,758 properties were reassessed downward for the 2007-2008 tax period, compared with the same period from 2000 to 2001, when the number was closer to 300.

“Obviously 2001 was the dot-com boom,” said Larry Stone, the Santa Clara assessor. “And the whole assessment role in my county was carried by a very hot residential market,” which has substantially cooled.

In his area, prices, and therefore values, remain strong in high end residential areas with great schools, Mr. Stone said. The coming reassessments are driven in large part in the lower and middle markets, especially the condo market, where the greatest part of the subprime lending problems have occurred.

Indeed, areas with high levels of foreclosures, vacant housing and a reduction in prices expect to see adjustments to the property taxes continue, which is bad news for local governments.

“Rising tax values are not usually a popular thing,” Mr. Hoene said , but homeowners tend to accept it, even begrudgingly, when they know the market value of their home is on the rise. “But the minute you think that your local government assessment practices are out of whack with what is happening in the market,” he said, “you will not accept it.”

Heat a casualty in foreclosures

Tenants in some foreclosed Boston apartment buildings are living without adequate heat because the new landlords - mortgage companies often based in other states - have not repaired broken systems or paid for the delivery of heating oil.

Karla Herrera, who gave birth to a daughter Wednesday, has lived without heat in her Roxbury apartment since November, when the system broke. "Sometimes, I turn on the oven for 20 minutes for heat," she said in Spanish, speaking through an interpreter.

Some foreclosed buildings also lack electricity, or hot water, or even running water, and the tenants may have no one to call: The new landlords often fail to provide tenants with a contact number, as required by Massachusetts law. And when landlords can be reached, the response is often so limited - half a tank of heating oil, for example - that the problems recur within a few days.

City officials say they have dealt with a dozen cases in the last two weeks of utility problems at foreclosed apartment buildings. Michael Kelley, acting administrator of the city's Rental Housing Resource Center, said the numbers are rising as foreclosures pile up and temperatures drop.

He said the city is searching for ways to compel companies to fulfill their responsibilities as landlords. The city also is trying to persuade the companies to improve voluntarily. "It is a sad state of affairs," he said, "that it takes a government agency to reach out to a responsible party to get some action."

At Boston Medical Center, a growing number of children who live in foreclosed buildings are being treated for problems related to a lack of heat, hot water, or electricity, according to the hospital's legal aid clinic, the Medical-Legal Partnership for Children.

One malnourished child was living in a building without running water, making it hard for the mother to mix formula. A child with sickle-cell anemia was treated for pain after temperature fluctuations in an unheated apartment caused the disease to flare up. The medical center's emergency room has treated children whose asthma inhalers cannot be recharged because their apartments have no electricity.

State law prevents utility companies from suspending service in the winter months if a tenant can prove financial hardship. Ellen Lawton, the legal aid clinic's executive director, said that isn't always enough. "The law on the books says they can't, but they do," she said. "And then who do you go to to get it turned back on?"

Massachusetts requires landlords to heat apartments to 68 degrees by day and 64 degrees at night. But on a recent 25-degree morning, Herrera's apartment was comfortable only with a winter coat. The thermostat was broken. When the heating system was engaged, the vents blew cold air into the living room.

Herrera's heating problems actually date to February, before the foreclosure. It is not uncommon for such problems to precede foreclosure, since landlords in financial trouble often allow their buildings to deteriorate.

more stories like thisIn August, Herrera received a letter from a representative of IndyMac Bank, a California company, informing her that it now owned the building. She wrote back to say that the gas stove wasn't working. That problem was fixed in early October. Shortly after Thanksgiving, however, the heat went off and the electricity stopped working in every room except the kitchen.

Herrera said she bought space heaters for her bedroom and her son's bedroom, both operating on extension cords run from the kitchen.

She is scheduled to return from the hospital tomorrow with her new baby girl and said she is resigned to the possibility that the heat still won't be working.

"At the beginning I was very upset but I see that in any case, with pressure or without pressure, things basically continue all the same," she said.

Contacted by the Globe, IndyMac said it was committed to fixing any problems.

"The last thing we want to do is have people living in the buildings we now own, freezing," said Grove Nichols, a company spokesman. "If it's our responsibility to provide heat to the building and to the occupant, then that's what we're going to do."

Mortgage companies say they are trying to make the best of a situation forced on them when the previous landlords defaulted on their loans. Most companies try to empty buildings quickly by paying tenants to leave, and evicting those who don't.

But legal aid attorneys can stall the process for months with procedural issues and counterclaims.

In late November, when the heat went off at Herrera's apartment, the company responded to one request for repairs with a note suggesting she should leave if she wasn't happy.

It also is common, according to legal aid attorneys, for companies to deliver a small amount of heating oil - 100 gallons, for example, into a tank that holds 250 gallons. When that runs out, the tenant must begin the entire process again.

Esme Caramello, a legal aid attorney with the WilmerHale Legal Services Center, who represents Herrera, said another client has lost heat four times this fall because the company did not provide sufficient oil. The mortgage company in that case, also IndyMac, has been operating under a court order to provide heat since mid-November.

The oil ran out on Dec. 6 and was not restored until Dec. 11, after Caramello returned to court. The heat went out again on Dec.16, and was not restored until Wednesday.

Once again, the tank was not filled. The oil is likely to run out around Christmas.

Heating is not the only problem. The walks outside Shareka Murdaugh's Roxbury apartment building have not been shoveled since the season's first snow. At more than nine months pregnant, Murdaugh can't do it.

All but one of the other tenants, a woman with a new baby, left after receiving $1,000 from New England Group, which represents the new landlord, GMAC Financial Services.

Murdaugh's reply to the offer: "Are you serious? Where do we have to go?"

The women say they started calling New England Group in early November to ask for heating oil.

On Nov. 30, the company arranged for the delivery of 100 gallons, they said. It lasted four days.

On Wednesday, after the intervention of City Life/La Vida Urbana, a tenant advocacy group, the company delivered another 100 gallons. But the radiator in Murdaugh's bedroom isn't working. She has covered her windows in plastic. Two space heaters are pointed at the bed. She uses them so continuously that one of the extension cords melted.

Michael Abbott of New England Group denied responsibility for heating the building.

He referred calls to a law firm, which referred calls to GMAC, which said there had been some miscommunication.

"We will go ahead and immediately take care of these things," said Stephen Dupont, a spokesman for GMAC. "We do everything we can to make sure that we're living up to our obligations."

Tent city in suburbs is cost of home crisis

ONTARIO, California (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.

The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.

The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression.

As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.

While no current residents claim to be victims of foreclosure, all agree that tent city is a symptom of the wider economic downturn. And it's just a matter of time before foreclosed families end up at tent city, local housing experts say.

"They don't hit the streets immediately," said activist Jane Mercer. Most families can find transitional housing in a motel or with friends before turning to charity or the streets. "They only hit tent city when they really bottom out."

Steve, 50, who declined to give his last name, moved to tent city four months ago. He gets social security payments, but cannot work and said rents are too high.

"House prices are going down, but the rentals are sky-high," said Steve. "If it wasn't for here, I wouldn't have a place to go."

'SQUATTING IN VACANT HOUSES'

Nationally, foreclosures are at an all-time high. Filings are up nearly 100 percent from a year ago, according to the data firm RealtyTrac. Officials say that as many as half a million people could lose their homes as adjustable mortgage rates rise over the next two years.

California ranks second in the nation for foreclosure filings -- one per 88 households last quarter. Within California, San Bernardino county in the Inland Empire is worse -- one filing for every 43 households, according to RealtyTrac.

Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now risks losing it after falling four months behind on mortgage payments.

"It's not just us. It's all over," said Hernandez, who lives in a neighborhood where most families are struggling to meet payments and many have lost their homes.

She has noticed an increase in crime since the foreclosures started. Her house was robbed, her kids' bikes were stolen and she worries about what type of message empty houses send.

The pattern is cropping up in communities across the country, like Cleveland, Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention Program, said there are entire blocks of homes in Cleveland where 60 or 70 percent of houses are boarded up.

"I don't think there are enough police to go after criminals holed up in those houses, squatting or doing drug deals or whatever," Wiseman said.

"And it's not just a problem of a neighborhood filled with people squatting in the vacant houses, it's the people left behind, who have to worry about people taking siding off your home or breaking into your house while you're sleeping."
Health risks are also on the rise. All those empty swimming pools in California's Inland Empire have become breeding grounds for mosquitoes, which can transmit the sometimes deadly West Nile virus, Riverside County officials say.

'TRICKLE-DOWN EFFECT'

But it is not just homeowners who are hit by the foreclosure wave. People who rent now find themselves in a tighter, more expensive market as demand rises from families who lost homes, said Jean Beil, senior vice president for programs and services at Catholic Charities USA.

"Folks who would have been in a house before are now in an apartment and folks that would have been in an apartment, now can't afford it," said Beil. "It has a trickle-down effect."

For cities, foreclosures can trigger a range of short-term costs, like added policing, inspection and code enforcement. These expenses can be significant, said Lt. Scott Patterson with the San Bernardino Police Department, but the larger concern is that vacant properties lower home values and in the long-run, decrease tax revenues.

And it all comes at a time when municipalities are ill-equipped to respond. High foreclosure rates and declining home values are sapping property tax revenues, a key source of local funding to tackle such problems.

Earlier this month, U.S. President George W. Bush rolled out a plan to slow foreclosures by freezing the interest rates on some loans. But for many in these parts, the intervention is too little and too late.

Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties, said his organization is overwhelmed and ill-equipped to handle the volume of people seeking help.

"We feel helpless," said Sawa. "Obviously, it's a local problem because it's in our backyard, but the solution is not local."

A Crisis Long Foretold

A truism of crisis management is that most seemingly out-of-the-blue disasters could have been prevented if someone had paid attention.

An article in The Times on Tuesday by Edmund L. Andrews leaves no doubt that the twin crises of the subprime lending mess — mass foreclosures at one end of the economic scale and a credit squeeze afflicting the financial system — are rooted in the willful failure of federal regulators to heed numerous warnings.

The Federal Reserve is especially blameworthy. Starting as early as 2000, former Fed Chairman Alan Greenspan brushed aside warnings from another Fed governor, Edward M. Gramlich, about subprime lenders who were luring borrowers into risky loans. Mr. Greenspan’s insistence, to this day, that the Fed did not have the power to rein in such lending is nonsense.

In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed “by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”

Yet, the Fed did nothing as junk lending proliferated — including loans that were unsustainable unless house prices rose in perpetuity, riddled with hidden fees and made to borrowers who could not repay. Mr. Greenspan has said that the law was too vague about the meaning of “unfair” and “deceptive” to warrant action.

The Fed has also disappointed since the current chairman, Ben Bernanke, took over in early 2006. It was not until the end of June 2007 — after the damage was done — that the Fed and other federal regulators issued official subprime guidance. On Tuesday, the Fed issued another set of proposals. Among those, subprime lenders would have to verify a borrower’s ability to repay and include mandatory tax and insurance costs in the monthly payment. In at least one key respect — enforcing the ability-to-repay standard — the proposal is weaker than earlier Fed guidance. Congress is considering other protections that are stronger in many ways.

When all the truth is out, the Fed will have company in the hall of shame. The Office of the Comptroller of the Currency, for example, blocked states from investigating local affiliates of national banks for abusive lending.

If the regulators had done their jobs, there might have been no lending boom and no extraordinary riches for the lenders and investors who profited from unfettered subprime lending. Neither would there be mass foreclosures, a credit crunch and a looming recession.

This crisis didn’t appear unexpectedly. And it won’t go quickly away. Congress and the next administration will have a lot of work ahead to clean up the subprime mess —once and for all.

US Foreclosure Filings Up 68 Pct in Nov.

U.S. homeowners increasingly failed to keep up with their home loan payments in November, as the number of foreclosure filings surged 68 percent nationwide compared with the same month a year ago, according to a mortgage research company.

In all, 201,950 foreclosure filings were reported last month, compared with 120,334 in November 2006, Irvine-based RealtyTrac Inc. said Wednesday.

Last month's filings fell 10 percent from October's 224,451.

The last time there was a sequential drop in foreclosure filings was between August and September, when they fell 8 percent.


"It's a little bit of good news in the otherwise murky real estate market right now," said Rick Sharga, RealtyTrac's vice president of marketing. "The fact that we're seeing a 10 percent decrease is significant. It's a good thing."

The U.S. had one foreclosure filing for every 617 households in November, RealtyTrac said.

The filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.

Forty-three states saw an increase in foreclosure filings over last year.

The decline in filings from October to November likely corresponds with a lull in adjustable-rate mortgage resets, Sharga said.

Such loans typically have a low introductory interest rate, then reset sharply higher after a set period. The number of borrowers who took on adjustable-rate mortgages offering a teaser rate for just two or three years rose sharply in the last couple of years of the housing boom, particularly in high-priced states such as California.

But many borrowers have been unable to afford the increased payments that come with the resets, and falling housing prices have made it harder to refinance or sell.

A flood of rate resets for such loans has helped drive up the number of home loan defaults in the last few months.

"We'll see another fairly big spike in (foreclosure) filings in early '08," Sharga said. "Then there's another group of loans that's due to reset in May and June, so we'll see another wave of defaults probably in the fall."

Experts estimate some 2 million adjustable-rate mortgages are due to reset at higher rates in the next seven months.

Nevada, Florida and Ohio had the highest foreclosure filing rates in the country last month, RealtyTrac said.

Nevada reported one foreclosure filing for every 152 households, earning the state the highest rate in the nation for the 11th month in a row. The state had 6,694 filings in November, up 1 percent from October and up 167 percent from November 2006.

Florida had one foreclosure filing for every 282 households. The state reported 29,238 filings last month, down more 3 percent from October, but up 212 percent from November last year.

Ohio reported one foreclosure filing for every 307 households. The state had 16,308 filings last month, down nearly 6 percent from October and nearly double the number from November 2006.

California had 39,992 foreclosure filings last month, up 108 percent from a year earlier and the most in the nation. Its foreclosure rate was one filing for every 325 households.

The state's filings fell 21 percent from October's total.

Rounding out the states with the top 10 foreclosure filing rates in November were Colorado, Michigan, Georgia, Arizona, Indiana and Illinois.

In Reversal, Fed Approves Plan to Curb Risky Lending

The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit.

Press Release on the Mortgage Plan (federalreserve.gov)The new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising.

Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation.

“Unfair and deceptive acts and practices hurt not just borrowers and their families,” said Ben S. Bernanke, chairman of the Federal Reserve, “but entire communities, and, indeed, the economy as a whole.”

The new regulations, expected to be approved in close to their proposed form after a three-month period for public comment, amount to a sharp reversal from the Fed’s longstanding reluctance to rein in dubious lending practices before the subprime market collapsed this summer.

The proposed changes, which do not apply to standard mortgages for borrowers with good credit, stopped short of banning all heavily criticized practices in subprime lending and did not go as far as many consumer groups had sought. But they won praise as worthwhile steps from some industry critics who had long complained that the Federal Reserve under its former chairman, Alan Greenspan, persistently ignored signs of trouble.

“Reading these proposals today is almost painful,” said Dean Baker, co-director of the Center for Economic Policy Research, a liberal research group in Washington. “These are all just simple, common sense regulation. Why couldn’t Greenspan have done this seven years ago?”

If the measures had been in place earlier, they would have applied to as many as 30 percent of all mortgages made in 2006.

Some advocacy groups that had warned for years about reckless practices said the Fed’s move was too little and too late.

“The Federal Reserve’s proposed guidance is riddled with loopholes and exceptions that will undermine its effectiveness,” said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group in Durham, N.C. “The proposals fall far short of what was needed, and in some ways fall short of where the industry was already headed.”

The new rules would do nothing to help the hundreds of thousands of people who are either already defaulting on subprime mortgages or are likely to lose their homes when their introductory teaser rates expire and their monthly payments jump by 30 percent or more.

Soaring default rates among subprime borrowers have already caused a crisis on Wall Street, all but shutting down the subprime mortgage market since August because lenders could no longer raise the cash to make new loans. The Bush administration has pushed for voluntary agreements aimed at avoiding some, but far from all, of the foreclosures expected next year.

The American Banking Association praised the Fed’s action as “an important proposal that would make a significant difference in protecting mortgage borrowers.” But the industry group warned that some provisions might go too far. “We worry that replacing important lending flexibility with rigid formulas might also limit lending to some creditworthy borrowers.”

In Congress, leading Democratic lawmakers said the Fed had been too cautious.

Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said the central bank showed it was "not a strong advocate for consumers." Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, called the proposal a "step backward."

The House recently passed a bill last month that would impose even tougher restrictions on many subprime practices that the Fed addressed on Tuesday. The Senate has not acted on a bill, but Mr. Dodd recently introduced a measure with many of the same goals as the House bill.

Despite their limitations, the central bank’s new proposals would nonetheless cut a wide swath across the nation’s fragmented mortgage system. They would govern practices for all mortgage lenders, regardless of whether they are banks, thrift institutions or independent mortgage companies. And they would apply regardless of whether a lender is supervised by federal or state regulators.

The most important indicator that the Fed wanted to throw down the gauntlet is in how it defined the mortgages that would be subject to special consumer protection.

Under its existing rules, based on the Home Ownership Equity Protection Act of 1994, the Fed’s extra protections applied to less than 1 percent of all mortgages — those with interest rates at least eight percentage points above prevailing rates on Treasury securities.

Press Release on the Mortgage Plan (federalreserve.gov)The new rules, by contrast, invoked broader legal authority to apply to any mortgage with an interest rate three percentage points or more above Treasury rates. Fed officials said that would cover all subprime loans, which accounted for about 25 percent of all mortgages last year, as well as many exotic mortgages — known in the industry as “Alt-A” loans — made to people with relatively good credit scores.

Under the new rules, such borrowers would have to document their incomes, supply tax returns, earnings statements, bank records or other evidence. Lenders would not be allowed to qualify a person based only on their ability to pay the initial teaser rate.

The proposal would essentially end the practice of allowing those with poor credit to apply for “stated income” loans, often known as “liar’s loans,” which do not require borrowers to provide evidence of their incomes and assets. And it would restrict mortgages with future monthly payments beyond those that could be justified by a borrower’s projected earnings.

The Fed proposal would still leave some room for flexibility. Lenders would have to provide “reasonably reliable evidence” of a person’s income, a definition that Fed officials said would allow small business owners and others whose income may be erratic or difficult to confirm to arrange a subprime mortgage.

The Fed also refused to prohibit the much-criticized subprime lending practice of big prepayment penalties. Prepayment penalties, which can cost thousands of dollars, often block people from switching to a cheaper mortgage for two years or longer.

Mortgage lenders argue that prepayment penalties are often essential, because they provide investors with assurance of earning more than just the low teaser rates. But consumer groups have argued that the penalties can trap borrowers in expensive loans and that many home buyers do not properly understand them.

Under the Fed proposal, lenders would still be allowed to demand prepayment penalties, but the penalties would have to expire at least 60 days before a loan’s introductory rate was scheduled to reset at a higher level.

The new rules would also make it more difficult for lenders to include hidden sales fees, which are usually paid to the mortgage broker. Many subprime lenders tell borrowers they will not have to pay any fees, or even any costs for services like appraisals, but include those fees in what is called a “yield-spread premium” on the interest rate.

The Fed proposal would not prohibit yield-spread premiums but would require that a lender disclose the exact amount of the fees and have the borrower agree to the fees in writing.

John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group, said simply disclosing the fees was not enough because home buyers were already inundated with a blizzard of disclosure forms to sign and can easily miss the significance of what they are approving.

Borrowers “shouldn’t need to be a lawyer or financial expert,” Mr. Taylor said, “to protect themselves from unfair and deceptive lending.”

Fed Shrugged as Subprime Crisis Spread

Until the boom in subprime mortgages turned into a national nightmare this summer, the few people who tried to warn federal banking officials might as well have been talking to themselves.
Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of “best practices” and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

“He never gave us a good reason, but he didn’t want to do it,” Mr. Gnaizda said last week. “He just wasn’t interested.”

Today, as the mortgage crisis of 2007 worsens and threatens to tip the economy into a recession, many are asking: where was Washington?

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

On top of that, many Fed officials counted on the housing boom to prop up the economy after the stock market collapsed in 2000.

Mr. Greenspan, in an interview, vigorously defended his actions, saying the Fed was poorly equipped to investigate deceptive lending and that it was not to blame for the housing bubble and bust.

On Tuesday, under a new chairman, the Federal Reserve will try to make up for lost ground by proposing new restrictions on subprime mortgages, invoking its authority under the 13-year-old Home Ownership Equity and Protection Act. Fed officials are expected to demand that lenders document a person’s income and ability to repay the loan, and they may well restrict practices that make it hard for borrowers to see hidden fees or refinance with cheaper mortgages.

It is an action that people like Mr. Gramlich and Ms. Bair advocated for years with little success. But it will have little impact on many existing subprime lenders, because most have either gone out of business or stopped making subprime loans months ago.

Before this year, officials here enthusiastically praised subprime lenders for helping millions of families buy homes for the first time. “I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk,” Mr. Greenspan wrote in his recent memoir, “The Age of Turbulence: Adventures in a New World.” “But I believed then, as now, that the benefits of broadened home ownership are worth the risk.”

As housing prices soared in what became a speculative bubble, Fed officials took comfort that foreclosure rates on subprime mortgages remained relatively low. But neither the Fed nor any other regulatory agency in Washington examined what might happen if housing prices flattened out or declined.

Had officials bothered to look, frightening clues of the coming crisis were available. The Center for Responsible Lending, a nonprofit group based in North Carolina, analyzed records from across the country and found that default rates on subprime loans soared to 20 percent in cities where home prices stopped rising or started to fall.

“The Federal Reserve could have stopped this problem dead in its tracks,” said Martin Eakes, chief executive of the center. “If the Fed had done its job, we would not have had the abusive lending and we would not have a foreclosure crisis in virtually every community across America.”

Mr. Greenspan, hailed as perhaps the best central banker in history when he left the Fed in early 2006, is now feeling defensive. In an extensive interview last week, he adamantly disputed the assertion that he could have prevented the mortgage bust.
The housing bubble, he said, had far less to do with the Fed’s policy on interest rates than on a global surplus in savings that drove down interest rates and pushed up housing prices in countries around the world.

As for his role as a regulator, Mr. Greenspan argued that the Fed was ill-suited to investigate deceptive lending practices.

“I got the impression that there were a lot of very questionable practices going on,” he said. “The problem has always been, what basically does the law mean when it says deceptive and unfair practices? Deceptive and unfair practices may seem straightforward, except when you try to determine by what standard.”

Mr. Greenspan also contended that the Federal Reserve’s accountants and bank examiners were ill-suited to the job of investigating fraud.

“It becomes essentially an enforcement action, and the question is, who are the best enforcers?” he said. “A large enough share of these cases are fraud, and those are areas that I don’t think accountants are best able to handle.”

Others are more critical.

“Hindsight is always 20-20, but it’s clear the Fed should have acted earlier,” said Ms. Bair, who became chairman of the Federal Deposit Insurance Corporation in 2006. “Financial innovation is great, but you have to have some basic rules. One of the most basic rules is that a borrower should have the ability to repay.”

A Booming Industry

Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that “no bubble exists.” Mr. Greenspan predicted several times — incorrectly, it turned out — that housing declines would be local but almost certainly not nationwide.

The Fed was hardly alone in not pressing to clean up the mortgage industry. When states like Georgia and North Carolina started to pass tougher laws against abusive lending practices, the Office of the Comptroller of the Currency successfully prohibited them from investigating local subsidiaries of nationally chartered banks.

Virtually every federal bank regulator was loathe to impose speed limits on a booming industry. But the regulators were also fragmented among an alphabet soup of agencies with splintered and confusing jurisdictions. Perhaps the biggest complication was that many mortgage lenders did not fall under any agency’s authority at all.

Subprime loans carry high interest rates, sometimes as high as 12 percent, and were designed for people with weak credit records. Unlike traditional banks and thrifts, which traditionally financed their loans with deposits, most subprime lenders are financed by investors on Wall Street who buy packages of loans called mortgage-backed securities.

Starting from a virtual standstill 10 years ago, subprime lenders became by far the fastest-growing segment of mortgage lending before they collapsed. They made $540 billion in mortgages by 2004 and $625 billion at their peak in 2006 — about one-quarter of all new mortgages.

Mr. Gramlich, a Democratic appointee to the Federal Reserve who had spent much of his career studying problems of poverty, saw both great benefits and great perils in the new industry.

As head of the Fed’s Committee on Consumer and Community Affairs from 1997 to 2005, he agreed that subprime lending had opened new doors to people with low incomes or poor credit histories. Home ownership, which had hovered around 64 percent for years, climbed to almost 70 percent by 2005. The biggest gains were among blacks and Hispanics, groups that had suffered discrimination for decades.

What alarmed Mr. Gramlich was that many subprime loans were extremely complicated and loaded with hidden risks.

Borrowers were being qualified for loans based on low initial teaser rates, rather than the much higher rates they would have to pay after a year or two. Many of the loans came with big fees that were hidden in the overall interest rate. And many had prepayment penalties that effectively blocked people from getting cheaper loans for two years or longer.

“Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked in a speech he prepared last August for the Fed’s symposium in Jackson Hole, Wyo. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.”


Turning Away a Bigger Role

In 2000, Mr. Gramlich privately urged the Fed chairman to send examiners into the mortgage-lending affiliates of nationally chartered banks. Many of them, like Bank of America’s affiliate, had already come under fire from state regulators and consumer groups. Fed examiners, Mr. Gramlich argued, could clean up those practices from the inside.

Mr. Greenspan was against the idea. In an interview last week, he said he feared that Fed examiners would fail to spot deceptive practices and inadvertently give dubious lenders what amounted to a government seal of approval.

“I remember telling him, ‘be careful,’ ” Mr. Greenspan said. If the Fed gave the appearance that it was overseeing thousands of local institutions, which he said it did not have the resources to do, “we’re going to end up with a situation that very well could be worse rather than better.”

To be sure, some of the speculative excesses of the housing bubble and the subsequent bust were driven by broader forces.

The Fed helped stoke the housing market by slashing short-term interest rates from 2000 to 2004. The rate cuts drastically reduced the effective cost of buying a house, which added more fuel to what was already a powerful housing boom.

In addition, foreign investors were pouring trillions of dollars into American securities. Much of that money, often described as the “global savings glut,” flowed directly into mortgage-backed securities that were used to finance subprime mortgages.

But by 2005, federal banking regulators were beginning to worry that mortgage lenders were running amok with exotic and often inscrutable new products.

The agencies, however, were like a Rube Goldberg machine with parts moving in different directions. The Office of the Comptroller of the Currency was in charge of nationally chartered banks and their subsidiaries. The Federal Reserve covered affiliates of nationally chartered banks. The Office of Thrift Supervision oversaw savings institutions. The Federal Deposit Insurance Corporation insured deposits of both state-chartered and nationally chartered banks.

Because each agency receives its funding from fees paid by the banks or thrifts they regulate, critics have long argued that they often treat the institutions they regulate as constituents to be protected. All of them are wary about stifling new financial services.

Ms. Bair was an exception, especially for the deregulation-minded Bush administration. As a former assistant secretary of the Treasury in 2001 and 2002, she had worked with Mr. Gramlich to raise concerns about abusive lending practices. Indeed, she tried to hammer out an agreement with mortgage lenders and consumer groups over a tough set of “best practices” that would have covered subprime mortgages.

But that effort largely stalled because of disagreement. Though some big lenders did endorse a broad code of conduct, she recalled, they soon began loosening standards as competition intensified.

The drop in lending standards became unmistakable in 2004, as lenders approved a flood of shaky new products: “stated-income” loans, which do not require borrowers to document their incomes; “piggyback” loans, which allow people to buy a home without making a down payment; and “option ARMs,” which allowed people to make less than the minimum payment but added the unpaid amount to their total mortgage.

Fed officials noticed the drop in standards as well. The Fed’s survey of bank lenders showed a steep plunge in standards that began in 2004 and continued until the housing boom fizzled in 2006.

But the regulators found themselves hopelessly behind the fast-changing practices of lenders. In a bid to set new standards for exotic mortgages, the agencies waited until December 2005 to propose a “guidance” to banks and thrifts. They did not agree on the final standard until September 2006.

Standards for Lenders

But the real shock to consumer groups — and even to some of the regulators — was that the new underwriting standards did not apply to subprime loans. Instead, they applied to only a fairly narrow array of exotic mortgages like “option ARMs.”

“The gaping hole was that it would only apply to nontraditional mortgages,” Ms. Bair said. But the exotic mortgages were already fading from the market, in part because of bad publicity. Subprime lending, by contrast, was still booming and represented a much bigger business.

“We hadn’t really focused on that,” said John C. Dugan, Comptroller of the Currency, who had pushed hard for the new guidance. “From our own perspective of national banks, it was really a smaller part of our universe.”

It was not until March 2007 that the group of regulators proposed yet another “guidance,” this one to address standards for subprime lending. But those standards were not finished until June 29. By that time, more than 30 subprime lenders had gone out of business and many more were headed that way.

Several people familiar with the regulatory deliberations said the delays stemmed in part from intense resistance among some policy makers to challenging subprime lenders.

“I had concerns, I really had concerns,” acknowledged Mr. Dugan, adding that he became convinced after listening to enough public comment on the issue.

In the end, any concerns for the industry quickly became moot. Less than two months after the new standards were issued, the subprime industry was essentially dead.

Ben S. Bernanke, who succeeded Mr. Greenspan as Fed chairman, is now scrambling to head off a recession. Last week, the Fed lowered its benchmark interest rate for the third time since August, and officials now worry that the subprime crisis has inflicted deep damage on credit markets that could in turn derail the entire economy.