Facing Default, Some Walk Out on New Homes

When Raymond Zulueta went into default on his mortgage last year, he did what a lot of people do. He worried.

In a declining housing market, he owed more than the house was worth, and his mortgage payments, even on an interest-only loan, had shot up to $2,600, more than he could afford. “I was terrified,” said Mr. Zulueta, who services automated teller machines for an armored car company in the San Francisco area.

Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure.

Last week he moved into a three-bedroom rental home for $1,200 a month, less than half the cost of his mortgage. The old house is now the lender’s problem. “They took the negativity out of my life,” Mr. Zulueta said of You Walk Away. “I was stressing over nothing.”

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say.

Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.

“I think I could make a case that some borrowers were ‘renting’ (with risk), rather than owning,” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.

For some people, then, foreclosure becomes something akin to eviction — a traumatic event, and a blow to one’s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.

“There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,” said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes.

In recent months top executives from Bank of America, JPMorgan Chase and Wachovia have all described a new willingness by borrowers to walk away from mortgages.

Carrie Newhouse, a real estate agent who also works as a loss mitigation consultant for mortgage lenders in Minneapolis-St. Paul, said she saw many homeowners who looked at foreclosure as a first option, preferable to dealing with their lender. “I’ve had people say to me, ‘My house isn’t worth what I owe, why should I continue to make payments on it?’ ” Mrs. Newhouse said.

“You bought an adjustable rate mortgage and you’re mad the bank is adjusting the rate,” she said. “And sometimes the bank people who call these consumers aren’t really nice. Not that the bank has the responsibility to be your friend, but a lot are just so uncooperative.”

The same sorts of loans that drove the real estate boom now change the nature of foreclosure, giving borrowers incentives to walk away, said Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania.

“There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,” Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.”

In the boom market, homeowners took their winnings, withdrawing $800 billion in equity from their homes in 2005 alone, according to RGE Monitor, an online financial research firm.

Since the Depression, American government policy has encouraged homeownership as an absolute good. It protects people from increases in rent and allows them to build equity as they pay off their mortgages. And it creates stability in communities, because owners are invested in their neighbors.

But new types of loans like interest-only mortgages and cash-out refinance loans mean buyers do not pay down their mortgages. And adjustable rate mortgages, which accounted for 39 percent of mortgages written in 2006, expose owners to rent-like rises in their housing costs.

The value of homeownership, then, has increasingly shifted to the home’s likelihood to rise in value, like any other investment. And when investments go bad, people tend to walk away.

“When people don’t have skin in the game, they behave like they don’t have skin in the game,” said Karl E. Case, a professor of economics at Wellesley College, who conducts regular surveys of borrowers as a founding partner of Fiserv Case Shiller Weiss, a real estate research firm.

Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim.”

Christian Menegatti, lead analyst at RGE Monitor, said the firm predicted more homeowners would walk away from their homes if prices continued to drop, regardless of their financial circumstances. If home prices drop an additional 10 percent, Mr. Menegatti said, 20 million households will owe more than the value of their homes.

“Will everyone walk out?” he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.”

When homeowners see houses identical to their own selling for much less than they owe, Mr. Menegatti said, “I wouldn’t be surprised to see five or six million homeowners walk away.”

For Raymond Zulueta, the decision to go into foreclosure, and to hire You Walk Away, brought him peace of mind. The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts.

Consumer advocates and others question the value of You Walk Away’s service.

“We are more interested in servicers and borrowers coming to mutual resolutions through loan remediation,” said Kevin Stein, associate director of the nonprofit California Reinvestment Coalition. “Even though we are not seeing good outcomes, we’re not willing to throw up our hands and say people should walk away from their homes based on the advice of a company that stands to profit from foreclosure.”

Jon Maddux, a founder of You Walk Away, said the company’s services were not for everybody and were meant as a last resort. The company opened for business in January and says it has just over 200 clients in six states.

“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”

Mr. Zulueta said he felt he had let down the lender, himself, and his family.

“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”

New Home Sales Drop Again

WASHINGTON (AP) -- In more bad news for the beleaguered housing industry, sales of new homes fell in January for a third straight month, pushing activity down to the slowest pace in nearly 13 years. The median price of a new home dropped to the lowest level in more than three years.

The Commerce Department reported Wednesday that new home sales fell by 2.8 percent last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1995.

The median price of a new home dropped to $216,000 in January, down 4.3 percent from the December median sales price, the point where half the homes sold for more and half for less. That was the lowest median price since September 2004 and underscored that the steep slide in housing is still under way.

Analysts believe that housing activity has further to fall as a tidal wave of mortgage foreclosures is dumping more unsold homes on an already glutted market. For January, the inventory of unsold homes dropped but since the pace of sales activity slowed as well, the number of months it would take to exhaust the current inventory rose to 9.9 months, the longest period in more than 26 years.

Until this inventory backlog is worked down further, economists are predicting more declines in prices in the months ahead.

The 2.8 percent drop in new home sales in January followed even bigger declines of 4 percent in December and 13.1 in November and represented weakness in every part of the country except the West, which saw sales increase by 2.2 percent.

Sales fell by 10.3 percent in the Northeast and dropped by 7.6 percent in the Midwest and 2.4 percent in the South.

Earlier this week, a real estate trade group reported that sales of existing homes had fallen by 0.4 percent in January, pushing existing home sales down to a seasonally adjusted annual rate of 4.89 million units, the weakest showing on records going back to 1999.

Median prices for existing homes dropped to $201,100, down 4.6 percent from a year ago, while the inventory of unsold existing homes rose to 10.3 months' supply, just below the two-decade high of 10.5 months hit in October.

Analysts forecast further price declines until the inventory levels are worked down further. However, a rising tide of mortgage foreclosures is pushing even more unsold homes onto the glutted market and financial institutions have tightened lending standards since a credit crisis hit with full force last August, making it harder for prospective buyers to qualify for loans.

The weakness in housing has spread to the rest of the economy, raising the prospects the country could fall into a full-blown recession. The country is being battered by the prolonged slump in housing, a serious credit squeeze and soaring energy prices.

In another sign of trouble, the Commerce Department reported Wednesday that orders to U.S. factories for big-ticket manufactured goods plunged in January by the largest amount in five months, an indication that manufacturers are being caught in the weakness engulfing the rest of the economy.

The 5.3 percent drop in new orders last month reflected declines across a wide swath of industry from commercial aircraft and autos to heavy machinery and computers.

A growing number of analysts believe the economy will slip into a recession this quarter although they expect the downturn to be short and mild, thanks to aggressive interest rate cuts from the Federal Reserve and a $168 billion economic stimulus package passed by Congress earlier this month. Millions of households will begin seeing rebate checks in May that should give the economy a boost starting this summer.

The overall economy skidded to a barely discernible growth rate of 0.6 percent in the final three months of last year and many analysts believe that the gross domestic product may turn negative in the current quarter and the second quarter this year, meeting the classic definition of a recession as consumers, whose confidence levels have plunged to the lowest levels in five years, cut back on spending.

The 5.3 percent decline in durable goods for January was the first setback since October and was the biggest decline since a similar 5.3 percent drop last August.

The weakness was led by a 13.4 percent decrease in orders for transportation equipment, which reflected a 30.5 percent plunge in demand for commercial aircraft, a very volatile category, and a 0.8 percent fall in demand for motor vehicles and parts. It was the second straight drop in autos and underscored the problems facing domestic automakers as they struggle with weak demand in the face of surging gasoline prices and plunging consumer confidence.

The new durable goods report showed that a key indicator of business investment dropped in January by the largest amount in three months. Orders for non-defense capital goods excluding aircraft, considered a good proxy for business investment, fell by 1.4 percent last month.

Help Hard to Get For Troubled Home Owners

DETROIT (Reuters) - As the housing crisis deepens, major lenders say they will help borrowers avoid foreclosure, but nonprofit groups and others say their actions are not living up to their promises.

"Some lenders are willing and able to work out loan modifications," said Juanita Bryant, a loss mitigation officer at Michigan Neighborhood Partnership, which covers one of the worst-hit states in the country. "Those lenders are in the minority."

Among the people Bryant's group is trying to help is Will Clark, 53, who bought his home in Detroit in 1996. After being diagnosed with diabetes in 2006, and with his savings wiped out by medical bills, he contacted his lender.

"I wanted to work something out because I couldn't afford the house anymore," Clark said.

His lender, JPMorgan Chase & Co unit Chase Home Lending, told him he could try a short sale -- sell the house for less than the outstanding debt and the bank would forgive the rest. Or he could hand over his property to the bank in a process known as deed in lieu of foreclosure. Both would harm his credit rating, but not as badly as foreclosure.

Clark found a buyer who offered him $70,000 for his house. But, according to both Clark and MNP, Chase ignored the offer until after the home went into foreclosure. Michigan allows borrowers up to six months to try to regain a foreclosed property, and Chase then said it would accept $80,000. Clark's buyer agreed, but wanted Chase to put it in writing. MNP said the bank refused, and the buyer gave up.

"If I had known this would happen, I wouldn't have bothered finding a buyer and just given them the keys," Clark said.

Chase spokesman Tom Kelly denied that the bank had ignored Clark, and said it had been "willing to work something out."

"We made a counter offer and got no response," he said.

MNP's Bryant said that Chase was both unresponsive and unwilling to cooperate, adding that Clark's experience is common.

Nonprofit groups around the country say many lenders either have no system for dealing with stricken borrowers, or they are not interested in cutting deals.

"Our experience on the ground does not reflect lenders' claims they're helping people," said Robert Pulster, executive director of ESAC, a Boston-based group that helps people with mortgage trouble. "Occasionally we have a breakthrough with a lender, but they need to do much more."

Or, lenders are not telling the truth when they claim to be helping people and are simply engaged in a public relations exercise. "They're lying bastards," said Mark Seifert, executive director of East Side Organizing Project (ESOP) in Cleveland, on a tour of the city's ravaged Slavic Village district. On some blocks here almost every last home is boarded up.

Some nonprofit groups say that just as lenders packaged and sold their mortgages to investors around the world during the property boom, the solution lies in persuading those investors to approve more loan modifications.

Gabe del Rio, vice president of lending at Community Housing Works in San Diego, said the problem is investors outside the United States bought the mortgages, so lenders no longer own them.

"Lenders say they are modifying loans, but they don't have authority from investors," he said. "We must get the message across to these investors that more loans must be changed."

LIFELINE

Since last October two U.S. government-backed initiatives have been announced since to reach out to modify loans for borrowers with bad loans, such as adjustable-rate mortgages where the interest rates and monthly payments spike.

Unveiled in October, the Hope Now alliance of mortgage counselors, lenders and servicing companies says it helped some 370,000 borrowers avoided foreclosure by the end of 2007.

In February, "Project Lifeline" was launched by six lenders who say they services around 50 percent of U.S. mortgages: Chase, Bank of America, Citigroup, Countrywide Financial, Washington Mutual and Wells Fargo. This plan would halt foreclosure proceedings for borrowers more than 90 days in arrears to determine if they could afford payments under different conditions.

"Every little bit like this helps," said Lori Gay, Chief Executive of nonprofit lender Los Angeles Neighborhood Housing Services. "But there is still a long way to go."

In a December 17 report entitled "U.S. Subprime Market Update" Moody's Investors Service found that by September 30, lenders had modified 3.5 percent of loans whose interest rates had reset in the first eight months of the year, up from just 1 percent in its previous survey.

But the report added: "Without a higher level of modifications, Moody's expects delinquency rates to increase."

A multistate task force, the State Foreclosure Prevention Working Group, said on February 8 that 70 percent of stricken borrowers are not up for loan modification. "The lack of interaction between mortgage servicers and homeowners remains a major problem," the group said.

And in an October survey of 33 mortgage counseling agencies, the California Reinvestment Coalition (CRC) found most reported that the "industry as a whole is not consistently modifying loans for long-term affordability."

CRC associate director Kevin Stein said there could be a number of reasons for the disconnect between lenders' claims they are modifying loans and the perception in the field.

"It may be that some lenders have no system in place to deal with loan modifications, or a communication problem within the company," he said. "But there is a huge disconnect there."

Barb Van Kerkhove, policy analyst at Rochester, New York-based Empire Justice Center said "our experience varies greatly from lender to lender and even between individual employees. It often depends on who answers the phone."

Foreclosure Aid Rising Locally, as Is Dissent

SEATTLE — As the Bush administration and Congress consider proposals to ease the home foreclosure crisis, local governments across the country have been lending money to imperiled homeowners and confronting some opposition.

Some of these municipal and state efforts have met resistance from people who consider the assistance undeserved and adamantly oppose anything that resembles a taxpayer bailout.

Seattle, which has nowhere near the kind of foreclosure problem other cities have, began a modest program last month offering loans of up to $5,000 to help a few dozen homeowners avoid losing their homes.

Not only are people in Seattle relatively prosperous, but they have a reputation for being nice, too. Yet no sooner had Mayor Greg Nickels announced the program than opposition surfaced.

“Just can’t agree with using taxpayer dollars to bail out private homeowners, no matter how the mayor tries to justify it,” read a complaint posted on the “Soundoff” section of The Seattle Post-Intelligencer’s Web site.

Mark Ellerbrook, who manages Seattle’s homeownership program, said that, aside from residents hoping to apply, few people were enthusiastic about the program. He said he understood that reaction, given the local housing market.

“People struggle to buy homes in this city, for sure,” Mr. Ellerbrook said. “And then you have what looks, on the face of it, like the city giving money to people who made bad decisions.”

In Massachusetts, MassHousing, a quasi-state agency, began a loan refinance program last summer that relies on bond revenue. After its initial public relations effort, the agency had to make clear “that this is not taxpayer-funded,” said Tom Farmer, an agency spokesman.

“The talk radio was all up in arms: ‘Why should we be helping these people out?’ ” Mr. Farmer said. “ ‘They should have known what they were doing.’ ”

The goal of these programs is not just to keep people from losing their homes, but also to limit broader economic fallout, including plummeting property tax revenues and widespread declines in home values. Still, they pit what some government officials say are practical economic solutions for the common good against individual ideals of fairness and personal responsibility.

The opposition may be rooted in “this ancient notion of deserving versus undeserving, and you’re undeserving if you made a bad decision,” said Nicolas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University.

While the negative reactions have not stopped the assistance efforts, it has put some local officials on the defensive and forced them to try to sell the programs to the general public, not just to the intended recipients.

“This is not a bailout,” Joseph Smith, the commissioner of banks in North Carolina, said this month in announcing a program to direct $300,000 in taxpayer money to mortgage counselors who could help homeowners refinance. “We’re not paying off anybody’s mortgage.”

Small, government-supported “rescue loan” programs have been used in many places before. Those efforts, as well as the current ones, typically have been cast as having broader benefits, similar to the way public health programs are portrayed, Mr. Retsinas said.

“Much of the rationale,” he said, “is less the notion of keeping an individual from getting sick than it is, ‘If we vaccinate this person, their illness won’t cause other people to get sick.’ ”

The program in Seattle is intended to help about 40 homeowners threatened with foreclosure. In Ohio, two government-sponsored programs offer similar assistance. Massachusetts, Maryland and other states also have loan or refinancing programs.

Some of these programs tap into into taxpayer money directly, while others use revenue from the sale of bonds or other sources. Most require borrowers to pay back the loan eventually, though some forgive them altogether.

Some programs, like Maryland’s, are designed for people caught in subprime mortgages, and these can have more generous terms. Several of the programs, including Seattle’s, aim to help low- or moderate-income borrowers facing an unexpected financial hardship, like loss of a job or illness. Many have strict requirements that often prevent people from qualifying, sometimes leading to charges that they do not go far enough.

Government has a history of getting involved in foreclosure crises. During the Great Depression, the federal government created the Home Owners’ Loan Corporation, which helped refinance about a million loans — and made a profit in the process. In December, Alan Greenspan, the former Federal Reserve chairman, suggested that government provide assistance to homeowners facing foreclosure.

Until recently, the Bush administration has focused on getting banks and lenders to restructure or refinance home loans, but critics say it is unclear how many people will be helped.

Bruce Marks, the chief executive of the Neighborhood Assistance Corporation of America, which works with lenders to restructure loans under terms that homeowners can afford, said giving loans to homeowners improperly focused public frustration on borrowers instead of banks and lenders.

“Before you criticize other people, ask your family members, ask your neighbor, ask your co-workers whether their home is at risk of foreclosure, and you will find that the people closest to you are about to lose their homes but they’re too embarrassed to tell you and to reach out for help,” Mr. Marks said. “That’s how pervasive this crisis is.”

Alex J. Pollock, a resident fellow at the conservative American Enterprise Institute who has written about the foreclosure prevention programs of the Great Depression, echoed concerns that, in some cases, government intervention could reward irresponsibility and make markets unpredictable. “The problem on the other side,” he said, “is if you have a general problem that threatens to cause a general downward spiral, then everybody’s going to suffer.”

Ryan Ellis, the tax policy director for Americans for Tax Reform, a conservative antitax group, said his group opposed efforts by the Bush administration to nudge banks and lenders into restructuring some loans, much less direct government loans to homeowners facing foreclosure.

“You can call it community reinvestment, neighborhood protection, whatever you want,” Mr. Ellis said, “but if you’re taking away the downside risk of a loan, you’re bailing them out.”

Foreclosures have increased as the national real estate market continues to decline. On Monday, the National Realtors Association reported that the sales of existing homes declined in January, the sixth consecutive month that sales have dropped. The median home price in January was $201,100, down 4.6 percent from a year earlier.

Prevention programs and the way they are received can vary depending on the region. In Ohio, foreclosure rates are among the highest in the nation because of fallout in the mortgage industry but also because of the widespread loss of manufacturing jobs. Two state programs there are offering nearly $5 million in loans to homeowners.

Lou Tisler, executive director of Neighborhood Housing Services of Greater Cleveland, which administers funds for the programs statewide, said political opposition had been little more than background noise. “We’re all suffering together through the whole economy,” he said. “It’s not just the housing bust. It’s not just people losing their jobs. It’s not just medical costs. It’s everything together. It allows for a stretch of innovation.”

In Maryland last month, the Department of Housing and Community Development started its “Bridge to Hope” loan program, which caps loans at $15,000 and focuses on keeping low- to moderate-income homeowners in their homes. The program has an initial budget of $400,000.

Clarence Snuggs, the deputy secretary of the department, said Maryland was ranked fifth nationally for its rate of so-called subprime loans.

“There are good people out there who are in bad loans that put them in tough situations,” Mr. Snuggs said. “We need to find ways to help them to help us all.”

In California, the notion of a government loan program seems remote to some state leaders, given how big such a fund would have to be and that California’s budget deficit is larger than most state budgets.

State Senator Michael Machado, a Democrat who is chairman of the Senate Committee on Banking, Finance and Insurance, is from Stockton, where the foreclosure rate increased 271 percent in 2007.

“If they got into a situation that got bad for them, they need to live through that and they shouldn’t expect government to bail them out,” he said, summarizing what he says is a commonly held view. “And when you’re dealing with a $14.5 billion deficit like we are here in California, it’s difficult to do that anyway.”

Cleveland: ghost town created by America’s loan scandal

LOOK through squinted eyes and you can still see what once attracted people to Cleveland’s Slavic Village.

The area took its name from the Czech and Polish immigrants who settled there in the mid-19th century to work the city’s wool and steel mills. Its tree-lined streets and attractive, wood-framed homes were once home to a community filled with factory workers, young families and first-time homebuyers.

Small pockets still have that family feel, but decline set in during the 1980s as those jobs moved overseas and drug dealers and violence moved in. The city authorities cracked down, local people rallied round, and until a few years ago residents said life in the village seemed to be improving again. Then came the sub-prime debacle.

Now Slavic Village looks as if it has been hit by a hurricane. And this man-made disaster rivals hurricane Katrina when it comes to displacing families. The 2005 storm displaced some 35,000 people in the worst-hit districts of New Orleans. Since 2003 34,156 people have lost their homes to repossession in the Cleveland area, according to Case Western Reserve University, and the pace of those losses is accelerating. The new year is barely two months old and so far there have been 1,857 foreclosures in the Cleveland area.

Slavic Village has street after empty street of boarded-up houses, their roofs caving in, collapsed balconies hanging from the fronts of buildings. Some people seem to have just upped and left, leaving their belongings behind for the rats and vandals. Owners have put up signs offering their burnt-out homes for a $500 (£250) downpayment.

Bins and rubbish litter the street. Signs warn trespassers the structures are unsafe. People have spray-painted “No copper” or “No metal” on their doors to deter crooks who have stripped anything of value from these decaying shells. Even brick steps have been ripped off, leaving houses that look as if they are floating on a dark sea of garbage.

Slavic Village is Ground Zero for a tragedy being repeated across America. The dramatic rise and fall of the sub-prime mortgage market has left borrowers across the country facing repossession. In 2002 there were 101 foreclosures in Cleveland. In 2005 the number was 2,000, last year it was almost 8,000. Across America the number of foreclosures rose 79% last year, according to Realtytrac, an American property analyst, as people, many of whom would never have received loans in the past, have failed to keep up their mortgage payments.

Similar, and in some cases worse, situations can be found in cities from California and Nevada to Michigan. The reverberations from this crisis have been felt across the world, wiping billions off the value of banks’ investments and making them reluctant to lend money even to each other, a problem that drove Britain’s Northern Rock to the edge of collapse.

Cleveland’s mayor Frank Jackson knows who to blame: Wall Street. The mayor’s office is suing some of the world’s biggest banks. including Citigroup, Goldman Sachs, HSBC and Royal Bank of Scotland’s Greenwich Capital, claiming they acted like organised criminals financing the sale of products that they knew could do nothing but harm to Cleveland. Sub-prime mortgages have proved as bad as drugs in the destruction they have wrought on the community, he said.

“Follow the money,” said Jackson. “If you ask organised crime figures why they persist in doing what they are doing, knowing the damage they are doing and the risks they are taking if they are held accountable, do you know what they will say to you? The money was just too good. You ask these financiers on Wall Street why they persist in doing this when they know the risks they are running and the damage they are doing to their communities and shareholders, do you know what they will tell you? The money was just too good.”

Low interest rates and rising house prices convinced Wall Street that sub-prime loans were a safe bet. With Wall Street’s blessing a once niche and – frankly – dodgy product aimed at borrowers with bad credit histories went mainstream.

The mayor’s writ sets out in black and white just how much money was once available in this market. Brokers targeted people in areas like Slavic Village offering loans to people with poor credit records. Those loans were then pooled together (securitised) and sold on to investors. If a few failed, there were others to pick up the loss and, if house prices rose, repossession would cover the debt.

RBS’s Greenwich Capital underwrote more than $180 billion in securities backed by sub-prime mortgages, according to the suit. HSBC issued more than $200 billion in such securities and also made loans to people through Household Finance, its sub-prime lending arm. Between 2004 and 2007, the suit states, HSBC moved to foreclose on 1,300 loans in the Cleveland area.

When the sub-prime mortgage market imploded, HSBC and its rivals lost billions but their debt to Cleveland has yet to be paid, said Jackson. The city’s property taxes are falling, people are leaving the city. As the city’s income falls, its expenses are rising. Vacant properties attract crime. Arson rates are soaring. Cleveland used to spend $1.7m a year tearing down abandoned properties. Last year that figure had reached $6m – as far as the budget would stretch. “We tore down 1,000 structures and we didn’t make a dent,” said Jackson.

“They created the demand and in a market like ours that was completely unable to withstand the failures that arose. We did not have the increase in the real-estate markets that other areas of the country experienced. We have had a difficult economy over the past decade as we have moved from a manufacturing economy to a services economy. We have struggled here. They created an environment where there was no other outcome than the foreclosures. We saw it coming. How could Wall Street not see it coming?”

Many others take the same view. “They knew,” said Robert Triozzi,” Cleveland’s director of law. “They knew.”

TWO YEARS AGO Aquila Eberhardt saw an advertisement in the local paper offering loans to people with poor credit histories. The 29-year-old single mother had not worked for three years and had trouble keeping up with credit-card payments.

“The advertisement said that if I looked at this house they would put me up in a hotel,” she said.

At the time her social-security benefits were worth about $1,400 a month and she had $1,300 in savings. A week after she visited the offices of a local estate agent she had a loan for $103,589 and had become a first-time homebuyer. “I thought this is crazy. I told them I didn’t even have any pay slips to show them. They told me I would be okay and that I could afford it because I would be paying about $400 a month.”

Almost as soon as she moved into the three-bedroom house in Slavic Village she was horrified to receive her first mortgage bill for $681, a figure she says she cannot afford and one she has struggled to keep up with ever since. The house is in disrepair. She lives in dread that something will happen to the roof, which she cannot afford to fix. Neighbours have moved out; their houses have been boarded up. But Eberhardt says she has nowhere else to go. On March 17 she must go to court and face eviction.

Credit checks, ignored when she took out her loans, are in vogue again at financial institutions. Eberhardt’s credit score has been further destroyed by her home-loan disaster, making it all but impossible for her to pass the financial checks set by most landlords. In pursuing the dream of homeownership she has lost her life savings, what was left of her creditworthiness and is now set to lose her home.

“I don’t think I should ever have been given this loan, but they tricked me. If I knew I was going to get into this big a mess, I would never have done it,” said Eberhardt.

Barbara Anderson, 60, has lived in Slavic Village for 25 years and says predatory lending is nothing new. Anderson, a community activist who is now a city liaison officer, nearly lost her own home in the 1990s when a new loan company took it over and her interest rate shot up from 7% to 20%. The unscrupulous have always targeted the poor. What’s different now is the scale of the problem, she said.

“Why would a bank want to harass me? Why are they so concerned about me paying an extra $40?” she said. “Because I was isolated I thought it was just me. It wasn’t about just me it’s about the terrorisation of a whole city,” said Anderson.

She feels the banks should take the biggest share of the blame, but homebuyers have some responsibility too she said: “The papers you sign affect an entire city. When something happens to your loan it affects me. If something happens to your loan, it affects my taxes, it brings down my house’s value, it adds a criminal element. It’s a terror to the neighbourhood.

“Somebody once said we have found the smoking gun and everyone’s fingerprints are on it,” she said. “That’s how I feel about it. We all can take some blame for some of this.”

THE CRISIS is likely to get worse before it gets better. As home prices fall and lending standards tighten, more people are defaulting on their mortgages, potentially causing billions of dollars in additional losses. Some 1.6m mortgage holders defaulted on home loans last year, and at least that many are expected to default this year, according to Moody’s Economy.com, a financial website.

A December 2006 study by the Center for Responsible Lending (CRL), a Washington-based lobby group, predicted that sub-prime foreclosures would cost American households as much as $164 billion. The nationwide study predicted that 19.4% of such loans taken out between 2005 and 2006 would fail.

Even during the period of strongly rising house prices, sub-prime foreclosures were high. Some 13% of these home loans ended in foreclosure within five years of being taken out, according to CRL.

And those rising house prices masked another problem that is only now starting to emerge. Many homeowners who were struggling with their loans were using equity from their rising house price to refinance their mortgages. With the housing boom over, and lenders tightening their standards, troubled borrowers could end up without the equity they need to refinance their loan or to sell their home and pay off their loans. According to the CRL, when these distressed borrowers are added to the foreclosure rates, the total “failure rate” for sub-prime loans approaches 25%.

Rather than a stepping stone to standard loans, as their champions once promoted them, sub-prime loans have left borrowers mired in spiralling debts. The CRL report said: “In reality, many borrowers refinance from one sub-prime loan to another, losing equity each time to cover the cost of getting a new loan. When we analyse the likelihood of foreclosure for borrowers who repeatedly refinance, we find that the risk of losing the home climbs to 36%.”

Last month the CRL put out a new report “Sub-prime Spillover” that attempted to quantify the impact of the crisis on the larger community. According to the report, foreclosures on sub-prime home loans originated in 2005 and 2006 will devalue the properties of 40.6m neighbouring homes. Homeowners living near foreclosed properties will see their property values decrease $5,000 on average. The report estimates that the total decline in house values and tax base from nearby foreclosures will be $202 billion.

“For all the headlines we are seeing, this situation is going to get worse,” said Kathleen Day, a CRL spokeswoman. “There has been irresponsibility all along the line. Many of these loans were made to people who never had the ability to repay. It’s ridiculous, like selling someone a car without a steering wheel and then being surprised when they crash. Sub-prime loans need not be bad but once you stop assessing the borrowers’ ability to pay and the interest payments don’t reflect the borrowers’ ability to pay, that’s crazy.”

NEXT WEEK Ohio gets its chance to vote for the Republican and Democrat candidates who will fight it out to be the next president. Anderson set out her views to the Democrat front-runner Barack Obama during a recent visit: “Families that used to sit in their homes around the kitchen table are now sitting around a steering wheel. Some children who should be in their beds at night are laying in the backseats of cars. Their closets are the trunks of those cars and what should be a personal bathroom is now a bathroom in any public area. It ain’t right,” she told the senator.

“It ain’t right,” repeated the senator. He didn’t offer much else by way of solution.

As the crisis gets worse, so will the clamour for action. So far there has been a cool reception to President George Bush’s latest action plan. Project Lifeline is backed by six big mortgage lenders and aims to slow the rising tide of foreclosures. Borrowers who are at least three months behind on mortgage payments can apply to the lender for a 30-day “pause” on foreclosure proceedings. If the delay is granted, then borrower and lender can work out a more affordable repayment scheme. Bankrupt homeowners or those who face foreclosure within the next month do not qualify.

The new plan follows a programme announced in December that would freeze interest rates on certain sub-prime loans. Unlike that effort, this plan will apply to all home mortgages.

Reaction was tepid at best. An analysis by Economy.com found that 425,000 households would be eligible to benefit, but in practice only a fraction of that number would be helped. Day said the government was both underestimating the problem and overestimating the ability of the industry to deal with it.

And as home prices fall and lending standards tighten, borrowers further up the economic ladder are starting to feel the pinch. In middle-class Maple Heights, a Cleveland suburb just 15 minutes drive from Slavic Village, foreclosures are starting to take their toll.

“This is a white-collar, upper-middle-class neighbourhood,” said Lindsey Sacher of East Side Organizing Project, a Cleveland nonprofit group. “But people got sick and then they couldn’t afford their payments.”

Now with debts mounting and home values falling “people are just leaving this city. If you look at the areas of the country that are losing the most population, this region is number six. Numbers one to five are areas hit by hurricane Katrina,” said Sacher.

“We are hoping the next president will have some comprehensive plan to work this out.”

The rest of the world will be hoping so, too.

THE CRISIS IN FIGURES

Number of families with a sub-prime mortgage: 7.2m

Proportion of sub-prime mortgages in default: 14.4%

Sub-prime loans outstanding: $1,300 billion

Sub-prime loans outstanding in 2003: $332 billion

Percentage increase from 2003: 292%

Proportion of loans approved without fully documented income: 43%-50%

Number of sub-prime mortgages that will have their interest rate reset this year: 1.8m

Typical rise in monthly payment (third year): 30%-50%

Sub-prime share of all new mortgages in 2006: 28%

Sub-prime share of all new mortgages in 2003: 8%

Number of homes not in foreclosure whose value will decline in 2008-9 as sub-prime foreclosures lower the prices of surrounding homes: 45m

Value of that decline: $233 billion

Rescues for Homeowners in Debt Weighed

WASHINGTON — Prodded in part by some of the nation’s biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses.

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com.

Administration officials say they still oppose any taxpayer bailout for either people who borrowed more than they could afford or banks that made foolish loans during the height of the speculative bubble in housing.

But with the current efforts to arrest the housing collapse so far bearing little fruit, Washington is being forced to explore new ideas, among them the idea of a federal mortgage guarantee for troubled borrowers.

And policy makers are listening to proposals from industry and community groups to use government funds to purchase and refinance billions of dollars in mortgages now in danger of default.

Many owners are only gradually becoming aware that their homes would sell for less than the debt against them — a phenomenon, said Richard T. Curtin, director of the Reuters/University of Michigan Surveys of Consumers, that is “beginning to weigh on people, making them uncertain and nervous about the future.”

That nervousness is evident across the country, particularly in places like Memphis, a city of nearly 1.3 million people where falling home prices and negative equity are new experiences.
The housing slumps of the mid-1970s and late 1980s were confined to the coasts. The current bust, while leaving some cities relatively unscathed, has cut a far wider path and it comes just when home debt is at its highest level since World War II.

For Stuart B. Breakstone, the problem hit home when he was forced to come to the closing on the sale of his eight-year-old custom-built house with a check for $65,000. The money, out of his own pocket, was to pay the difference between what he still owed on the mortgage for his home and the lower selling price.

Mr. Breakstone, a 42-year-old lawyer, and his wife, Lori, chief of customs agents at Memphis International Airport — who together earn more than $250,000 a year — managed to extricate themselves by paying off the mortgage. But millions of others are trapped in their homes. They have jobs, make their mortgage payments on time, but cannot raise enough cash to cover the shortfall.

Some eventually default, surrendering to foreclosure. But the vast majority — embedded in their communities, their children in public schools, their reputations at stake — wait nervously in hope that prices will bottom and rise once again, eliminating their negative equity and restoring their freedom to sell or refinance.

“People can’t believe this is happening to them,” said Robert Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

In Washington, it will be difficult to engineer a bailout similar to the one for savings and loan companies in the early 1990s, because Democrats and Republicans alike cringe at the very word bailout and fear a backlash by people who never became overextended.

But with millions of homeowners already underwater and the prospect that millions more may face the same situation, Democrats and Republicans alike are scrambling for ideas to keep people from simply walking away from their homes and to help those struggling to pay their bills.

Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans.

The bank warned that tightening credit conditions were leading to “escalating levels of delinquency and default among borrowers” and “an unprecedented number” of homes that would enter foreclosure.

Administration officials have given the Bank of America plan a cold reception. But the idea is similar to one proposed by Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate Banking Committee.

The Federal Housing Administration, meanwhile, is examining ways to expand its new insurance program, known as FHA Secure, to help people replace their costly subprime mortgages with federally guaranteed fixed-rate mortgages.

Mortgage industry executives have complained that the F.H.A.’s eligibility requirements are so restrictive that the new program has helped only a trickle.

Credit Suisse executives said they have held lengthy meetings with F.H.A. officials and have urged the agency to relax rules that currently disqualify many borrowers.

One idea, company officials said, was to allow borrowers who had simply made six payments during the course of their mortgage to qualify.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, has ordered his staff to come up with options for a broader rescue bill. An aide to Mr. Frank said his bill would, among other things, allow the government to buy up at least some troubled mortgages.

A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.
In an interview, Mr. Reich said he hoped that most of the old mortgages would be replaced by cheaper mortgages insured through the F.H.A.

“It isn’t a bailout,” Mr. Reich said. “It is a market-driven solution.”
For Americans caught in a mortgage trap and owing more on a home than it would sell for, consumer spending and confidence are the most immediate casualties, Mr. Curtin reports. But the damage goes deeper.

People cannot move easily to jobs in other cities if they have to sell their homes at a loss. The $168 billion federal stimulus package is likely to be less effective than intended because many homeowners may simply use their government checks to pay down their debts.

Housing prices in Memphis fell by 2.5 percent last year, only the second decline since records began to be kept in 1968, and by far the largest dip, according to Chandler Reports, which gathers this data for Greater Memphis.

The Memphis metropolitan area highlights the larger national trend, with the average first-mortgage debt, at $153,764, edging above the average home price, $152,815, for the first time. And that does not count refinancing and home equity loans, as well as closing costs.

Collie Tuttle, in her early 60s, is caught in this bind. Four years ago, she purchased a newly built four-bedroom three-bathroom house in the Memphis outer suburb of Olive Branch, Miss., for $270,000. She put nothing down, relying on her six-figure income from selling furniture to pay down the mortgage, reducing it to $248,000.

But then she lost her job, and in her next one — also selling furniture, but at lower pay — she is being forced to choose between her home and the rest of her life.

“It was a big mistake on my part to buy this house,” she said. Divorced, with two grown sons, she rattles around in it alone. She had thought the house would add to her wealth.

But now, to sell it for the $269,000 a potential buyer was recently willing to pay, “I would have to come up with $6,000 from my pocket,” Ms. Tuttle said, explaining that she cannot afford to invade her meager retirement account. “All I’m asking is for enough so that I come out even.”

Her house payments and utilities come to nearly $2,400 a month. That is affordable, she said, on her present income. But very little is left over to replace her 11-year-old car, to travel, to pay down her credit card debt, or even to buy new clothes.

“I’m stuck,” she said. “I’ve tried everything and I can’t get rid of this house.”
The reluctance to sell at a loss helps to explain why the number of homes listed for sale in the

Memphis area has climbed to more than 13,000 from 9,000 a year ago.
Jane and Kevin Naus, in their mid-40s, have had their home on the market since last May; their attempts to sell for a price that covers their debts are skewing their lives.

Mr. Naus took a job in Greenville, N.C., last March, at a local bank. His wife stayed behind, putting their house up for sale, just a month before prices began to unravel.

But there were no offers at the $239,000 the couple asked for their four-bedroom brick house on a one-acre corner lot, so they gradually cut the price to $220,000, barely enough to cover the $192,000 in mortgage debt and an additional $22,000 in closing costs and broker’s fees. It still did not sell.

Mr. Naus says prices are under downward pressure because of competition from the auctioning of foreclosed homes at bargain prices. There were 5,714 foreclosures in Memphis in 2007. “In our neighborhood alone,” Mr. Naus said, “five houses were sold last September and October, and four of the five were foreclosures.”

Mrs. Naus joined her husband in Greenville in December but he lost his job in January, when his division was shut down. The couple decided to stay in Greenville, to be near the family of Mrs. Naus, who has multiple sclerosis and no longer works.

Her $1,800-a-month in disability pay, however, falls short of the $1,400 in monthly payments on the Memphis house and the $700 in rent for an apartment in Greenville. The Nauses make up the difference with his severance pay, and occasional dips into their savings, which have fallen below $100,000.

“We don’t want to lose the house or cut the price,” Mrs. Naus said, “and end up owing money.”
“Basically,” she added, “we are praying that the house sells before my husband’s severance runs out.”

The Breakstones are similarly in danger of sinking, despite their high income. After forking over $65,000 on the house they just sold, they are struggling with $670,000 in debt on their present, larger home — perhaps more than the house itself is worth.

The Breakstones, each previously divorced, married in 2006, bringing three children to their union. They needed a bigger house than the one Mr. Breakstone had built.

Mr. Breakstone thought that he could sell his other home quickly, but it sat on the market for 17 months and finally brought only $170,000. He covered the shortfall by borrowing against his present home — bringing it closer to being underwater, too.

Now the Breakstones are saddled with $4,000 a month in house payments, and $14,000 more in fixed outlays, including child support, car leases, taxes, consumer debt and utilities, using up the bulk of their income.

“I used to think,” Mr. Breakstone said, “that I would pay the piper later and enjoy life now. I’ve totally reversed that view.”

Condos Are "For Sale" For Foreign Buyers

MIAMI (Reuters) - Canadian retiree Sheldon Kovensky felt the lure that attracts so many foreign buyers to sunny Florida these days -- falling prices for luxurious oceanfront condos that can be bought with weak U.S. dollars.

Kovensky has been scouring south Florida from Miami Beach to Palm Beach in search of a three-bedroom apartment on the sand. Armed with a Canadian dollar that has gained 25 percent against the greenback in the last two years, he is expecting a big bargain.

"We're hoping to get an apartment worth about a million (U.S. dollars) that I can purchase for about 20 percent less," he said by phone from his home in Unionville, Ontario, as he faced digging out from a snowstorm.

"The Canadian dollar is on par and the Florida market has dropped 20 to 30 percent, so you get a lot of bang for your buck," he added.

Realtors, analysts and buyers say the strength of the Canadian dollar, the euro and other foreign currencies, on top of a falling real estate market, is making the United States an enticing place for foreigners looking to buy property.

In fact, they say, the combination of the weak dollar and the allure of Miami as a cosmopolitan, multilingual city may be helping to prop up a faltering, overbuilt condo market that had been expected to crash but has seen, to date, only a small drop in prices compared to other Florida cities.

In a study by the National Association of Realtors last year, Florida was the top destination for foreign buyers, accounting for 26 percent of all transactions, ahead of California at 16, Texas at 10 and Arizona at 6 percent.

More than 7 percent of all Florida homes were sold to foreigners, the study found, and 65 percent of realtors said they had brokered at least one foreign deal.

Online property auction site FastHomeAuction.com in December reported a record number of foreign visitors, citing the weakness of the dollar as a key contributor.

FOREIGN SHOPPING SPREE

Jan de Vetten, a Dutch toy trader who has built a side business helping friends and business associates buy Florida homes, said that in some cases they are getting properties at half price.

"They negotiate typically 25 to 30 percent off the asking price and the euro is almost a dollar and a half now, so they probably have another 10 to 15 percent in value," he said.

Foreign buying was also reported brisk in Arizona, New York and elsewhere.

In New York, Manhattan's average sales price soared to a record $1,439,909 in the fourth quarter last year as foreigners pushed up demand.

In Phoenix, cash-toting Canadians are snapping up second properties, mostly high-end homes on golf courses as refuges from the harsh winter, agents said. Many hail from Calgary, Canada's oil boomtown.

"There's definitely some Canadian money in town," said Julie Goodman, a Remax agent who said she had sold six properties and had another four families coming this month for visits. "They pay cash and know that cash talks."

After the U.S. market peaked in late 2005 and the subprime mortgage crisis set in, sales and prices began tumbling across Florida. The worst was felt in west coast cities like Punta Gorda, where condo sales fell 50 percent, and Fort Myers, where the median price of an apartment fell 21 percent in 2007.

While Miami sales fell -- 39 percent for existing single-family homes and 41 percent for condos -- median prices remained resilient before finally weakening in December, 2007.

For the year, the median Miami condo price rose 6 percent. But analysts expect a drop in coming months as thousands of new condo units come onto the market.

SOUTH BEACH, SWIMMING POOLS

The weakness in the greenback, agents say, is attracting buyers to Miami from continental Europe, Scandinavia and Canada in addition to the traditional influx of cash from volatile South American countries, particularly Venezuela.

A strong pound has Britons Florida looking outside their traditional stomping ground in Orlando, said Vani Ungapen, director of research at the Florida Association of Realtors.

"Most of them are buying high-end homes," she said. "They are looking for a big house with a swimming pool, and you can't buy that in London."

Brokers say Miami Beach's famous South Beach district is luring Italians, French and Germans; Russians are flocking to Sunny Isles Beach to the north; Venezuelans who may be fearing socialist President Hugo Chavez are buying in Doral, to the west.

Miami broker Brigitte Benichay said middle-class French entrepreneurs are eager to join a 30,000-strong French community in Miami and open businesses here.

"Because of the strength of the euro they are paying cash," she said. "Eighty percent of the ones I meet want to pay all cash. Business is very strong."

The Beacon Council, Miami's business development agency, said foreign businesses are increasingly setting up shop in the city. The number of multinational projects it is working on has virtually doubled in five years, and those companies are bringing employees interested in buying property.

"The economic market here is diversified. We're not any longer dependent on one industry, like tourism, or on one region, like Latin America," president Frank Nero said.

Despite explosive price increases in recent years, Nero said, prices can look cheap to someone from Paris or Madrid.

Someone to Speak for Borrowers in Trouble

AS she leafed through her client’s mortgage papers, the housing loan counselor just shook her head.

The numbers and interest rates and payment schedules formed such a familiar, dispiriting picture. The 32-year-old man who was sitting across the desk from her said he had been persuaded to take out an adjustable rate mortgage called an option ARM when he bought his home, the first he has owned. The terms of the loan put him in danger of joining millions of people dragged under by the mortgage crisis that has washed through towns and cities across the country.

But this client, a waiter, had not yet fallen behind on his payments, so there was still time to help him.

The loan counselor, Judy Brzuskiewicz of New Jersey Citizen Action, a nonprofit advocacy group in Newark, picked up the phone to call the lender, Countrywide Financial, and told the representative that her client still had good credit and needed the 9 percent interest rate on his mortgage lowered, maybe to 6 percent. Politely but insistently, she said the adjustable rate needed to be frozen.

“I’m counting on you,” she told the representative, who told her that he fielded calls like hers all day long.

Day after day, Ms. Brzuskiewicz and counselors like her across the country keep making the same calls, trying to stand between homeowners who say they took out loans they did not comprehend, or could not afford, and foreclosure.

More than 1.6 million borrowers nationwide defaulted on mortgages last year. A Federal Reserve Bank of New York study of 75 percent of the subprime loans held by homeowners in New York, New Jersey and Connecticut found that as of late last year 9.9 percent of those examined were in foreclosure, or about 12,147 of 123,200.

The study reviewed 3,356 subprime loans in Bridgeport and found that 334, or 10 percent were in foreclosure. In New Haven, 8.6 percent or 186 of 2,151 subprime loans studied were in foreclosure and in Waterbury, 9.8 percent or 140 of the 1,434 loans studied were in foreclosure.

The housing counselors are overwhelmed.

In Bridgeport, a city that in 2006 had some of the highest subprime lending rates in the state, Julissa Soto, a housing counselor with Acorn, a housing advocacy group, said that demand was so high that the organization recently trained its 21-year-old administrative assistant as a counselor.

“We’re totally bombarded,” said Ms. Soto, who is 25.

The homeowners reach out when they are at wits’ end, and almost beyond help. “They’re frantic, and they don’t know what to do,” Ms. Soto said.

This month, she counseled a family with problems that are becoming more and more typical, requiring that the counselors act both as therapists and financial advisers. A Bridgeport police officer and his wife, a schoolteacher, had taken out a mortgage with an adjustable rate, and their monthly payments now totaled more than $3,000. “He had perfect credit,” Ms. Soto said of the officer. “Their car got repossessed. He feels ashamed that he can’t provide for his family.”

Ms. Soto is trying to negotiate with the lender, Wells Fargo, to freeze the interest rate on the couple’s mortgage, but they are already two months behind.

Last week, the Bush administration worked out a plan with some major mortgage lenders that would allow some homeowners facing foreclosure to delay losing their homes for 30 days. Although the lenders are not required to do so, they can use the 30-day window to agree to more affordable mortgage terms. Borrowers who are at least three months behind on their mortgage payments can apply.

As the mortgage picture darkens, the housing counselors have seen their roles shift and take on new importance. Where once they mainly counseled first-time home buyers and brokered affordable mortgages, they now take calls from increasing numbers of homeowners in crisis. The counselors negotiate with lenders for lower interest rates, propose payment plans, or — in the worst cases — are reduced to offering sympathetic words for those on the verge of foreclosure.

“The housing counselors are important intermediaries,” said Ira Rheingold, the executive director of the Boston-based National Association of Consumer Advocates. “It’s almost impossible for a normal human being to interact with a lender.”

John Mechem, a spokesman for the Mortgage Bankers Association, acknowledged that lenders were the “last people” delinquent borrowers wanted to speak with.

“Our lenders lose between $20,000 and $40,000 for each foreclosure,” he said. “There is a real value in having third-party counselors.”

The Department of Housing and Urban Development accredits more than 2,300 housing counseling agencies across the country and about 200 around the region, providing services like assistance for renters and workshops on predatory lending. But consumer advocates say the counselors are overburdened and always short on cash.

That could be starting to change. In December, as part of the latest Congressional appropriations bill, lawmakers approved $180 million in new money for counseling and foreclosure prevention, an amount consumer advocates said was unprecedented and underscored the depth of the housing market problem.

Ms. Soto, who works primarily with borrowers in Bridgeport, said that sometimes the pressure on families boils over as the counselors watch. One woman came to Ms. Soto after realizing that her husband, who had left her, had also fallen behind on their mortgage. The two visited together and nearly came to blows.

“It was like a soap opera,” Ms. Soto said.

She said that another client, an elderly woman who fell behind on her high-interest mortgage, refused to leave her house, fearing the authorities would put padlocks on the door if she went out.

“We went to visit her,” Ms. Soto said. “She was completely depressed, and the place was a mess. She had just stopped keeping up the house.”

In the rush to buy a home, borrowers often overlook the red flags in their mortgage papers. Annette Thomas Allen, a housing counselor with the Burlington County Community Action Program in southern New Jersey, said a flood of homeowners were coming into her office now, worried about future adjustments to their interest rates.

Ms. Allen is trying to help Donea and Cheryl Fish keep the four-bedroom home they bought two years ago. Their mortgage payments have already climbed well past what they say they can pay, and last week, they received their first foreclosure notice.

“The mortgage was confusing, and there are a lot of things I should have questioned,” said Mr. Fish, who works as a mechanic. “I was just happy to get a house.”

Mrs. Fish said her own attempts to negotiate with the lender, Saxon Home Mortgage, have gone nowhere. She said she was relying on Ms. Allen. “I’m scared,” she added.

The 32-year-old man in Newark said he found Ms. Brzuskiewicz only after friends told him he should get advice on his loan.

He said he had bought a two-family home, in Bloomfield. But even though he had been able to keep a tenant, his mortgage contained perilous traps — a large “balloon payment” at the end of the loan, along with a penalty for early prepayment. Ms. Brzuskiewicz tried to explain the details to him.

After they had finished speaking with the Countrywide Financial representative, the man left, saying he did not believe the bank would be able to help him. Ms. Brzuskiewicz said they would wait to see some sort of an agreement in writing. She worked till 9 that night, writing the appeal on his behalf.

Groups try school to stem foreclosures

CHICAGO (Reuters) - For hundreds of thousands of Americans facing spiraling mortgage costs, the last hope of keeping their home may lie in a classroom in a back office of a local nonprofit group.

It was standing room only at one such class in Chicago's blue-collar South Side in late January, with nearly 70 people packed into a room and hoping for help.

They listened, expectant, as the presenter talked about how to get easier loan terms. When he came to the toughest part, there were gasps from some in the room, as if he had slapped them.

"I'm not going to sugarcoat this for you," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. "Things will get very tough and many people will lose their homes," he told them. "Sadly, that includes a lot of you here."

Nationally, the number of people with mortgage trouble is so great that nonprofit groups -- with small budgets and staffs -- say that big classes are the only way they can reach everybody.

"There are so many people in need of help that this is the best way to get to them," said Gabe del Rio, vice president of lending and home ownership at Community Housing Works in San Diego, which holds similar clinics every few weeks.

FORECLOSURES RISING

When the dot.com bubble burst in 2001 and interest rates fell, trillions of dollars -- $1 trillion a year in the peak years from 2004 to 2006 according to U.S. Federal Reserve data -- flowed into mortgages for those seeking the American dream of owning their own home. But lax lending standards meant a big chunk of that cash went into adjustable-rate mortgages that became unaffordable when their interest rates rose. This was exacerbated when a credit crunch cut off funding, leaving many borrowers unable to refinance.

As a result, there were 2.2 million foreclosure filings in the United States in 2007, a 75 percent increase from the previous year, according to real estate data company RealtyTrac.

The crisis has hit minorities harder than whites. All the participants in the Chicago class were African Americans with adjustable-rate mortgages, and their interest rates and monthly payments have already started to go up.

According to most nonprofit groups, 2008 will undoubtedly be worse than 2007. Already, thousands of distressed borrowers -- those with poor and good credit histories alike -- have turned to nonprofits for help, and the groups are overwhelmed.

"A year ago we couldn't have got 10 people to attend one of these classes," said van Zalingen. "Today we had to turn away about 35 people."

The goal of such programs is to reach borrowers before they are in too much trouble, separate them from those whose homes cannot saved, and try to get them into a loan they can afford, usually a 30-year fixed mortgage.

HOME OR CAR?

Debt counselor Flo Bernard tells the Chicago class that if they plan to seek a loan modification from their lender they must rein in spending, "which may include no more cable TV or selling your new car."

When borrower Ronald Young -- whose monthly payment has spiked to $1,024 from just over $700, which his wife Candice says is too much -- argues that he needs his new car for work, Bernard responds: "Do you want to sleep in your home or your car?"

"Because that will be the choice," she added. "Trust me, sell the new car and buy an old, beat-up one."

Those who cannot afford their homes under any circumstance will be encouraged to put their homes up for sale before it is too late.

And, for those who eventually go into foreclosure, there are warnings about the lending scams they will face.

"There are sharks ready to take advantage of subprime borrowers at every step of the way," said Josh Zinner, co-director of the New York-based Neighborhood Economic Development Agency Project (NEDAP).

After the class Young, 39, signed up for individual counseling, as did the majority of the other participants. "It's time to do something to keep my home," he said.

Reaching distressed borrowers like Young and giving them basic knowledge of what awaits them ahead of one-on-one counseling sessions is exactly what nonprofit groups say they want to achieve.

"If I wanted to do only individual counseling, I'd need five more counselors," said Mark Seifert, executive director of East Side Organizing Project in Cleveland, which has three counselors on staff.

Another group, the California Reinvestment Coalition, which represents 250 nonprofit groups and public agencies in California, recently raised $5 million to hire more counselors in hard-hit areas of the state. "In some areas, things are spiraling out of control," said Kevin Stein, the group's associate director.

But some groups are short on funding even for classes. That is the case with Michigan Neighborhood Partnership in Detroit, according to its president, Dennis Talbert.

"We haven't received a nickel in funding and may have to cancel our foreclosure prevention classes."

Eviction Can Come Suddenly For Renters

SEATTLE (Reuters) - As the mortgage crisis forces more properties into foreclosure, even renters are feeling the pain.

When a landlord cannot pay the mortgage, tenants can face eviction, financial loss and pressure tactics from new owners who want them to move out. And some are ending up homeless.

Teacher Stuart Briggs was plunged into a nightmare when lenders foreclosed on his landlord last year: Utilities were cut off and he endured months with no lights or working toilets.

Vagrants took over an empty unit, and the building, in Oakland, California, fell into disrepair. Next the bank demanded that he and the other tenants pay five months rent at once or face eviction in three days.

"We had no idea this was coming. We were stranded," he said.

Realtytrac, a firm that monitors foreclosures, estimates that 20 percent of foreclosures nationwide involve rental property and that number rises to around 45 percent in some places like Las Vegas and San Diego.

In Minnesota, tenant hotline HOMEline found the number of calls it got from renters facing eviction due to foreclosure rose to 427 last year from 47 just two years earlier.

For renters, the crisis often begins unexpectedly as owners are rarely required to tell tenants they are in arrears.

Darrell Smith and his wife, who rented a house in Phoenix for $1,245 a month in mid-December, can attest to that.

Little did they know that, when they signed the lease, the house had been in foreclosure since November. Just one day after they moved in, notice was posted on the door that the house would be auctioned off to pay the debt.

They had paid the landlord $5,500 in move-in costs including $2,200 for an option to buy the house in a year. They also spent $11,000 in moving expenses, Smith said.

They are trying to fight in court but so far have only gotten an $1,800 judgment against them for not paying their next month's rent. "Me and my wife don't know what to do," Smith said. "We've had one nightmare after another with this house."

FROM APARTMENT TO HOMELESS SHELTER

More often, tenants don't fight when lenders or landlords tell them to move out, and they almost always lose their security deposits and any advance rent payments, according to housing advocates.

Rosemary Spencer and her two children are being forced out of the house that she has rented on Chicago's South Side for two years because of foreclosure.

She had no inkling of a problem. "Then the sheriffs came one day with a notice," Spencer said. She has no other place to go, she said.

Gabriel Zucker of the Illinois Tenants Union, which helps renters in Spencer's position, said she has few options because foreclosure nullifies a lease in the state. "There's no way to fight it. We are just doing all we can to keep the tenant there as long as possible until they have the wherewithal to find an alternative place," he said.

Some renters do not land on their feet. Chris Anderson, who heads homeless services for the Saint Vincent de Paul, a Catholic charity in Phoenix, a foreclosure hotspot, said numbers are growing.

"We see a lot more (evicted renters) these days. They are going to shelters or weekly motels or doubling and tripling up in family members' homes," she said.

Laws vary widely around the country, and a housing bill before Congress would give renters at least 90 days notice before eviction for foreclosure and other rights if passed.

Some places offer more protection. New Jersey and the District of Columbia dictate that leases survive foreclosure. In Minnesota, renters are allowed to stay six months in their homes after a foreclosure sale, and there is movement in other states such as Nevada and Arizona to consider new rules.

But Las Vegas resident Patricia Shorter is so desperate she would actually welcome an eviction notice. She was recently laid off from her job, and she and her husband, who is unemployed and disabled, unwittingly rented a house in November that went into foreclosure two days after they moved in.

After a few weeks, legal notices began arriving for the owner, people showed up to photograph the house and the landlord stopped taking her phone calls. Then two days before Christmas, they told the family they had to be out within days. A crew came with a truck to take away the appliances.

While the family has held on to the house so far, they are out of funds and believe that with an eviction notice they might be able to get assistance to move.

"We spent all our money to move in here. We've got nowhere to go. The only thing that is getting us through is our strong belief in God," Shorter said.

SHRINKING RENTAL STOCK

While the weak real estate market has brought down rents in some places, giving renters a leg up, in many cities it offers no help to displaced tenants. Lenders are keeping foreclosed properties empty in hopes they will sell faster, and some renters struggle to find new homes.

"We're actually seeing a shrinkage in housing stock, less rental housing, because of all the foreclosures. The banks are holding on to a significant stock of empty housing," said Jim Vilt, directing attorney for Nevada Legal Services, which sees about 20 renters a week facing foreclosure.

In Seattle, which has a low rental vacancy rate, Jonathan Grant, a housing counselor at nonprofit group Solid Ground, said the tight market gives evicted tenants few alternatives, especially the poor and the disabled who get housing subsidies. Higher-income renters are also competing for rentals with former homeowners who have lost houses due to mortgage woes.

"The housing market is extremely tight and rents are extremely high. People need a lot more time to move" than the 20 days provided under Washington law, Grant said.

As rolling foreclosures leave swathes of vacant homes in some cities, vandalism and crime are growing. This has led activists to suggest that banks should keep tenants in place as a way of preserving neighborhoods and property values.

John Mechem of the Mortgage Bankers Association said there sometimes may be merit to that argument, but lenders are not equipped to be landlords and do not want the job.

Lenders almost universally want the properties vacant and sometimes employ brokers and agents who get bonuses for getting tenants out more quickly. This is giving rise to shady practices, said Judith Liben of the Massachusetts Law Reform Institute, who has studied the problem.

"There are terrible tactics all over. People are scared and intimidated (into moving) even in places where there are laws to protect them," she said.

For example, in Oakland, California, where a tenant cannot be evicted for foreclosure, renters in one building got notices that their monthly payment was being raised from $800 to $10,000, said Alex Katz, a spokesman for City Attorney John Russo. Others have gotten notices that locks would be changed and possessions discarded.

"It's a creative way to do an eviction," said Katz. The city has been successful in blocking many such moves but believes there are many more it doesn't know about.

Mortgage Crisis Spreads Past Subprime Loans

The credit crisis is no longer just a subprime mortgage problem.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.

Like subprime mortgages, many prime loans made in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. As long as home prices were rising, these borrowers could refinance their loans or sell their properties to pay off their mortgages. But now, with prices falling and lenders clamping down, homeowners with solid credit are starting to come under the same financial stress as those with subprime credit.

“Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio manager at American Century Investments, a mutual fund company. “The problem was we had a debt or credit bubble.”

The bursting of that bubble has led to steep losses across the financial industry. American International Group said on Monday that auditors found it may have understated losses on complex financial instruments linked to mortgages and corporate loans.

The running turmoil is also stirring fears that some hedge funds may run into trouble. At the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure, according to the Mortgage Bankers Association.

That was the highest rate since the group started tracking prime and subprime mortgages separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is higher than at any time since the group started tracking that data in 1979, largely as a result of the surge in subprime lending during the last few years.

An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

The default rate for prime mortgages is still far lower than for subprime loans, about 24 percent of which are delinquent or in foreclosure. Some economists note that slightly more than a third of American homeowners have paid off their mortgages completely. This group is generally more affluent and contributes more to consumer spending and the economy relative to its size.

Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges. The recent reductions in short term interest rates by the Federal Reserve should also help by reducing the reset rate for adjustable loans.

Still, economists say the rate cuts and the $168 billion fiscal stimulus package are unlikely to make a significant dent in the large debts weighing on many Americans, because banks have tightened lending standards and expected rebates from the government will not cover most house payments.

The problems are most acute in areas that experienced a big boom in housing — California, the Southwest, Florida and other coastal markets — and in the Midwest, which is suffering from job losses in the manufacturing sector.

And it is not just first-mortgage default rates that are rising. About 5.7 percent of home equity lines of credit were delinquent or in default at the end of last year, up from 4.5 percent a year earlier, according to Moody’s Economy.com and Equifax, the credit bureau.

About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.

On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.

Banks are responding to the rise in delinquencies by capping home equity lines of credit in areas with falling real estate prices. A few credit card companies have also moved to reduce the credit limits of customers they deem more risky.

Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo are expected to announce on Tuesday at the Treasury Department that they will offer both prime and subprime borrowers who are more than three months behind a chance to halt foreclosure proceedings for 30 days and work out new loan terms.

In a conference call with analysts in December, Kenneth Lewis, the chief executive of Bank of America, said more borrowers appear to be giving up on their homes as prices fall, noting a “change in social attitudes toward default.”

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

Home prices in the North Las Vegas neighborhood of Brenda Harris, a technology analyst at a casino company, have fallen 20 percent to 30 percent. The builder who sold her a new three-bedroom home on Pink Flamingos Place for about $392,000 in 2006 is now listing similar properties for $314,000. A larger house a block down from Ms. Harris was recently listed online for $310,000.

But Ms. Harris does not want to leave her home. She estimates that she has spent close to $40,000 on her property, about half for a down payment and much of the rest on a deck and landscaping.

“I’m not behind in my payments, but I’m trying to prevent getting behind,” Ms. Harris said. “I don’t want to ruin my credit.”

In addition to the declining value of her home, Ms. Harris, 53, will soon be hit with a sharply higher house payment. She has an option adjustable-rate mortgage, a loan that allows borrowers to pay less than the interest and principal due every month. The unpaid interest gets added to the principal balance. She is making the minimum monthly payments due on her loan, about $2,400.

But she knows she will not be able to pay the $3,400 needed to cover her interest and principal, which she will be required to pay once her loan balance reaches 115 percent of her starting balance. And under the terms of her loan, which was made by Countrywide Financial, she would have to pay a prepayment penalty of about $40,000 if she chose to refinance or sell her home before May 2009.

She said that she now wishes she had taken a traditional fixed-rate loan when she bought the home. At the time, she asked for a loan that could be refinanced after one year without penalty. She said her broker had told her a week before the closing that the penalty would extend until May 2009 and that she reluctantly agreed because she had already started moving.

A nonprofit community group, Acorn Housing, is trying to broker a modification of Ms. Harris’s loan. In a statement Friday, Countrywide said the company had been in touch with Ms. Harris and would work with her.

Credit counselors say many borrowers like Ms. Harris were cajoled or pushed into risky mortgages that they never had the ability to repay.

Others disregarded warnings about complex loans because they wanted to be a part of the housing boom, which like the technology stock bubble lured people in with seemingly instant and risk-free profits, said Mory Brenner, vice president of Financial Firebird Corporation, a company based in Pittsfield, Mass., that publishes consumer debt information and refers borrowers to credit counselors.

“I’d say, Let me tell you something, this is crazy,” Mr. Brenner said. “You cannot afford this house, even if nothing happens and rates stay as low as they are today. And the response would be: I don’t care.”

Lenders extended credit to people without verifying their incomes and allowing them to make little or no down payments.

But borrowers like Mr. Doyle, the engineer in Northern California, say they are victims of their circumstances — housing prices collapsed and lending standards tightened just as they needed to sell or refinance.

In refinancing their home in 2004, Mr. Doyle and his wife were doing what millions of other homeowners did in the last decade — tapping into the rising value of their homes for home improvements, paying off credit card debt, college tuition and for other spending.

The Doyles took advantage of the housing boom by refinancing their home nearly every year since they bought it in 1995 for $275,000. Until their most recent loan they never had a problem making their payments. They invested much of the money in shares of companies that subsequently went bankrupt.

Still, Mr. Doyle does not regret refinancing in 2004. “My goal was clear: I wanted to help my daughter go through college,” he said. “It wasn’t like it was for us.”

In foreclosure capital, few see election help

STOCKTON, California (Reuters) - Stockton, California, may be the foreclosure capital of the United States, but that is not influencing how residents like Michelle Encinias who are losing their homes will vote on "Super Tuesday."

Encinias recently cast a mail ballot for Sen. Hillary Clinton, but has little faith that the New York Democrat or other presidential candidates can do much about foreclosures if they make it to the White House.

"They're just going to say what we want to hear," Encinias, who has two children, said during an interview in her four-bedroom home in a middle-class neighborhood in Stockton.

California ranks second in the nation for foreclosure filings. Stockton posted one foreclosure for every 31 households in the third quarter of 2007, the highest foreclosure rate among the 100 largest U.S. metropolitan areas in that period, according to real estate data company RealtyTrac.

California and more than 20 other states hold primaries and caucuses to nominate Democratic and Republican candidates for the November presidential election. California, the most populous state, is the biggest prize on Super Tuesday.

Encinias' skepticism is shared by Tino Gonzalez, another Stockton Democrat leaning toward Clinton for Tuesday's primary election, but who may back Arizona Sen. John McCain in November if he becomes the Republican candidate.

"I don't think either party is going to do anything about it," Gonzalez, a mechanic for the city of Stockton, said of the local foreclosure surge. "They're promising a lot of stuff to get elected but once they get elected they'll forget."

Clinton has proposed a 90-day moratorium on foreclosures and a five-year freeze on interest rates, while rival Sen. Barack Obama of Illinois has proposed a $10 billion foreclosure-prevention fund. McCain has urged more transparent mortgage documents.

HOUSING, EASY CREDIT BOOM

Gonzalez's mortgage is rock solid. He chose a fixed-rate loan because, he said, he felt adjustable rate loans were a trap waiting to be sprung on unknowing borrowers. His caution paid off, for foreclosures are soaring among borrowers with adjustable-rate mortgages, such as Encinias.

As the original low rates on those loans adjust upward over time, monthly mortgage payments rise sharply. That is why the number of borrowers nationwide who can not make those higher payments is up dramatically.

In Stockton, where single-family neighborhoods are tied together by expressways lined with small and mid-sized shopping malls, many mortgages are in defaults or foreclosure.

"I go to the gym and hear a lot of horror stories," Gonzalez said. "A lot of people bought houses a year, year-and-a-half ago and paid top dollar and now can't make the payments."

But Stockton-area voters have more pervasive concerns than foreclosures, said Bill Perkins, chairman of the region's Democratic Central Committee. "You sit in on a conversation with five people and one has a health-care story," he said.

Encinias conceded she could have avoided defaulting on her mortgage by selling her house when local home prices were peaking, but said better loan disclosure rules could have prevented her current predicament.

But many who bought during Stockton's housing boom simply ignored loan terms, said Bill Herrin, an economist with the University of the Pacific: "Everybody wanted to do it now, today ... Collectively, we went a little nuts out here."