Disney dreams turn to disaster

Andrew Bartlett is a property consultant in Sarasota who makes his money helping British buyers when their Florida deals turn sour. As house prices continue to plummet around the state, he says he has never been busier.

"The biggest problem is that people don't take good, independent advice before they buy into what they think will be their dream home," he said. "It's sad that people often give more thought to buying a television than the consequences of a $300,000 property in another country.

"Anyone who bought in central Florida since 2005 probably paid too much and if they are relying on rental income they have a major problem competing with everyone else who is in the same position."

Bartlett, who has been advising Britons for almost a decade, says there are still bargains to be had in the right areas, but that parts of Orlando had been "a disaster". "Many areas are in freefall, particularly those where Britons have been sold over-priced properties without any feedback on the laws of supply and demand.

"They were told 'buy near Disney, the tourists are coming'; they've fallen hook, line and sinker and lost a lot of money. It's tragic that there are still property exhibitions, television adverts and magazines in the UK peddling this dream.

"The exchange rate is on our side and opportunities are there if you look for them, but it's imperative to get good, independent advice from someone who's not motivated to sell linked to one particular development or area."

Home prices may not rebound till 2010

WASHINGTON — U.S. home prices are unlikely to recover until at least 2010, one of the nation's top housing economists said Thursday, adding that home building this year is likely to post its worst year in five decades.

Speaking to the National Economists Club, Frank Nothaft, the chief economist for government-sponsored mortgage buyer Freddie Mac, painted a grim picture of today's housing market.

Through the final three months of 2007, he said, sales of existing homes were down 29 percent from the same period two years earlier. Forty-six states had falling home prices in the fourth quarter, and prices nationwide were down 9.3 percent. In the Pacific region, which saw the steepest drop, prices fell an average of 17.2 percent, followed by mountain states, whose home prices fell an average of 12.9 percent.

"I don't think we're going to see any improvement in the national house-price matrix until 2010," said Nothaft, a respected government economist who's followed the national housing market for more than two decades.

He projected a 16 percent drop in mortgage originations this year, for new home loans and refinancing. He expects foreclosures, which rose by about 1.5 million in 2007, to increase even more this year

If there was any good news in the stark snapshot of the housing crisis, it came from a bit of really bad news. The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president.

What's good about that? The plunge in new-home construction means that fewer homes will come onto the market in an environment with few buyers. A fall in home starts helps reduce the supply of unsold new and existing homes. By late this year or early next year, life should be returning to the national housing market, but prices won't see significant recovery until 2010, Nothaft said.

Across the nation, he said, most markets are seeing homes for sale sitting for longer periods. Miami leads all markets, with homes remaining on the market 65 days longer in September 2007 than they did in September 2005. Boston was close behind at 61 days more, followed by the Washington-Baltimore area at 40 additional days.

North Carolina was the exception. Homes in Raleigh were on the market four fewer days than they were in September 2005, and in Charlotte one day fewer than two years earlier.

Equity Loans as Next Round in Credit Crisis

Little by little, millions of Americans surrendered equity in their homes in recent years. Lulled by good times, they borrowed — sometimes heavily — against the roofs over their heads.

Now the bill is coming due. As the housing market spirals downward, home equity loans, which turn home sweet home into cash sweet cash, are becoming the next flash point in the mortgage crisis.

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.

Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening.

It is a remarkable turnabout for the many Americans who have come to regard a home as an A.T.M. with three bedrooms and 1.5 baths. When times were good, they borrowed against their homes to pay for all sorts of things, from new cars to college educations to a home theater.

Lenders also encouraged many aspiring homeowners to take out not one but two mortgages simultaneously — ordinary ones plus “piggyback” loans — to avoid putting any cash down.

The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity — the value of the properties minus the mortgages against them — has fallen below 50 percent for the first time, according to the Federal Reserve.

Lenders holding first mortgages get first dibs on borrowers’ cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line. This arrangement sometimes pits one lender against another.

When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.

In places like California, Nevada, Arizona and Florida, where home prices have fallen significantly, second-lien holders can be left with little or nothing once first mortgages are paid.

In December, 5.7 percent of home equity lines of credit were delinquent or in default, up from 4.5 percent in 2006, according to Moody’s Economy.com.

Lenders and investors who hold home equity loans are not giving up easily, however. Instead, they are opposing short sales. And some banks holding second liens are also opposing refinancings for first mortgages, a little-used power they have under the law, in an effort to force borrowers to pay down their loans.

“Acknowledging a loss is the most difficult thing to do,” said Micheal Thompson, the executive director of the Iowa Mediation Service, which has been working with delinquent borrowers and lenders. “You have to deal with the reality of what you are facing today.”

While he has been able to strike some deals, Mr. Thompson said that many mortgage companies he talks with refuse to compromise. Holders of second mortgages often agree to short sales and other changes only if first-lien holders pay them a small sum, say $10,000, or 10 percent, on a $100,000 debt.

Disagreements arise when the first and second liens are held by different banks or investors. If one lender holds both debts, it is in their interest to find a solution.

When deals cannot be worked out, second-lien holders can pursue the outstanding balance even after foreclosure, sometimes through collection agencies. The soured home equity debts can linger on credit records and make it harder for people to borrow in the future

Experts say it is in everyone’s interest to settle these loans, but doing so is not always easy. Consider Randy and Dawn McLain of Phoenix. The couple decided to sell their home after falling behind on their first mortgage from Chase and a home equity line of credit from CitiFinancial last year, after Randy McLain retired because of a back injury. The couple owed $370,000 in total.

After three months, the couple found a buyer willing to pay about $300,000 for their home — a figure representing an 18 percent decline in the value of their home since January 2007, when they took out their home equity credit line. (Single-family home prices in Phoenix have fallen about 18 percent since the summer of 2006, according to the Standard & Poor’s Case-Shiller index.)

CitiFinancial, which was owed $95,500, rejected the offer because it would have paid off the first mortgage in full but would have left it with a mere $1,000, after fees and closing costs, on the credit line. The real estate agents who worked on the sale say that deal is still better than the one the lender would get if the home was foreclosed on and sold at an auction in a few months.

“If it goes into foreclosure, which it is very likely to do anyway, you wouldn’t get anything,” said J. D. Dougherty, a real estate agent who represented the buyer on the transaction.

Mark Rodgers, a spokesman for CitiFinancial, declined to comment on the McLains’ situation, citing privacy considerations.

“We strive to find solutions that are acceptable to the various parties involved,” he said but two lenders can “value the property differently.”

Other lenders like National City, the bank based in Cleveland, have blocked homeowners from refinancing first mortgages unless the borrowers pay off the second lien held by the bank first. But such tactics carry significant risk, said Michael Youngblood, a portfolio manager and analyst at Friedman, Billings, Ramsey, the securities firm. “It might also impel the borrower to file for bankruptcy,” and a judge could write down the value of the second mortgage, he said.

A spokeswoman for National City, Kristen Baird Adams, said the policy applied only to home equity loans originated by mortgage brokers.

Underscoring the difficulties likely to arise from home equity loans, a Democratic proposal in Congress to refinance troubled mortgages and provide them with government backing specifically excludes second liens. Lenders holding a second lien would be required to write off their debts before the first loan could be refinanced. That could leave out a significant number of loans, analysts say.

People with weak, or subprime, credit could be hurt the most. More than a third of all subprime loans made in 2006 had associated second-lien debt, up from 17 percent in 2000, according to Credit Suisse. And many people added second loans after taking out first mortgages, so it is impossible to say for certain how many homeowners have multiple liens on their properties.

“This is turning out to be a real impediment to solving this problem,” said Mark Zandi, chief economist at Economy.com, “at least, solving it quickly.”

US home sales see surprise rise

US home sales unexpectedly rose in February, the first increase in seven months, but prices posted a record fall, industry figures show.

The National Association of Realtors (NAR) said that sales of existing homes rose 2.9% in February to an annual rate of 5.03 million units.

The median home price fell 8.2% from a year ago to $195,900, the biggest fall since records began in 1968.

Analysts said the data was a sign that the US housing market was stabilising.

In January, sales of existing homes hit a nine-year low and economists had been expecting sales to fall again in February.

"It's clearly a positive indication," said Pierre Ellis, senior economist at Decision Economics in New York.

"It does seem as if we can tentatively call a bottom in existing home sales. There is price weakness, but that was a given."

The Federal Reserve has cut interest rates substantially since September when the slump in the housing market and its effect on financial markets first became clear.

"The relationship between home prices, interest rates and income has improved to the point where buyers are more serious about making offers," said Lawrence Yun, NAR chief economist.

Insurers deal new blow to home buyers

In the wake of huge losses, mortgage insurers are also playing it extra safe when it comes to writing policies in markets like South Florida. That means bigger down payments for the home-buying public.

First, it was mortgage lenders who began requiring bigger down payments from borrowers in South Florida, ostensibly making it harder to buy and slowing recovery of the housing sector. Now, mortgage insurers are delivering a new blow to a market that is already down.

Over the last several weeks, the nation's mortgage insurers have been unrolling their own distressed market policies in Miami-Dade and Broward counties, eliminating certain loans from coverage and requiring higher credit scores and more upfront money from borrowers.

On March 1, PMI Mortgage Insurance, the country's second-largest insurer, began requiring at least 10 percent down to insure loans for borrowers in most of Florida, even when lenders are willing to take smaller outlays. PMI said it designated distressed markets as areas in which it expects home prices to fall over the next two years.

The new insurance guidelines, which vary by company, come as South Florida's housing market staggers under the weight of record foreclosures and unsold inventory. The median price of a single-family home in the region fell by an average of 14.5 percent in January, according to the most recent figures from the Florida Association of Realtors.

Typically, borrowers who put down less than 20 percent of a home's sale price are required to carry mortgage insurance, which covers the lender in case of default. In the boom years, many lenders assumed the risk of default themselves by writing second mortgages to cover the difference in so-called piggy-back loans.

''When the interest rates were jammed down between 2001 and 2005, there was a general sense that there was no risk in the market, so lenders did 20 percent loans,'' said Nate Purpura, a spokesman for PMI.

`DOWN-PAYMENT GAME'

Since the credit crunch, no-money-down arrangements have all but disappeared, forcing more borrowers to purchase the insurance much as they used to, said Mike Pappas, chief executive officer of The Keyes Company.

''Historically, real estate has been a down-payment game. We are going back to what we've grown up with,'' Pappas said. The market, he added, had already adjusted to stricter lending standards and was on the mend anyway because of low interest rates, low prices, and recent changes to Florida's Save Our Home amendment.

Others disagreed, saying the lending industry, including insurers, could be the biggest obstacle to getting the real estate market back on its feet because borrowers now may have to delay purchases to save up for down payments.

''People are in foreclosure and their houses are not selling because nobody can get loans to buy them,'' said Alphoncia Lafrance, president of Midas Lending in North Miami.

To get loan insurance from MGIC Investment Corp., the country's largest mortgage insurer, South Florida borrowers with a 620 credit score have to put down 10 percent on loans of $650,000 or less. For borrowers with better scores, the down payment drops to 5 percent.

So-called no-doc loans are disqualified, as well as pick-a-payment and negative amortization loans that were popularized during the boom. Those new guidelines mirror policies already in place by most lenders.

OBSTACLES

Justin Miller, president of JB Mortgage & Financial Services in Coral Springs, said the lending industry is throwing up obstacles for even the most qualified borrowers.

''They are overcompensating because of the subprime problem. It's almost like going from Democrat to Republican, from Dennis Kucinich to Ron Paul -- that's how far it's gone from the far left to the far right in terms of standards,'' a frustrated Miller said. Like everyone else, insurers want to guard against future losses after being hit hard in mortgage meltdown.

LOSSES

Milwaukee-based MGIC reported a $1.47 billion-dollar loss in the last three months of 2007. On Monday, PMI Group of Walnut Creek, Calif., reported a fourth-quarter loss of $1 million. And the No. 3 insurer, Radian Group, booked losses of $721 million in the same period.

Still, Robert DeLoach, a securities attorney with Fort Lauderdale-based Ledbetter & Associates who closely follows the real estate market, said it's unfair to make qualified borrowers pay for the excesses of the boom years.

''When I was in my 20s, I got a 95 percent loan. I paid it off. The mortgage insurers are picking on qualified borrowers, even when they have good credit scores, good payment histories and good jobs,'' DeLoach said, ``It will hurt us, and it's too bad they singled out South Florida.''

In housing slump, some places still robust

ROSS, California (Reuters) - Even in the worst storms, there are pockets of calm, and the housing crisis gripping the United States is no different.

While prices are falling and owners are losing their homes to foreclosure around the country, places like Ross, a wealthy, woodsy town 18 miles north of San Francisco, still enjoy robust demand.

That demand is explained by the town's sleepy feel -- the 2,300 residents have to collect their own mail from the post office -- and its exclusivity. Actor Sean Penn and Grateful Dead bassist Phil Lesh live here.

"It's doing very well," said real estate agent Tracy McLaughlin, whose offerings include a $10 million estate. "It's supply constrained. I can't think of one buildable lot in Ross."

While Ross and surrounding Marin County may be a special case, a report last month by S&P/Case-Shiller showed that three metropolitan areas posted modest gains in home prices last year -- Seattle; Portland, Oregon; and Charlotte, North Carolina.

Both Charlotte, a major financial center, and Seattle, a high-tech hub, have low unemployment rates and all three are seen as desirable places to live.

But even in those three markets, average home prices declined in December from November, leading home owners and real estate agents to hope declines will be small.

Seattle's home prices may give up some gains -- but not much, because "they weren't as far out of kilter as in other places," said Glenn Crellin, director of the Washington Center for Real Estate.

Charlotte's home prices should hold much of their gains or only lose a bit of ground for the same reason, said real estate agent Mike Sposato of Carolina Realty Advisors.

"Maybe one year we had 10 to 12 percent appreciation, but over the five-year period we had on average about 7 percent," Sposato said.

"NOT TERRIFIED"

Mark Jenkins and Linda Baker hope that Portland, like Seattle and Charlotte, holds relatively steady. They are looking to sell their home in Portland and buy a new one there.

"We are a little worried, but not terrified," Baker said. "We have been told by our broker that we have a good chance to sell at a reasonable price and in a reasonable amount of time."

Similar sentiments hold in San Francisco, where real estate agents report that demand for homes still exceeds supply, especially for luxury properties, even though average prices fell there last year.

"There is a lot of wealth here ... If they (buyers) want something better, they'll go for it," Realtor Richard Weil said while showing a 10,000 square-foot home listed for sale at $14.5 million in San Francisco's Presidio Heights neighborhood.

Demand remains strong in San Francisco and nearby cities for less expensive homes, too.

Where home builders in many other markets have shelved blueprints, builders in the San Francisco Bay area's urban centers remain busy thanks to the region's wealth, scarce land for building and persistent demand.

"Would I like to sell more units at better prices in San Francisco, Oakland, Silicon Valley? Sure. But it's very insulated from what's going on in many places," said Mike Ghielmetti, president of home builder Signature Properties.

By comparison, the median home price in Las Vegas, up at double-digit rates during the boom years, fell 5.6 percent in January from December and 16.4 percent from a year earlier, according to DataQuick Information Systems.

And the worst of the U.S. housing slump is playing out just a two-hour drive east of the San Francisco Bay area in California's Central Valley, where affordable land, strong demand and easy credit fuelled a boom in construction.

As interest rates on adjustable-rate loans reset to higher levels, an increasing number of borrowers defaulted, sending foreclosures soaring to among the worst rates in the United States.

In Central Valley towns of Merced, Modesto and Stockton, prices fell by at least 15 percent last year from the prior year, the worst such drops among metropolitan U.S. areas, according to Office of Federal Housing Enterprise Oversight.

Tapping a Flow of Cash From the Credit Crisis

THE United States may have already entered a recession set off by the upheaval in the subprime mortgage market and sharp declines in house prices nationwide. For the rich, however, the mortgage crisis and housing slump have created opportunities to leverage their real estate holdings for other investments.

“There’s a lot of talk about a credit crisis, but the fact is there’s plenty of available capital for wealthy clients,” said Michael J. McPartland, a managing director at Citigroup and head of residential real estate at Citigroup Global Wealth Management, where the average mortgage size in 2007 was $1.7 million on homes worth $2 million to $3 million.

From a wealth management perspective, the crisis is about house values and not about subprime mortgages, said Erin M. Gorman, national sales manager for mortgage products at the Bank of New York Mellon. “The wealthier borrower is going to ride the storm out,” she said.

For many rich people, that means repositioning their investment portfolios, and a big part of that is being accomplished by borrowing against homes, some bankers say. The Federal Reserve’s lowering of interest rates to try to keep the economy from sliding into recession has had the effect of making mortgages on seven- and eight-figure homes attractive. “Money is cheap right now,” Ms. Gorman said.

Such highly leveraged mortgages and refinancings, which have landed many so-called prime borrowers in difficult straits when the value of their houses sank, are now a flow of money that can be put into higher-yielding investments.

“They’re not looking at this as a mortgage, but as a way to accomplish some other goal they have in mind,” said Jan Reuter, a residential real estate executive at U.S. Trust, Bank of America Private Wealth Management. “Most of them have the ability to pay off the loan if it doesn’t make sense anymore.”

She cited the example of a client who recently took out a $15 million mortgage on an apartment in New York City, something he would not have done with higher interest rates. The loan allowed the borrower to buy the property without liquidating other investments that would have meant paying capital gains taxes.

There are three popular options that the very rich have been using to get cash out of real estate they own:

¶ Interest-only mortgages, the bane of so many less affluent borrowers, are well suited for the wealthy. With them, wealthier borrowers can reap the full tax benefits of a mortgage while reducing the principal only when it suits them. “It’s a cash flow management tool,” Mr. McPartland said.

¶ Adjustable-rate mortgages, or ARMS, are a second popular tool. Ms. Gorman says clients can get one-month ARMs with rates in the high 3 percent range. “ARMs historically have not been a bad play for wealthy clients,” she said. “If the market moves against them, they can pay down or pay off their mortgages.”

Jeff Kauffman, president and chief executive of Northern Trust’s Personal Financial Services Business in the Northeast, takes a slightly longer view, recommending adjustable-rate mortgages that lock in a lower rate for up to 7 or 10 years — as long as there are no prepayment penalties.

With these clients, financing the full value of a home, or even several homes together, is always an option. Since the start of the year, Ms. Gorman said, she has seen a rise in the number of borrowers taking out $10 million to $20 million mortgages and has gone as high as $50 million for a group of properties.

¶ But a third, simpler strategy for people in the highest tax bracket is a $1 million mortgage and a $100,000 home equity loan on a property that did not have a mortgage before. This amount hits the limit for federal mortgage interest deduction, Ms. Gorman pointed out.

One place where these strategies have been put to work is Naples, an affluent beach town in southwestern Florida.

From 2003 to 2006, speculator-driven price increases on high-end homes rose to 20 percent or more a year, compared with 7 percent to 10 percent in a normal real estate cycle, said Michael J. Timmerman, a senior associate at Fishkind & Associates, a financial consulting company based in Orlando, who has been tracking the real estate market in the southeastern United States for 25 years. Last year, by contrast, prices fell 5 to 8 percent, a slide that has continued at the same pace into 2008.

While the midrange market is trying to regain its footing, the wealthy are using the flat market to their advantage. Ms. Gorman said she had a client in the Naples area who took out a $1 million loan on a $2 million condominium he owned outright. What made this attractive was a 10-year interest-only adjustable-rate mortgage with a rate in the low 5 percent range, which is locked in for the first five years.

“Typically our clients do something different every three to four years, so that five-year window is a good window to lock in an interest rate,” she said.

Given the easy credit available to the rich for the homes they own, those who are looking to buy property are equally well positioned when it comes to getting second or third mortgages.

“It’s a good time to be an opportunistic buyer,” said Mr. Kauffman of Northern Trust. “I believe that applies to whether it’s a unique real estate opportunity, a third home or land. There are fewer strong buyers out there.”

Ruth Trettis, a broker at Premier Properties in Naples who has watched the market for 30 years, agreed. “When the market was really on fire, we would have multiple offers on properties,” she said, adding that right now the adage about location being paramount is more relevant than ever. “We had a home in the beach block come on the market recently for around $4 million, and it sold very quickly.”

Mr. Timmerman said he expected that the market would stabilize in the first quarter of 2009 as election-cycle uncertainty waned, and that prices would start to rise by the end of 2009.

There are plenty who have done nothing with their homes and have weathered the worst of the storm without problems. Richard Cacciagrani, an owner of Toscano, a popular Boston restaurant, watched the value of his home four blocks from the beach in Naples climb so rapidly — tripling in value from 2002 to 2005 — that he couldn’t imagine selling. “My house appreciated so much that I was wondering if it was going to keep booming,” he said.

It didn’t. But now, instead of fretting over a lost opportunity of cashing in during the boom, he looks at the property more as another asset in his portfolio, and eventually, he will realize its value. “They built two $1.2 million houses across the street and they sold,” he said optimistically.

Landlords find deals in housing crisis

LOMBARD, Illinois (Reuters) - The housing crisis and credit crunch may end the American dream of property ownership for millions of people, but for landlords seeking bargain investment properties the market is looking up.

"There will be a lot of product hitting the street in the coming months and it should be pretty cheap," said Mike Bacza, watching the bidding at a foreclosure auction last month in this western suburb of Chicago. "This year I expect I'll buy at least two multi-family units in a decent neighborhood."

The 48-year-old union carpenter is not ready to purchase today, but observes from the back of a large conference hall crowded where hundreds of people -- most of them investors -- are looking to snap up one of some 170 foreclosed homes.

"I'm on a reconnaissance mission," Bacza said, jotting down bids. "I want to know what's selling and for how much."

Building contractor Chad Blankenbaker seeks foreclosed homes to "flip" -- buying at well below market value, refitting then selling them at a hefty profit. "I'm shocked at how low the prices are here," he said. "There's so much inventory that no one has to fight to buy anything."

Around the country the housing crisis represents both a business opportunity for landlords and a huge shift in the rental market.

During the property boom, mortgage rates were low and people could buy a home with little or no money down, so there was no incentive for many Americans to rent.

"The U.S. rental market was nearly flat between 2000 and 2005," said Ken Fears, an economist at the National Association of Realtors. "Some landlords were so desperate to get tenants that we saw cases where they would offer three months free rent and other promotions to fill vacancies."

"Now mortgage rates have risen and it's harder to gain access to credit, allowing landlords to jack up rents for the first time in years," he added.

What is good news for small-time landlords, however, may not be good for publicly traded U.S. real estate investment trusts as the extra supply is expected to push prices down.

Some real estate analysts also worry that many landlords will turn their units into government-subsidized rental housing and stifle the rebirth of some U.S. inner city areas.

BARGAIN BASEMENT

For many people, the housing market is all bad news now.

The Mortgage Bankers Association (MBA) said on March 6 that in the fourth quarter of 2007 a record 0.83 percent of U.S. home loans entered the foreclosure process. The U.S. mortgage delinquency rate of 5.82 percent was the highest since 1985, the MBA said. Officials added that they didn't expect foreclosures to peak until mid- to late 2008.

Dave Webb, principal of Texas-based firm Hudson & Marshall, which held the auction in Lombard on behalf of lenders, said he expects business will be brisk all year, nationwide.

"Last year we sold 7,000 units, in '08 we should sell 15,000," he said. "If we had the capacity we could do 40,000."

Even markets like Chicago, which has not experienced the same boom-and-bust intensity of states like Florida or California, have seen many foreclosed homes hit the market.

According to real estate data company RealtyTrac, Chicago was the 30th ranked U.S. city for the percentage of homes with foreclosure filings in 2007. In absolute terms, its 73,469 filings put it in fourth place.

Auctions are often the last resort for lenders to offload foreclosed properties they could not sell using real estate agents. At the Lombard auction, most prices were around 60 percent to 70 percent off the list price -- itself well below market value. Projection screens showed photos of properties boarded up in inner city areas, but there were also many higher-end houses in wealthy suburbs up for sale.

"There's no emotion here," said real estate agent Greg Fisher, looking around the conference hall. "These investors know what to bid, what it will cost to get these properties into reasonable shape and what to sell or rent them for."

The lack of easy credit following the credit crunch means that there will be no shortage of renters in most markets.

"The housing crisis has removed the ability of people to get out of the rental market and onto the property ladder," said Van Johnson, president of the Georgia Association of Realtors.

John Vranas of Vranas & Chioros Realty Group, which owns rental properties throughout the Chicago area, said the "rental market has been firming since the first quarter of last year."

"We're now seeing normal vacancy rates of 3 percent to 5 percent compared with double digits during the property boom."

BMO Capital Markets analyst Rich Anderson said he expects that "an unprecedented flow of rental properties hitting the market could be a negative for multi-family REITs over the next few years."

He said the influx of properties could especially be a "thorn in the side" for REITs like Apartment Investment and Management Co and Camden Property Trust with exposure to hard-hit areas like Florida, Texas or California.

Observers like Boston-based real estate analyst John Anderson worry that investors will seek to get properties registered in government-subsidized rent programs. Commonly referred to as "Section 8" housing -- a reference to the U.S. Housing Act of 1937 -- under which the U.S. government guarantees the rent.

"Guaranteed cash flow like this actually raises the property's value," John Anderson said. "But flooding inner city neighborhoods with Section 8 housing will kill off the recovery or gentrification that has taken hold in recent years."

U.S. Regulators Unveil Plan to Revamp Mortgage Rules

WASHINGTON (Reuters) - U.S. financial regulators pledged on Thursday to toughen rules for mortgage brokers, lenders, and credit agencies, to try to restore investor confidence and prevent a recurrence of credit-market problems that threaten to slow the economy.

U.S. Treasury Secretary Henry Paulson, unveiling a 20-page set of recommendations from the top-level President's Working Group on Financial Markets, blamed a "dramatic weakening" of underwriting standards for lower-quality home loans that have trigged turmoil in credit markets around the globe.

Paulson, a Wall Street veteran who took the reins at Treasury in mid-2006, said "financial innovation," like the practice of slicing up and repackaging so-called subprime mortgages for sale worldwide, had worsened the situation by introducing a baffling level of complexity.

Speaking at the National Press Club in Washington D.C., Paulson appealed to banks and other lenders not to stop issuing the loans that are the lifeblood of the economy and implied they should reduce dividends paid to shareholders if necessary to raise capital.

"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said.

Among other items, the regulators recommended "strong nationwide licensing standards" for mortgage brokers, stiffer federal and state oversight of all mortgage originators, and new rules to force more disclosure of loan terms to borrowers.

Analysts said the proposed changes, which touch nearly every corner of the credit market, from Wall Street firms to credit rating agencies to regulators, come too late to forestall a wave of foreclosures sweeping the country. Some suggested brokers in particular needed more scrutiny.

"Mortgage brokers need to have some skin in the game, so that if they defraud borrowers, the brokers are worth suing," said Kurt Eggert, a law professor at Chapman University in Orange, California.

REGULATORS LEFT BEHIND

The regulatory working group is made up of the heads of the Federal Reserve Board, the New York Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, as well as Treasury officials, and Paulson said it had focused since last summer on finding ways to reduce the likelihood of a repeat performance in the U.S. mortgage market.

"Regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," he said.

Chris Low, an economist with FTN Financial Capital Markets, said in the short run the recommendations, if implemented, could make it harder for people with marginal credit to refinance existing mortgages and so worsen the situation.

But, he added, more regulation is inevitable and if President Bush's administration doesn't act, the U.S. Congress likely will.

Democratic Sen. Charles Schumer of New York said he believed direct government involvement eventually will be needed to help the economy, and said the proposals seemed like a first, tentative step in that direction.

"We need government action not only to solve the current crisis, but also to prevent a future one," he said.

Many Democrats advocate a bolder federal response. House of Representatives" Financial Services Committee Chairman Barney Frank unveiled a bill on Thursday that would allow the Federal Housing Administration to offer guarantees for mortgages whose values have been written down.

SLOPPY LENDING

Paulson said state and local regulators need to toughen oversight of all mortgage originators.
Sloppy lending practices are widely blamed for the soaring tide of foreclosures. U.S. foreclosure filings in February stood 60 percent higher than their level a year-ago, real estate data firm RealtyTrac said on Thursday.

Paulson also said credit rating agencies need to make sure that securitized credit issuers, like those who issue mortgage-backed securities, "perform robust due diligence" to ensure that the underlying assets are sound.

"We are going to be mindful when we implement it to not create a burden," Paulson said in an interview published in the Wall Street Journal on Thursday. "But we think it's very appropriate to lay out some of the causes and some of the steps that need to be taken ... to minimize the likelihood of this happening again."

Home loan demand drops as rates near 5-month high

NEW YORK (Reuters) - U.S. mortgage applications dipped last week, reflecting lower demand for home loan refinancing as interest rates surged to their highest since October, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended March 7 fell 1.9 percent to 671.7.

The U.S. housing market is suffering one of the worst downturns in history. Last week's drop in demand may indicate what is in store for the hard-hit sector this spring, which is the peak home-buying season.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.37 percent, up 0.39 percentage point from the previous week, the highest since the week ended October 12, 2007 when it hit 6.40 percent.

Fixed 15-year mortgage rates averaged 5.72 percent, up from 5.26 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) increased to 6.72 percent from 5.83 percent.

Overall mortgage applications last week were 2.7 percent below their year-ago level. The four-week moving average of mortgage applications, which smooths the volatile weekly figures, was down 12.1 percent to 711.1.

The MBA's seasonally adjusted purchase index rose 1.6 percent to 368.8. The index came in below its year-earlier level of 414.3, a drop of 11.0 percent.

The group's seasonally adjusted index of refinancing applications decreased 4.7 percent to 2,448.2. The index was up 5.9 percent from its year-ago level of 2,312.2.

Consumers seeking to refinance their existing home loans tend to be highly sensitive to shifts in interest rates.
The refinance share of applications decreased to 50.6 percent from 52.4 percent the previous week. The ARM share of activity decreased to 15.5 percent, down from 17.3 percent the previous week.

FBI Begins Countrywide Criminal Inquiry

NEW YORK (Reuters) - The FBI has begun a criminal inquiry into the largest U.S. mortgage lender, Countrywide Financial Corp , for suspected securities fraud as part of investigations into the mortgage crisis, The New York Times reported in Sunday editions.

Citing unnamed government officials with knowledge of the case, the Times said the investigation into whether Countrywide misrepresented its financial condition and the soundness of its loans in securities filings was at an early stage and it was not clear if any charges would result.

A Countrywide spokeswoman, Susan Martin, told the newspaper that "we are not aware of any such investigation." The probe was first reported on Saturday in The Wall Street Journal.

The Countrywide inquiry follows a broader investigation by the FBI into 14 companies as part of a review of the practices of the mortgage industry, the Times said.

Investigators had been looking at possible accounting fraud or insider trading connected to loans made to borrowers with subprime credit, the Times said.

Countrywide already faces federal and state investigations of its lending practices, as well as several lawsuits by investors and mortgage holders.

The Securities and Exchange Commission is conducting about three dozen civil investigations into how subprime loans were made and how securities were valued, the Times said.

State investigations include one by the Illinois attorney general, who earlier this month subpoenaed units of Countrywide Financial and Wells Fargo & Co in a probe of whether the companies violated federal lending and civil rights laws by steering minority borrowers into more expensive loans.

In that probe, Countrywide said it would fully cooperate with authorities.
Countrywide, drowning in a pool of bad home loans, is in the process of being acquired by Bank of America for about $4 billion. It reported a loss of about $422 million in the fourth quarter of 2007.

Foreclosures set records as housing troubles worsen

WASHINGTON — More than one of every 20 home mortgages was delinquent during the last three months of 2007, the highest level in 23 years, according to a report Thursday by the Mortgage Bankers Association.

The group's National Delinquency Survey also found that the rate of foreclosures and the percent of loans in the process of foreclosure reached record levels during the period.

Homeowners with adjustable-rate subprime mortgages, loans given to borrowers with the weakest credit records, were particularly hard hit. One in every five outstanding subprime ARM was delinquent in fourth quarter 2007; one in every 20 already was in foreclosure.

The percentage of overall home loans in delinquency, 5.8 percent, is second only to a period in 1985, when low oil prices caused an economic downturn in the nation's oil-producing region.

More than 938,000 home loans were in foreclosure nationwide in the fourth quarter of 2007, a record 2 percent of all outstanding home loans. In all, more than 3.6 million mortgages were past due or in foreclosure proceedings across the country during the final three months of last year. Of those, nearly 381,700 entered foreclosure in the quarter, another record.

Borrowers with good credit weren't immune. About 5.5 percent of all adjustable-rate prime mortgages were past due in fourth quarter 2007, more than double the rate at the beginning of 2006, shortly before the housing market became unhinged.

California and Florida, which together account for one of every five home loans nationwide and 30 percent of new foreclosures, are dragging down the national housing numbers. Their housing problems matter to the rest of the nation because together they account for about 18.5 percent of the nation's economic activity.

"To the extent that there is an intermingling of economics of the housing market and the economy ... it will have an effect on the broader marketplace," said Doug Duncan, the chief economist for the bankers' group.

More than 5.3 percent of the nearly 6 million outstanding home loans in California were delinquent in the fourth quarter, and more than 7.4 percent of Florida's 3.5 million loans were past due. Mississippi, Michigan and Georgia have the highest overall delinquency percentages (11.07, 8.97 and 8.37, respectively), but California and Florida drag down the national average by their sheer size.

The outlook grows more complex when Arizona and Nevada are added to California and Florida. The four states suffer from a glut of new and existing homes, have a higher-than-average number of adjustable-rate loans and are seeing the biggest price drops.

Late last year, Treasury Secretary Henry Paulson secured a pledge from mortgage lenders to work expeditiously to modify loans and prevent foreclosures. The effort began in December, so the fourth-quarter data don't reflect its results.

Federal Reserve Chairman Ben Bernanke on Tuesday called on lenders to be more aggressive in modifying problem loans. It was seen as a rebuke of Paulson's efforts with lenders.

Modifying loans is no easy task. Banks no longer hold loans on their books; instead, they sell them into a secondary market where loans are bundled with others and sold to investors as mortgage bonds. It's a process called securitization or syndication.

Securitizers have stopped bundling loans given to the weakest borrowers. Federal Reserve Governor Frederic Mishkin on Tuesday described subprime lending as "already dead as a doornail."

And the resale of loans representing anything but the best credit also is drying up.

Investors right now have little appetite for mortgage bonds since the collateral that backs the loans — the homes themselves — are falling in value.

And since investors, not banks, now hold mortgage bonds, it further complicates a workout to prevent foreclosure.

"What's unusual now is so much of the housing debt has been syndicated, placed in complex structures, so you cannot have face-to-face negotiations between the bankers and the homeowners," said Martin Feldstein, a Harvard University economist and head of the National Bureau of Economic Research.

Thursday's numbers confirm a downward spiral. Lenders have tightened their underwriting standards, making it harder to get loans. That also makes it harder to sell a house, and the longer a home sits on the market, the more it drives down local prices.

The Federal Housing Administration announced on Wednesday higher limits for the loans it guarantees in 14 hard-hit California counties. The FHA now will be able to guarantee loans worth up to $729,750 in California, and the agency is set to announce new loan limits nationwide.

This temporary increase in loan limits was part of a fiscal stimulus package passed by Congress and signed by President Bush last month. The package also allows government-sponsored mortgage bundlers Fannie Mae and Freddie Mac to increase the maximum loan value they can purchase to up to $729,750. Actual limits will vary nationwide based on median home prices.

But the effects of the stimulus package won't be felt anytime soon.

"It won't start affecting the marketplace for three to six months," said Duncan, the chief economist. "That will not be a near-term solution, but will provide some assistance down the road."

Report: Minorities Hit by Foreclosures

SAN FRANCISCO -- Subprime lenders that went out of business with the industry's collapse targeted minority neighborhoods, leaving them to struggle disproportionately with foreclosures and crumbling home values, according to a new report.

These companies' high-risk loans made up 20 percent of all loans in predominantly minority communities, compared with 4 percent of total loans in mostly white areas, according to the report released Thursday by an alliance of policy, research and advocacy organizations.

''These high risk lenders were targeting their loans to particular neighborhoods -- to communities of color,'' said Saara Nifici of the Neighborhood Economic Development Advocacy Project in New York, one of the organizations participating in the study. ''That's where they focused their marketing practices.''

Part of their growth in those areas can be explained by the lack of other available resources -- simply not having another lender in the neighborhood, Nifici said. But researchers believe there's more to the issue.

''It's a question of access and a question of steering,'' Nifici said. ''If you walk into the local subprime office, there's no incentive for them to send you to a different lender where you can qualify for a prime loan. People are steered downward, not upward.''

The study analyzed the geographic operating patterns of 35 high-risk lenders that were very active in 2006 but that went bankrupt, were closed or sold in 2007 as the industry imploded.

Chief among them were New Century Mortgage Corp., WMC Mortgage Corp., Fremont Investment & Loan, and Argent Mortgage Co.

The survey focused on lending to minority urban markets in New York, Los Angeles, Chicago, Boston, Cleveland, Charlotte, N.C., and Rochester, N.Y. In six of these seven urban areas, high-risk lenders' market share in minority neighborhoods was at least three times the share in white neighborhoods.

Many subprime loans to borrowers with blemished credit or low incomes featured low introductory or ''teaser'' rates. When the adjustable mortgages reset to higher rates, it made the monthly payments unaffordable for many people and put their homes at risk of foreclosure.

Advocacy groups have said poor and minority borrowers who qualified for traditional loans were nevertheless steered into risky adjustable mortgages.

The concentration of subprime loans happened in low-income areas, but also in middle-class minority communities like the predominantly African- and Caribbean-American areas of southeast Queens in New York, Nifici said.

In these cases, ''race and ethnicity played a bigger part'' in lending decisions than income, she said.

This concentration means these minority communities will shoulder most of the negative impacts of the subprime crisis -- foreclosures, sinking property values, lower tax bases, abandoned homes and higher crime.

The report recommended that policy makers protect borrowers and tenants from foreclosures and pass mortgage reform legislation.

The city of Baltimore filed a federal lawsuit against Wells Fargo Bank in January, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites in violation of federal law and targeted black neighborhoods for high-risk and unfairly priced loans.

Wells Fargo has said it does not consider race when making loans.
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On the Net:
Neighborhood Economic Development Advocacy Project: http://www.nedap.org

Fraud Compounds Woes Of U.S. Housing Crisis

CHICAGO (Reuters) - As the U.S. housing meltdown forces hundreds of thousands of Americans from their homes, the extent to which fraud was a factor in the crisis is just coming to light.

Products such as stated-income loans -- known as "liar loans" because no proof of income was needed -- led to widespread misrepresentation by borrowers about their earnings.

But far more sinister forms of fraud, including identity theft and "straw buyers" -- those created using fake documents -- are also coming into the open.

Mike Reardon of nonprofit lender Neighborhood Housing Services of Chicago (NHS) points out two such properties, both boarded up, on South Rockwell Avenue in Chicago's blue-collar South Side.

The owner of one of the homes was traced to Texas, he said.

"Turns out it was a case of identity theft," Reardon said, shaking his head. "He had no idea he owned a home in Chicago."

Across the street, he points to another boarded, slowly rotting home, which had last been sold to a woman named Susan Haas.

"I may be wrong, but I've been looking for months and months and I can't find any proof Susan Haas exists," he said.

Many fraud schemes kept running as long as cash kept flowing from Wall Street. Once the credit crunch turned off the supply of easy money, the perpetrators simply walked away.

Estimates vary as to how prevalent fraud was during the boom.

Arthur Prieston, chairman of the Prieston Group, which provides mortgage-fraud insurance and training to lenders, said that "at least 30 percent of the loans out there contain some form of misrepresentation."

"But because lenders often have to sell off properties quickly to cut their losses, we will never know exactly how much mortgage fraud has been committed," he added.

Prieston estimates that mortgage-fraud losses were around $4.2 billion for 2006, adding that figures for 2007 "will be much higher."

In a recent case in Chicago, he said the authorities prepared to file charges against a woman who had fraudulently bought five properties.

"When we turned up to serve papers on her, we found she was 9 years old," he said. "Her uncle had stolen her identity."

HOUSE OF STRAW

The mortgage scam known as identity theft is relatively simple -- the perpetrator uses a stolen identity to buy property with no money down, then rents it to tenants until it goes into foreclosure, collecting rent but never making a mortgage payment.

A far more lucrative scam, using what are known as straw buyers, happened was much more common, according to Boston-based real estate analyst John Anderson.

"The vast majority of the cases I'm aware of involved straw buyers," he said. "Thanks to products like stated-income loans, people walked away with a ton of free money."

All you needed was to buy a foreclosed property at a bargain price, have it falsely appraised with a grossly inflated value, then sell it to a straw buyer at a big profit. The straw buyer never makes a payment and the home goes into foreclosure. The process was often repeated over and over again.

"We've seen some properties that were sold like this dozens of times," NHS' Reardon said. "This artificially pushed up prices in some neighborhoods and when those fake buyers walked away, the abandoned homes pushed prices down."

"The real victims are the genuine borrowers who bought here at inflated prices and are stuck now with mortgages worth more than their homes," he added.

False appraisals were also used to fool genuine borrowers.

"We get a lot of cases involving fraud that we refer to the state attorney general," said Lori Gay, CEO of Los Angeles Neighborhood Housing Services, a nonprofit lender that also offers financial counseling services. "Some 15 to 20 percent of the cases we see have some element of fraud."

The U.S. Federal Bureau of Investigation saw Suspicious Activity Reports (SARs) related to mortgage fraud rise to 47,000 in 2007 from 7,000 in 2003, spokesman Stephen Kodak said.

"This year it looks like we're on track for 60,000 SARs, which is a significant rise," he said. "This has required more allocation of manpower to mortgage fraud cases."

Prieston, the mortgage insurer, said that had major lenders been proactive in checking the identities of the people who were buying properties using stated-income loans and similar products, then a lot of fraud could have been avoided.

"A lot of lenders claim they were victimized by fraud but helped to constitute it by looking the other way," he said. "The sad fact is that the vast majority of mortgage fraud out there could have been prevented."

Anderson, the Boston-based real estate analyst, is among those who were warning for years that easy credit created an easy climate for fraud. "The banks on Wall Street had to know there would be fraud. If they didn't they're morons."

Bipartisan Spirit Falters in Fights on Debt Relief

WASHINGTON — Just a month after President Bush and Democratic leaders hailed their bipartisan agreement on an economic stimulus plan, the two sides went to war on Thursday over how to prevent widening damage from the housing crisis.

Senate Republicans, lining up with President Bush, blocked a Democratic bill that would provide more money for homeowner counseling programs and let bankruptcy judges reduce the terms of a mortgage for people about to lose their houses through foreclosure.

Meanwhile, the Bush administration flatly rejected Democratic proposals to rescue hundreds of thousands of borrowers, as well as their mortgage lenders, by having the government buy up and restructure billions of dollars in delinquent home loans. Instead, the president called on Congress to extend indefinitely his 2001 and 2003 tax cuts, which expire at the end of 2010.

With new data showing that the economy may be even weaker than previously thought, Republicans and Democrats plunged back into a partisan, ideological clash over whether the government should try to stabilize home prices, prevent foreclosures and perhaps even bail out lenders.

The battle played out as Ben S. Bernanke, chairman of the Federal Reserve, told the Senate Banking Committee on Thursday that he did not expect a recession or a return of stagflation. But he reiterated his prediction of very slow growth this year and rattled investors by warning that some smaller banks might fail.

“I expect there will be some failures,” he told lawmakers. The Dow Jones industrial average declined 112 points.

In Congress, Democratic lawmakers have begun to push ahead with an agenda aimed at shoring up the housing market with federal money, giving delinquent homeowners more bargaining power with their lenders and having the government buy troubled mortgages.

About 20 percent of subprime mortgages, which are made to people with low credit scores or low incomes, are delinquent and in danger of default. Moody’s Economy.com recently estimated that three million subprime borrowers were likely to default over the next several years.

Delinquencies are also climbing sharply among people with good credit who took out risky mortgages, often with no down payment, and are now watching the resale value of their homes sink to less than the amount of the outstanding mortgage.

The bill drafted by Senate Democrats would have provided $4 billion for state and local programs to rehabilitate abandoned housing; $10 billion for states to raise low-cost mortgage money through tax-free revenue bonds; and another $200 million for counseling services to help homeowners renegotiate their loans.

The Bush administration opposed most of those provisions, but the biggest fight was over allowing bankruptcy judges to reduce the total owed or the interest rate on mortgages as part of a broader debt restructuring.

That provision, supported by a wide range of consumer and civil rights groups, drew intense opposition from the mortgage industry, whose lobbyists argued that it would increase risks for lenders and drive up mortgage rates in the future.

Republican lawmakers blocked the bill, voting almost entirely along party lines to defeat a “motion to proceed” that required 60 votes.

Senator Mitch McConnell, the Senate Republican leader who is from Kentucky, called the Democratic bill a “hastily concocted political exercise.”

But in presenting what they described as their own proposal to protect homeowners, Mr. McConnell and other Republican lawmakers resorted to a grab bag of longstanding Republican initiatives, like making Mr. Bush’s tax cuts permanent and reducing “frivolous litigation,” that had little direct connection to the mortgage mess.

Democrats, knowing that they could not muster 60 votes to pass their bill, charged that Mr. Bush and the Republicans were protecting banks and Wall Street firms while doing little for people trapped in mortgages they cannot afford and houses they cannot sell.

“Their do-nothing leadership will cause this crisis to spiral farther out of control,” said Senator Richard J. Durbin, Democrat of Illinois. Mr. Durbin, who had drafted the provision to let bankruptcy judges modify mortgages on a person’s primary residence, said his measure could have helped as many as 600,000 people avoid foreclosure and keep their homes.

Senator Harry Reid of Nevada, the Senate Democratic leader, promised to bring up the housing bill again but declined to say when.

“The bankers on Wall Street and the big lenders are high-fiving tonight,” Mr. Reid said after failing to get enough votes to bring the bill up on the Senate floor. “It is becoming increasingly clear that Republicans either have no interest in turning around our sinking economy, or no ideas on how to do so.”

President Bush, who met with his top economic advisers at the Labor Department on Thursday, brushed aside the need for new government rescue efforts.

“I don’t think we’re in a recession, but no question we’re in a slowdown,” he told reporters at a news conference. “One way Congress, if they really want to make a substantial difference in creating certainty during uncertain times, is to make the tax cuts we passed permanent.”

The next big fight could be over proposals, which the Bush administration strongly opposes, that would allow the federal government to buy up billions of dollars in troubled mortgages.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, proposed a bill this week that would provide $10 billion for the Federal Housing Administration to help refinance as many as one million distressed subprime loans with cheaper government-insured loans.

Senator Christopher J. Dodd, Democrat of Connecticut, has proposed creating a government agency that would buy troubled mortgages at a discount and restructure them into more affordable loans.

Henry M. Paulson Jr., the Treasury secretary, said such proposals appeared to be a taxpayer-funded bailout and saw no need for them. “While some in Washington are proposing big interventions, most of the proposals I’ve seen would do more harm than good. I’m not interested in bailing out investors, lenders and speculators,” Mr. Paulson said in prepared remarks to the Economic Club of Chicago.

But unlike other Democratic proposals, the idea of a government-funded mortgage buyout has considerable support among banks and mortgage lenders. Lobbyists for the mortgage bankers have circulated a detailed proposal, though company executives said they were merely providing “technical information” requested by Democratic lawmakers.

Stephen O’Connor, chief lobbyist for the Mortgage Bankers Association, which fought intensely to prevent bankruptcy judges from having the power to change mortgage terms, said this week that the administration and Congress should have a “conversation” about mortgage buyout proposals.