Low-rate mortgage plan generates hope - Valley would benefit, analysts say

The Arizona Republic - December 2008

Home builders and industry analysts say a proposal to offer federally subsidized mortgage rates as low as 4.5 percent could go a long way toward reviving the Valley's decimated housing market.

Mortgage rates have not been that low for more than a generation.
RL Brown, publisher of the Phoenix Housing Market Letter, said the projected low rates could bring in more buyers and help slow falling housing values. More stable values, in turn, could help slow rising foreclosures.

In September, Phoenix led the nation in declining home prices, and in October, Arizona was pegged as No. 2 in foreclosures, after Nevada.

The lower rates would be available only for purchases, according to the proposal, which is under consideration by the Treasury Department. They could not be used to refinance higher-interest loans.

The mortgage-rate program could get prospective buyers off the fence by offering a rate almost 1.5 percentage points lower than the 5.92 percent that large lenders are offering for 30-year, fixed-rate mortgages, according to a Dec. 3 Bankrate.com survey.

Buyers would have to document income, be able to afford the payments and qualify for guarantees from Freddie Mac, Fannie Mae or the Federal Housing Administration.

Thus, the initiative would be geared toward boosting the housing market to stem future foreclosures rather than helping people whose homes now are in the process of being taken back by lenders.

Besides stimulating sales, Brown said, the low rates could send a message that there may never be a better time to buy.

"Right now, buyers are sitting on the sidelines waiting for prices to go even lower," Brown said
Stephanie Dunbar of Phoenix said she has been looking to buy a house to take advantage of the "incredibly low prices." Dunbar, a property manager, said she would jump at a 4.5 percent mortgage rate.

"I've been waiting for interest rates to fall," she said, adding that the lower rates would enable her to buy a better house.

Dunbar, who has been looking at mortgages in the $125,000 range, said that a 1 percentage-point decrease in the interest rate would reduce her monthly payments by about $100.

At a fixed-interest rate of 6 percent over 30 years, a $250,000 mortgage would cost $1,498.88 a month. At 4.5 percent, a $250,000 mortgage would have a $1,266.71 monthly payment.

Prospective buyers, paralyzed by the credit issues or the economy, as well as mounting foreclosures, are keeping Valley home prices in a free fall, which is further feeding the downward cycle.

Under the plan, the Treasury would offer to buy securities that finance newly issued loans for home purchases. But to sell the securities to the government, mortgage lenders would have to charge interest rates of no more than 4.5 percent.

Further intervention in the housing market appears likely as serious troubles persist.
Federal Reserve Chairman Ben Bernanke estimates that U.S. lenders could initiate 2.25 million foreclosure proceedings this year and that as many as 20 percent of mortgage-holders could be "underwater," meaning they owe more than their homes are worth.

In September, metro Phoenix led the nation in falling home prices, logging a 32 percent decline in a year and 38 percent over two years, according to the S&P/Case-Shiller Home Price Indices.
RealtyTrac, a service that follows foreclosure filings, counted 17,507 Arizona foreclosure notices in October, up 35 percent from the previous month and 176 percent from October 2007.

Jay Butler, director of realty studies at Arizona State University's Morrison School of Management and Agribusiness, believes lower interest rates could slow foreclosures. But he is worried that the stimulus could be offset by mounting job losses and worsening economic conditions.

Traditionally, he said, the primary reason for a home falling into foreclosure has been loss of employment by the owner.
"We're just starting to see than now," he said.

Many of the recent foreclosures have been the result of investors walking away from houses that have declined in value and homeowners getting in over their heads.

The plan to offer low-interest loans, would work through quasi-government mortgage giants Fannie Mae and Freddie Mac. Longtime Valley home builder Garth Wieger believes the program could help stem the persistent slide in home values and growing foreclosures that are the underpinning of the current financial crisis.

"It would certainly go a long way to bring in more people to take the inventory off the market," he said.

Brian Esquivel, a loan officer with Security Mortgage in Scottsdale, said 4.5 percent interest rates definitely would stimulate sales.

"It would move a lot of the Valley's inventory of unsold houses," he said. "Rates are low, prices are low and Arizona is a great place to live."

Meanwhile, government agencies continue to work on other plans to jump-start the nation's ailing housing industry.

• On Thursday, Bernanke suggested sweeping moves are needed to halt falling home prices, including a plan for the government to buy troubled mortgages and refinance them under more favorable terms.

• Last week, the Federal Reserve and Treasury Department announced a plan to cut mortgage rates by purchasing up to $600 billion in debt issued or backed by federal agencies. The announcement briefly helped push mortgage rates down almost a point to about 5.5 percent.

• A third plan, offered by Federal Deposit Insurance Corp. Chairman Sheila Bair would use $24 billion from the government's $700 billion financial-rescue fund to stave off 2 million foreclosures by modifying loans and providing government guarantees.

Valley foreclosures down

The Arizona Republic - December 2008

Valley foreclosures significantly fell in November, suggesting that lenders are finally working with borrowers to help them pay their loans and that the area's housing market may have hit bottom.

Last month, 3,826 Phoenix-area homes fell into foreclosure, according to the Information Market. That is down 17 percent from October.

Foreclosures are likely to fall again in December because notices of trustee sales, or pre-foreclosures, fell 23 percent in November, to 6,509.

In the past few months, several big lenders announced programs to work with more struggling borrowers. Fannie Mae and Freddie Mac halted foreclosures during the holidays and plan to begin lowering interest rates and payments on some loans.

Valley housing recovery on track

The Arizona Republic - December 2008

National real-estate analyst Tim Sullivan of the Sullivan Group put together a seven-point test to track a recovery of metropolitan Phoenix's housing market. Last December, the Valley passed only one of the measures.

Check out the area's current housing report card on Sullivan's seven criteria. The market is getting better marks.

• The number of resales on the market falls below a seven-month suply.

The Valley has 55,620 homes for sale, according to the Cromford Report's analysis of Arizona Regional Multiple Listing Service data. That's about a 12-month supply, which is better than the market's 14-month supply of homes for sale a year ago.

• Home sales need to stop slowing.
Resales are up from a year ago, according to realty studies at Arizona State University. Last month, 4,465 existing homes sold Valley-wide. That compares with 3,280 in November 2007.

• New-home permits must fall.
New-home permits dropped to 697 in October, their lowest level in more than 25 years, according to RL Brown's Phoenix Housing Market Letter.

• Mortgage-purchase applications increase.
Applications from home buyers did increase last week, according to the Mortgage Bankers Association of America.

• Thirty-year mortgage rates drop to 6 percent.
The average 30-year rate is down to almost 5.9 percent this week, according to Freddie Mac.

• Affordability must improve dramatically.
Valley home prices dropped 26 percent through August, according to data released Tuesday from ASU's Repeat Sales Index. The Valley's median has dropped to $175,000. That makes many Valley homeowners, including me, cringe. But it means a lot more first-time buyers can afford homes, which will help the market.

• At least one major home builder goes away.
Unfortunately, several builders have gone under.

Score: The Valley's housing market has six out of the seven indicators, a much better score than last year. Unfortunately, now the financial and credit markets must stabilize and the recession must end before the housing market recovers.

Flipping homes profitable, but not risk free

Yahoo Finance - November 2008

If flipping a house in today's real estate market seems riskier than trekking with a ragtag band of hobbits to Mordor, take heart: Home flippers can still find plenty of opportunities, though they're not entirely without risk.

It may seem counterintuitive to invest in real estate when the housing market is in its darkest hour. But in fact, it may prove to be the most optimal time for such a venture. According to RealtyTrac, a seller of mortgage default data, the foreclosure rate is at its highest level in 50 years, rising to record numbers in the third quarter of 2008. Real estate investors are finding bargains everywhere, particularly in formerly hot housing markets such as Florida, Nevada and California.

Angie Hicks, founder of Angie's List, a compendium of consumer-service reviews, says a recent informal poll of list members found that of those who had purchased a home in foreclosure, 29 percent of respondents had done so within the last six months. Of those, 95 percent said their purchases were profitable.

"The key ... is doing your research and knowing what you're getting into," says Hicks. "Know the area you're buying, the market, how the price compares to the neighborhood."
The horizon is flush with opportunity for those with the money and know-how to snap up a bargain and flip it, but to make it pay you first must understand how the rules of the game have changed.

The new rules for flipping homes
1. Stick with familiar territory
2. Check your capital
3. Cut your costs creatively
4. Consider it a long-term investment

1. Stick with familiar territoryCharlotte, N.C., resident Emma Allen, CEO of Emma Allen Enterprises and an experienced flipper, says there's lots of inventory on the market.
"The prices that were recently so outrageous are down again, so those with capital or access to credit will find it's a very good time to pick up bargains in the marketplace," Allen says.
Allen finds those bargains mostly in neighborhoods where she would like to live. "Properties I've added lately are near our downtown area, with an urban feel to them," Allen says.
Areas undergoing urban renewal present good investment opportunities. Allen, who owns a home on a large, popular lake, also thinks waterfront is a win-win on a flip, but she echoes Hicks' caution. "If you're not terribly experienced, stick with what you know -- just like buying stocks," says Allen.

The dreary economy has resulted in increased inventory, but it has also affected financing. Allen and other veteran home flippers say the days of flipping on a thin wallet have officially ended.

2. Check your capitalIt seems elementary, but in the recent past many flippers found themselves in trouble because they had not correctly calculated the amount of money it takes to finish a flip and market it. Allen says investors should figure out how much money they'll need right up front, and not just the purchase price. It translates to being realistic about both renovation costs and the hidden expense that gets so many in trouble: carrying costs.
"You may have carrying costs on the books longer than you think. The days of the 60-day flip are gone," Allen says.

Carrying costs, or house payments you must make until you sell the property, can subtract thousands from the bottom line. And even though you are technically chipping away at the debt incurred when you purchased the property, the interest you're paying at the top of the flip probably won't be earned back in the sale. Those payments come right out of your potential profit.

What about financing in general? While it's certainly more difficult to obtain a bank loan, it still can be done. But having a stash of cash is still important. Veteran Southern California flipper and interior designer Nicole Sassaman advises would-be flippers looking for a loan to: "Be sure to have 25 percent down and 18 months of reserves in the bank."

If you can't come up with it any other way, consider putting together a consortium of investors -- either share the cost of the project or divide the responsibility by contributing the manpower while your investor brings cash to the table. But when partnering on such a deal, Sassaman cautions, remember that the process has changed.

"In the last 10 years, any dummy could make money in real estate. Now you must buy sharp, do a professional finish job on your product, (and) you must create something very special," Sassaman says. "You must have the staying power and the stomach to go with it all."

3. Cut your costs creativelyFlipping in an economy that's not terribly user-friendly takes guts and creativity. Home flipper and Internet entrepreneur Scott Patterson says he increases his chances for success by breaking as many rules as possible, including making aggressive "low-ball offers" on potential flips.

"(I) offered $80,000 on a house I would have offered $100,000 (on) a year earlier," Patterson says. His strategy worked and he sold the renovated home for a tidy $160,000 a few months later.

Patterson also hopes to cut the middleman by obtaining his real estate license, letting him pocket the commission he would normally pay to sell his flips. He actively seeks capital via Internet and e-mail lists, marrying projects to the right investors.

"The stock market tanking has more people thinking that real estate is looking good right now," Patterson says.

He also expands his chances of selling his flips by targeting VA and FHA homebuyers. "We are concentrating on the first-time buyers market (and) will offer to pay closing costs where possible," Patterson says. He plays up a home's VA or FHA eligibility when advertising.
But buying and selling aren't the only places where a flipper needs to become adventurous to succeed. It also helps to get creative with materials.

Think good secondhand appliances or new ones sold as scratch and dent models, refinishing old cabinets by painting them and changing out the hardware, purchasing leftovers from rolls of carpet, close-outs on tile and fixtures, clearance items and even recycled stuff. By cutting renovation costs, you can keep your asking price low and make your property attractive to more potential buyers.

4. Consider it a long-term investmentReal estate consultant and mortgage broker Todd Huettner of Huettner Capital says changing markets have forced his clients to alter their business practices. Huettner says that while a quick flip is possible, investors should be prepared to hold the property for several years as a rental.
"If they flip it at their price, then they made their short-term gain. If they can't sell it at their price, then they will have a good long-term flip investment and just sell it in a few years," he says.

Huettner says renting protects investors from losing properties they can't sell. "Some complain they tie up too much money if they hold a property, but I point out they will be much better off with money tied up with a return than losing money." In other words, a positive return is always better than a negative one.

Huettner concedes it's more difficult now to qualify for loans and the terms are not always as favorable to buyers, but that well-qualified investors can still make a profit if they meet three criteria: understand their risk tolerance, know their market and come prepared to hold a property long term if needed.

The journey from Point A to Point B may take more time, but in the long run, there's still profit to be made in flipping homes.

Home values stay ahead of 2004 levels

The Arizona Republic - October 2008

Foreclosed homes are shredding the paper gains made during the market's run-up in recent years, but Southeast Valley cities are still ahead of 2004 levels.
Median home values fell from 2005 to 2008, but they're still greater than four years ago, according to data from Information Market and analyzed by The Arizona Republic.

"The only people generally who have lost real value in their house are those who have bought in the last three to four years," said real-estate analyst RL Brown, who produces the Phoenix Housing Market Letter. "It's tragic when someone has to sell their home in this market."

Homeowners who bought at the market peak in 2005 and 2006 have seen values decline to record lows in many cases throughout the Valley. But those in the Southeast Valley have fared better, in part, because they aren't located in the farthest-flung areas.

The average median home values in Mesa, Chandler, Gilbert and Tempe through mid-September this year are still $42,000 to $68,000 greater than the average median home values in 2004.

But communities in outlying areas aren't holding onto their gains. They are the ones that boomed during the real-estate heyday and the "drive till you qualify" buyer mantra.

Banks have taken back many of those homes through foreclosure, while others have agreed to "short sales" in which buyers pay less than what is owed on a mortgage.

"Mostly what I'm doing are short sales, and I've got quite a few listings in Queen Creek," said Julie Bieganski, a real-estate agent with Century 21 Premier Realty. "Oh, man, that place is getting decimated."

Like many real-estate agents, Bieganski recommends homeowners sit tight and not try to sell their homes until the market recovers.

"If you don't need to, don't," she said.

The number of foreclosures and short sales are driving down median home values but so is the sheer number of homes for sale. The number of properties on the Arizona Regional Multiple Listing Service totaled more than 44,000 plus another 6,800 under contract or pending as of Tuesday.

In a so-called normal market, listings total 15,000 to 20,000 at any given time.
Bill Ryan, a broker with Re/Max Elite, said the majority of single-family homes being sold are foreclosures, also known as bank-owned properties, and short sales.

"Buyers know that there are opportunities on properties that have been written down as a loss," he said. "One foreclosure sale drives the market, and people have to take that into account."

Ryan sympathized with homeowners who lose their jobs, become ill or otherwise can't keep up with their mortgages. But he had harsh words for homeowners who walk away from their homes because they are "upside down" on their mortgages, meaning they owe more to the bank than they their homes currently are worth.

"It's unconscionable to walk away just because the market has gone down," he said. "It's not an excuse to go into default if you are capable of paying. A deal is a deal."

Homeowners who believe their credit won't be ruined by a foreclosure and in some cases, a short sale, are wrong, he added.

For the vast majority of homeowners, declining or rising home values are immaterial to their everyday lives.

"When you think about it, what you have really lost is this big fluff of paper," he said. "That's the outlook you have to have on it."

Most real-estate analysts say it's impossible to predict when the housing market will bottom out and when values will rise again. A lot, they say, has to do with the current economic slump.
But for first-time buyers, the home buying picture couldn't be brighter, said Jodi Erwin, a real-estate agent with Coldwell Banker Residential Brokerage in Tempe.

Erwin said she has several clients in the Southeast Valley who are first-time homebuyers who have pre-qualified for mortgages and are shopping for homes under $350,000.

"I'm working with a lot of buyers because everyone wants a deal right now," she said.

Banks anxious to unload bad mortgages have priced homes cheaply, Erwin said, adding that she has found more than 100 single-family homes throughout the Valley listed for $200,000 or less.

"Two years ago, you couldn't touch a condo for $200,000," she said.
But even with the prospects for first-time homebuyers, Erwin is candid about the complexity involved in trying to buy short sales and bank-owned properties.
"I tell my clients, 'Don't expect logic to prevail because it won't. It's out of our control,' " she said.

US working on plan to help homeowners refinance

Associated Press - October 2008

The federal government is working on a loan-guarantee plan that could help many homeowners escape foreclosure, a banking regulator told Congress Thursday. At the same time former Federal Reserve Chairman Alan Greenspan said the financial crisis will get worse before it gets better.

Accused of contributing to the meltdown, but denying that it was his fault, Greenspan told a House panel the crisis left him — an unabashed free-market advocate — in a "state of shocked disbelief."

Federal regulators told Congress they were making steady headway in confronting the worst financial crisis since the 1930s as committees in both the House and the Senate held hearings on a contagious financial collapse that has infected global markets.
Sheila Bair, chairman of the Federal Deposit Insurance Corp., told the Senate Banking Committee that the government can do more to help tens of thousands of home borrowers avert foreclosure. She suggested the government set standards for modifying mortgages into more affordable loans and providing loan guarantees to banks and other mortgage services that meet them.

"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

The FDIC is working "closely and creatively" with the Treasury Department on such a plan, she said.

While Bair, a Bush appointee and independent regulator, has publicly nudged the administration in recent months to go further on remedies for troubled home borrowers, Democrats have voiced vigorous support for her and have applauded her public pleas on this front.

On the other side of the Capitol, Greenspan, who stepped down in February 2006 after serving as Fed chairman for 18 1/2 years, was asked to explain his role in the crisis.

Some critics have blamed Greenspan for contributing to the problem by leaving interest rates too low for too long and for failing to regulate risky banking practices such as the issuance of subprime mortgage. But he put the blame on soaring mortgage foreclosures on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.

Greenspan called the global financial crisis is a "once in a century credit tsunami" that policymakers did not anticipate.

He said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief." And Greenspan also blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

He told the House Government Oversight and Reform Committee that a necessary condition for the crisis to end will be a stabilization in home prices but he said that was not likely to occur for "many months in the future."

Committee Chairman Henry Waxman, D-Calif., suggested that Greenspan contributed to "irresponsible lending practices" by rejecting appeals that the Fed intervene to regulate a surging subprime mortgage industry.

"The list of regulatory mistakes and misjudgments is long," Waxman said of oversight by the Fed and other federal regulators.

In other testimony, Neel Kashkari, a Treasury Department official who is overseeing the government's $700 billion bailout program, told the Senate Banking Committee that the administration was making "tremendous progress" in carrying out the bailout program enacted earlier this month.

There have been "numerous signs of improvement in our markets and in the confidence in our financial institutions" since the program was started, he said.
Still, Kashkari cautioned that "while there have been recent positive developments, the markets remain fragile."

The administration must move to resolve the deepening financial crisis as swiftly and aggressively as it has so far addressed only the symptoms of the debacle, said Sen. Christopher Dodd, D-Conn., the Banking Committee chairman.

Otherwise, continued "volatility and paralysis" will reign in the markets, he warned.
Dodd said he was troubled by recent reports that some major banks receiving multibillion-dollar cash injections from the government under the rescue plan are weighing using the money to buy up other institutions rather than making loans.

Just as it is crucial to stabilize U.S. banks, "it is absolutely imperative" that homeowners be helped to avoid foreclosure, he said.

Sen. Charles Schumer, D-N.Y., said that by not setting conditions on banks in return for the government injections of money, "We're feeding them a little too much dessert and not making them eat their vegetables."

Schumer said he's "still not convinced" that banks receiving the government money should continue paying dividends to their shareholders.

Greenspan said that when home prices finally stabilize "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk."

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said. "Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."

Greenspan called the $700 billion rescue package passed by Congress on Oct. 10 "adequate to serve the need" and said that its impact was already being felt in markets.

Greenspan's critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed's powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.

Data show how foreclosures pull down Valley home values

The Arizona Republic - October 2008

Here's a new way to help better track home prices in Valley neighborhoods: foreclosure resales.
For the first time, homeowners can see exactly how foreclosures are affecting their home values.
New data tracks the prices of homes taken back by lenders through foreclosure and then resold. It then compares that median price of the foreclosure resales to the median price of regular resales in a ZIP code.

With that, homeowners can look at the overall median price for home sales in their neighborhood and see how much foreclosures are pulling down overall values.

"This is the indicator to watch now," said Tom Ruff, analyst with real-estate data-research firm Information Market, which began tracking foreclosure resales a few months ago. "Everyone knows foreclosures can drag down home prices in an area. It's surprising to see how low lenders are selling some homes for in the Valley now."

In summer 2007, when Valley foreclosures had just started to climb, the foreclosure-resale number wasn't that important an indicator of where the housing market was headed. But now that foreclosures are at record levels and haven't yet peaked, what happens to those houses is key for neighborhoods.

In a normal housing market, most homes to go into foreclosure are sold at trustee-sale auctions. Since last fall, about 98 percent of all homes to go into foreclosure have instead been taken back by the lender. What lenders resell foreclosure homes for now is driving home values, particularly in neighborhoods where a higher percentage of existing-home sales are foreclosure resales.
Foreclosure resales make up at least one-fourth of all sales in a many Valley neighborhoods now. In a few areas, the rate of foreclosure resale is much higher. In the El Mirage ZIP code 85335, there were more foreclosure resales than regular resales. The overall median home price in the area is $135,000. The foreclosure resale is $133,750. In most other Valley neighborhoods, the overall median price is $20,000 to $40,000 higher than the foreclosure resale.

"These foreclosure homes need to sell for the Valley's housing market to recover," said Brett Barry, a Phoenix real-estate agent with Realty Executives. "It's a good thing they are selling, but it's not going to make you happy if you are a homeowner in a neighborhood with a lot of these properties."

He said for buyers who are patient and will work with lenders, there are great deals in foreclosure resales.

Gloria Giroux recently bought a foreclosure-resale home from Deutsche Trust Bank. She paid $560,000 for a 3,400-square-foot Carefree home on a half-acre lot that had sold for $815,000 in 2005. "The pool was green. It needed work, and it was frustrating waiting for answers on my offers from the bank," Giroux said. "But I got it, and the house behind me is almost identical and sold for $839,000 in April of this year."

Strategy to stave off Arizona foreclosures falls short of goal

The Arizona Republic - October 2008

More than 7,000 homeowners facing foreclosure in the Valley are trying to sell their homes through a process known as a short sale, according to Arizona Regional Multiple Listing Service data.

But less than 5 percent manage to sell before lenders seize their houses.

The failure by banks and homeowners to agree to a short sale - to sell a home for less than the amount still owed on the mortgage - is adding to the Valley's growing foreclosure problem.
And the government's recent financial-bailout package to help alleviate the nation's housing crisis will do little to address the problem of short sales.

When homeowners whose property values have collapsed fall into arrears on a mortgage, short sales allow them to negotiate a deal with their lender to sell their home for less than they owe and avoid foreclosure.

An increase in the number of short sales could slow the Valley's record foreclosure rate, which has yet to peak.

However, a number of factors are preventing short sales:
• Lenders, overwhelmed by a record number of mortgages in default and their own losses in the financial-market meltdown, are not negotiating with many borrowers seeking a short sale.

• Many homeowners facing foreclosure wait too long before contacting their lenders.
"I don't see many people having success with short sales, either sellers or buyers," said Mike Orr, a Valley real-estate agent. "For buyers, the process of getting lender approval is lengthy and tiresome. Sellers often run out of time if they are already behind in their mortgage payments."

Because there are so many foreclosed-on homes that lenders are trying to resell at bargain prices, he said, there is little incentive for a buyer to go through the "laborious" process of a short sale.

Lenders have foreclosed on almost 30,000 Valley homes this year. Most are sold for tens of thousands of dollars below what was owed on them. And many resell for thousands of dollars less than what was offered through short sales.

Better than foreclosure

The purpose of a short sale is to allow a homeowner to sell a house at its current market value and get off the hook for however much of their mortgage isn't paid off by the sale.

Homeowners don't get any cash from a short sale but avoid a foreclosure black mark on their credit. A short sale impacts credit, too, but not as badly.

A short sale is better for a neighborhood because it means a home is being purchased by someone and not foreclosed on by the lender, left vacant for months and then resold for even less.
Also, short sales usually cost lenders less than a foreclosure. Research from the national financial-consulting firm Clayton Holdings Inc. indicates lenders lose only 19 percent of a home's loan amount on a short sale, compared with 40 percent on a foreclosure.

"Short sales are the best solution out there for the borrower, the bank and the buyer," said Randy Kutz of HomeSmart's Phoenix Heritage Real Estate Group. However, he said short sales are "the brain surgery of real estate" and take time and expertise to execute.

There's no exact way to track short sales in Arizona. The best indicator is how many homes in pre-foreclosure sell before a foreclosure. In the Valley, only about 200 homes a month in pre-foreclosure sell before the lender takes them back, according to housing-data firm Information Market. In September, pre-foreclosures hit a record 7,447 in the Valley while foreclosures hit a high of 4,378.

A slow process

Myra Shane has been shopping for a home in an east Phoenix neighborhood for months. Her agent found one that a couple were trying to sell through a short sale. That was four months ago.
"I thought the lender would want to move quickly and keep the house out of foreclosure," Shane said. "We can't get answers on anything from the lender."

Shane said she is about to give up and make an offer on a home in the same neighborhood that a lender has already foreclosed on and is now reselling for even less than her short-sale offer.
Slowing the process are the multiple lenders and investors involved.

"It's even trickier if there's both a first and second mortgage involved," said Chris Doyle of American Alliance Mortgage of Tempe. He said lenders with second mortgages on properties are asking for more money before agreeing to a short sale.

The Consumer Bailout That Nobody Knows About

RISMEDIA, Oct. 1, 2008-As congress considers various bailout proposals for the financial system, there is a little known ‘bailout’ for home owners that has already been enacted into law, according to Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers. Section 1403 of the new housing bill that was signed into law on July 30, 2008 (HR 3221) requires mortgage servicers to modify loans for homeowners and help them avoid foreclosure as long as three requirements are met:
1. Default on the mortgage either has already happened or is “reasonably foreseeable”
2. The home owner is living in the property as his or her primary residence
3. The lender is likely to recover more through the loan modification or workout than by forcing the home owner into foreclosure
“The fact is that this law is effective immediately, and most distressed home owners are simply not aware that they have this option,” Nicholas said. Borrowers make their monthly payments to mortgage servicers, and servicers keep a portion of the payment as their profit while sending the rest to the Wall Street investors who actually own the mortgage. “This law requires servicers to act in the best interest of all their investors and obligates them to modify your loan if you can afford the modified loan terms and if they are likely to recover more for their investors by working with you than by going all the way through the foreclosure process,” Nicholas said.
When negotiating a loan modification with your mortgage lender, it is advisable to follow this four step process:
1. Make sure you are dealing with your lender’s loss mitigation and/or work out department.
2. Write a hardship letter demonstrating job loss, serious medical condition, balloon payment coming due, adjustable rate reset or some other financial calamity that will make it impossible for you to continue making your mortgage payments as scheduled. Unless you are in imminent danger of default as required by this new law, lenders are not likely to work with you.
3. Send the lender your financial statements, employment records, tax returns and bank statements demonstrating how you would be able to afford the modified loan terms under your present financial circumstances
4. Send the lender a current appraisal of your home or some documentation on recent comparable sales in your neighborhood demonstrating the current value of your home. “The key is to demonstrate how the lender is likely to recover less money through foreclosure than they would by working with you in your proposed loan modification plan,” Nicholas said.
Here is a sample letter that you can use during your renegotiation:
http://www.cmpsinstitute.org/pdf/SampleLoanModificationRequest.pdf
It may be advisable to consult with an attorney - especially if you qualify for a loan modification under the law and your lender still refuses to work with you.

Getting a loan is tough, here's what you need to know

The Arizona Republic - September 2008

With tighter lending standards and a slumping housing market, opening the door to a home of your own is more challenging than it has been in years.

Experts say the rules for obtaining a home loan have undergone more revision in the past 18 months than during any comparable period since the Great Depression, as lenders seek to do away with practices that landed their industry in its current crisis.

Changes include tougher credit-score and down-payment requirements; a recent crackdown on stated-income "liar loans"; the disqualification of rental income on some loan applications; an expected lowering of Federal Housing Administration insurance limits and the pending elimination of seller-funded down payment assistance for FHA loans.

More changes are expected in the coming months, and even lenders say they have yet to understand the future impact of a federal housing bill passed in July.

"Everything is pretty much in flux," said Jill Hoogendyk, president of the Arizona Mortgage Lenders Association.

Here is a rundown of the current situation on several lending fronts:

• Down-payment requirements.

Down-payment requirements, paramount to any prospective home buyer's ability to obtain a loan, have risen dramatically for conventional loans and are scheduled to increase Jan. 1 for FHA loans.

Up until a year ago, lenders were still offering conventional loans with no down-payment requirement, said Hoogendyk, owner of HomePoint Mortgage in Phoenix. Now the bare minimum is 5 percent for borrowers with "stellar credit," she said.

Most applicants for conventional mortgage loans can expect to put down at least 10 percent, she said, and certain loan types require up to 30 percent.

The federal government's recent decision to place mortgage-lending giants Fannie Mae and Freddie Mac into conservatorship should help keep interest rates down for conventional loans, but the increased down-payment requirements have made them cost-prohibitive for most borrowers, Hoogendyk said.

As a result, most borrowers have turned to FHA-insured loans, but an expected decrease in the maximum-allowable loan amount could limit their future appeal.

Lenders expect the limit for FHA loans in Maricopa County to decrease by about $50,000 or more as of Jan. 1. The FHA limit is generally 115 percent of a county's median home price for the previous year, and area property values continue to decline.

Hoogendyk said she expected the local limit to drop below $300,000 from the current $346,250, which was inflated to begin with.

"That $346,250 was really a gift, because it had nothing to do with reality," she said.
FHA loans require only about 3 percent down, but that requirement will increase to 3.5 percent on Jan. 1. Meanwhile, Hoogendyk said most sellers in today's market were covering the buyers' closing costs, usually another 3 percent, which wasn't happening prior to the downturn.

• Down-payment assistance.

Still, lenders say as many as 80 percent of recent home buyers in the Valley have taken advantage of a loophole in FHA guidelines that allows sellers, usually home builders, to pay the entire down payment on an FHA loan by funneling it through one of two large non-profit organizations.

A ban on the practice, known as seller-funded down-payment assistance, was included in the recent federal housing bill and is set to take effect Oct. 1. From a practical standpoint, it is already dead, Hoogendyk said, because banks have stopped accepting new loan applications that involve seller-funded assistance.

However, a bill to revive the practice is scheduled for committee action on Tuesday, and some supporters say it has gained traction in recent weeks.

House Resolution 6694 would allow borrowers with credit scores of 620 or higher to use seller-funded assistance, and the U.S. Department of Housing and Urban Development would be allowed to lower that threshold beginning in mid-2009.

Ann Ashburn, president of seller-funded down-payment assistance provider AmeriDream Inc., said there has been support for the bill.

"Support for H.R. 6694 in Congress is gaining steam," Ashburn said. "This is encouraging news, and the credit goes to the 32,000 Americans who called on leaders in Washington to protect down-payment assistance."

• Credit scores.

Though there is no credit-score requirement to obtain an FHA loan, Hoogendyk said underwriters have also gotten a lot pickier about credit.

Standards vary from one lender to the next, but the typical credit-score requirement for an FHA loan is now 580, and the minimum score to obtain a conventional loan is generally 620, she said.

To get the best available interest rate on a conventional loan, the borrower must have a near-pristine score of 740.

One loan that was popular during the housing boom but has proven particularly onerous for lenders is the stated-income loan, nicknamed the "liar's loan. "

Though the loans are still available, increased credit score and down-payment requirements have rendered them inaccessible to most borrowers, Hoogendyk said.

For instance, in the past year the required down payment has crept upward from 10 percent to 30 percent, she said.

Liar loans belong to a category of alternative prime loans, referred to as Alt-A loans, which includes jumbo loans, 80/20 loans, interest-only loans and option-ARM loans, in which the borrower can pay less than the amount of accrued interest for a limited period of time.
None of those loans have been eliminated, Hoogendyk said, but most have become prohibitively expensive in the past year.

• Qualifying income.

Another factor that will limit some potential borrowers is a recently imposed restriction on the use of income from renters to qualify for a home loan, she said.

In July, Fannie Mae announced that it would no longer accept rental income as a qualifier to obtain a second home loan unless the applicant had accrued at least 25 percent equity in the first home.

The purpose was to thwart buy-and-bail schemes, in which a homeowner facing foreclosure qualified for a second loan before walking away from the first mortgage.
Some buy-and-bailers had been using estimated rental income to qualify even though they had no intention of renting out their existing home.

Investors boost Valley home resale activity

The Arizona Republic - July 2008

Renewed investor interest in low-priced properties helped make June the best month so far this year for Valley home resale activity, but foreclosures were almost just as prevalent, according to the latest report from Arizona State University's Realty Studies department.

ASU reported Wednesday that Valley home resales hit 4,565 in June, up slightly from May and almost exactly the same as in June 2007.

Foreclosures, however, were way up from the previous June - 3,275 this year compared with 575 in 2007, according to the latest report from Jay Butler, director of Realty Studies at the Morrison School of Management and Agribusiness at ASU's Polytechnic campus. In May, the split was 2,895 foreclosed homes and 4,315 resale transactions, the report says. June 2007 saw 575 foreclosures and 4,570 resales.

June is usually a strong month for home sales, so it's not surprising that it has been the best month so far this year for home resales.

The year-to-date total for 2008 is 21,060 resales and 14,590 foreclosures, according to Butler's report. That number is slightly less than the 16,647 foreclosures The Arizona Republic's own data analysts reported recently.

Housing-aid bill not a cure-all

The Arizona Republic - July 2008

A federal housing bill poised to become law this week is likely to help ease Arizona's housing-market pain, but a variety of local voices in the industry said it won't heal the deeper wounds.

Too many residents are neck-deep in unaffordable mortgages for Arizona's cut of the proposed $300 billion in federal refinancing aid to save them all, government and business leaders said Wednesday.

"We've got a huge problem here," said Fred Karnas, state Department of Housing director. "It's obviously not going to solve the problem, but it will bring a variety of resources for partial solutions."

Those resources provided in the bill include a higher cap on Federal Housing Administration loans; $3.9 million in community-development block grants to buy and restore abandoned properties; an unlimited line of credit to stabilize mortgage giants Fannie Mae and Freddie Mac; and the creation of an independent regulator to ensure sound management and operating standards for those lending institutions.

"Overall, we're really positive about it," Karnas said. "I've been joking . . . that every housing bill we've wanted to get passed in the last 18 years somehow wound up in this bill."

Kevin Egan, president of Tempe luxury-home builder T.W. Lewis, said any measure that helps maintain the stability of Fannie Mae and Freddie Mac is good for Arizona's housing market.

Egan said home builders such as T.W. Lewis that specialize in "move-up" homes, those for existing homeowners who have accrued equity and want or need a larger home, have been struggling even more than builders at the extreme high and low ends.

Therefore, raising the cap for FHA loans from $362,790 to $625,000 (which follows a temporarily higher limit earlier this year) will help get midrange customers buying again, he said.

"I think we have to get investors back into the market," Egan said.
ARM conversions

Home buyers struggling to keep up with adjustable-rate loan payments would be allowed to convert those loans to 30-year, fixed-rate FHA loans under the legislation.

But Karnas said some Arizona borrowers are so deep in negative equity that no realistic refinancing deal would allow them to keep their homes.
"I think there are some markets in which the bottom has completely fallen out," he said.

Margie O'Campo de Castillo of Arizona Dream Realty said she doesn't understand why lenders aren't already trying to help homeowners refinance into fixed-rate loans to avoid foreclosure.

"The housing package will help some," she said, "but we shouldn't kid ourselves. Housing is just one failing pillar of our economy, and I'm not sure we the taxpayers have enough money to fix our housing crisis."
Property-rehab grants

The housing bill also will provide $3.9 billion in community-development block grants for local governments nationwide to buy and rehabilitate foreclosed properties.

President Bush initially threatened to veto the bill unless Congress removed the grant provision, which his administration called a bailout for banks.

Still, Karnas said, the amount is not significant enough to take on a large percentage of foreclosures.

Foreclosures across metro Phoenix numbered 16,647 for the first half of the year, up from 9,966 during all of 2007 and 1,070 in 2006.

Karnas said Arizona officials expect to receive about $100 million of the bill's grant money, based on a formula that favors states with the greatest number of foreclosures.

"A hundred-million dollars maybe buys you 500 homes," Karnas said. "It'll make a dent, but it won't solve the problem."

Federal backing

The bill also is aimed at protecting future loans by offering mortgage giants Fannie Mae and Freddie Mac an unlimited line of credit and allowing the federal government to buy equity in those institutions. Federal legislators say it will also promote sound management and operating standards of those government-sponsored institutions by creating an independent regulator with wide-ranging authority.

Herbert Kaufman, a finance professor at ASU who used to work at Fannie Mae in Washington, said the legislation should help to lower mortgage interest rates. Kaufman also said the bill, along with recent government promises to support Fannie Mae and Freddie Mac, should help calm jittery investors here and abroad.

"Foreign investors, so far, have been very patient," said Kaufman, referring to turmoil in the U.S. financial markets.

Another provision likely to affect Arizona's new-home market is the proposed ban on federal insurance for mortgage loans in which a home's seller pays the buyer's down payment through a non-profit intermediary.
Down-payment assistance requires the buyer to receive approval for a Federal Housing Administration loan, and the seller must agree to pay the buyer's down payment, usually 3 to 6 percent of the home's sale price. Then, the lender arranges with a non-profit assistance provider to accept the seller's donation, which it then gifts to the buyer, minus a transaction fee.

Seller-funded, down-payment assistance has drawn criticism from the FHA, which considers the practice a "shell game" that circumvents sound lending standards and carries a higher default rate.

However, some local lenders say down-payment assistance is responsible for at least half of all mortgage loans currently being issued in the Valley. They are worried that eliminating the practice would knock the already staggering local housing economy flat on its face.

"It has really opened the doors to so many people, and now those doors are going to be shut," Phoenix loan originator Dean Wegner said.

Wegner also questioned why the bill includes an increase in the required down payment on FHA loans from the current 3 percent to 3.5 percent.
"It's going to hurt good people who want to buy houses, who don't have any issues," he said about the bill, "and it's going to help the people who are in trouble."

NE Valley foreclosures surge

SCOTTSDALE - About 800 Northeast Valley property owners lost their homes to foreclosure in the first half of this year, nearly five times as many as the same period a year ago, according to a data analysis by The Arizona Republic.
Plus, nearly 2,000 area homeowners have been issued a notice of trustee sale, a precursor to foreclosure. That is nearly three times as many as the first six months of 2007.
Foreclosures by city through June 30 of this year and the percentage increase from a year ago are:
• Scottsdale, 640 homes, an increase of 378 percent.
• Fountain Hills, 82 homes, up 531 percent.
• Cave Creek, 58 homes, up 164 percent.
• Paradise Valley, 17, up from zero.
• Carefree, 7, up 250 percent.
Notices of a trustee sale were sent to 1,543 Scottsdale homeowners and another 410 went to owners in the four other Northeast Valley communities.
The highest concentration of foreclosures are in these areas:
• Downtown, south to Thomas Road.
• The Scottsdale Airpark area, bounded by Shea Boulevard, Bell Road, Scottsdale Road and 104th Street.
• The Kierland area, bounded by Tatum Boulevard, Shea, Bell and Scottsdale Road.
• DC Ranch, McDowell Mountain Ranch and other areas in the 85255 ZIP code.

Arizonans brace for summer mortgage resets

The Arizona Republic - July 2008

More Arizonans than ever before will face the threat of foreclosure this summer as their adjustable-rate mortgage loans jump to a higher interest bracket.

Adjustable-rate mortgage "resets" - in which a low initial interest rate is converted to a higher rate - are expected to peak this month in Arizona, and experts say the summer resets undoubtedly will lead to fall foreclosures.
In a state where one in 20 mortgage borrowers is already at least 30 days behind on payments, government officials, nonprofit organizations and even some lenders have stepped up efforts to help Arizona families stave off foreclosure. A statewide hotline set up in late May to connect borrowers with HUD-approved foreclosure intervention counselors received nearly 1,500 calls in its first month of operation, and a large nonprofit organization with strong lobbying power recently opened an office in Phoenix to bring its counseling services to the state.

Those efforts have contributed to a growing number of success stories. Unfortunately, the fastest-growing segment of delinquent borrowers is just beginning to grapple with the prospect of higher monthly bills, which typically are triggered by resets two to three years into the term of a sub-prime loan.

The effect of a reset varies tremendously based on each loan's specific terms, ranging anywhere from a slight increase in the required monthly payment to doubling it.

Most borrowers awaiting initial loan resets have accrued no equity because of plummeting land values, making it virtually impossible to refinance. For some of them, foreclosure is all but inevitable.

"My opinion is that we haven't seen the worst of it," said Kevin Murphy, executive director of Labor's Community Service Agency in Phoenix. "People who got into those stupid loans did so with the idea that the property value would increase."

Resets rising As of February, an estimated 157,000 adjustable-rate loans had yet to reach their initial reset dates in Arizona, according to economic research firm First American CoreLogic, based in Santa Ana, Calif. The total value of those Arizona loans was roughly $38.7 billion, company spokeswoman Meghan Donovan said.

First American determined that nearly 10 percent of those loans would reach their initial reset dates between March and August, with the highest monthly total - about 2,600 loans, valued at nearly $665 million - occurring in July.

The number of monthly resets is then expected to gradually decline and stabilize until a second, even more dramatic increase in resets occurs in mid-2010, according to First American's research.

The second spike represents so-called "option ARM" adjustable-rate loans, in which borrowers are allowed to make lower monthly payments until the loan reaches an automatic 5-year reset date or the borrower hits the maximum limit on negative amortization, usually 110 percent to 125 percent of the original loan amount.

The vast majority of adjustable-rate mortgages in Arizona that have yet to reach their initial reset dates were issued from 2004 to 2006, when the housing market crested and fell, Donovan said.

The lending industry has since phased out most of the loan types responsible for the ensuing foreclosure crisis, but homebuyers who agreed to those terms are still contractually bound to fulfill their obligations unless the lender is willing to renegotiate, said Murphy, who runs a free, nonprofit foreclosure intervention counseling service in Phoenix.

Since September, calls from struggling borrowers with adjustable-rate loans have increased from a small fraction of all inquiries to nearly half, Labor's counselor Liz Henry said.

"Prior to that, it was more traditional loans," she said.

Murphy said most lenders won't even consider modifying a loan to reduce the effects of a reset until the borrower is at least 60 days delinquent and has demonstrated a willingness to eliminate excess spending, sell off luxury items and even take a second job if necessary to keep the home.

Even then, the mortgagor must have sufficient monthly income and a history of timely payments before the reset made them unmanageable.
"They're not going to bend over to the extent some of these homeowners need them to," Murphy said.

The surge in resets has made it far more difficult to negotiate agreements that will keep homebuyers out of foreclosure, Murphy said.

"Up until six to eight months ago, our success rate was up in the 90 percent range," he said. "That's when some of those ARMs started to reset."
Sweat equity Labor's Community Service Agency has still enjoyed some recent successes, however bittersweet.

Phoenix resident Connie Vasquez was one of hundreds of struggling Valley homebuyers who picked up the phone in June and called for help.
Vasquez, 56, reached out to the Arizona Foreclosure Help Line, a new service administered by the Arizona Department of Housing that connects residents with one of a dozen state-contracted foreclosure intervention services.

"When I first called, I was a bit leery," said Vasquez, who works for the Arizona Public Safety Retirement System. "I just took a shot."

Vasquez, who has a traditional, fixed-rate loan, struggled to pay the monthly bills after worsening arthritis made it impossible for her 58-year-old husband, Nolberto, to continue practicing his trade as a concrete finishing contractor.

"My husband hasn't worked in about a year, and so I got stuck with everything," she said.

At first, Vasquez was able to keep her mortgage current by taking on a second job at the post office and cutting back on family expenses.
However, the seasonal job ended after the New Year, and before long she had missed a house payment.

The already difficult task of scraping together $1,400 a month to pay off the mortgage suddenly became double, Vasquez said. Now she would have to come up with $2,800 to avert the foreclosure process.

"It was very stressful during that time," she said. "I was getting desperate."
Vasquez was connected by the hotline service to Labor's Community Service Agency, where counselor Henry asked her to collect the required documents to prove her income and expenses.

Two weeks later, Vasquez arrived for a face-to-face meeting to go over the documents with Henry and answer some questions. By that time, her mortgage had become three months past due.

Henry convinced Vasquez' lender, HSBC Mortgage Services, to forgive the past-due payments and add them back into the loan's principle. The lender did not reduce her interest rate or the amount of her monthly bill.
Vasquez still had to make one payment of $1,400 in June, but she is no longer in default.

"It took every penny I had," she said, sitting in her 115-degree living room on Monday afternoon. Air-conditioning is a luxury she can no longer afford.
Still, Vasquez said she is committed to keeping the home at any cost.
"I don't want to worry about where I'm going to live in 10 or 20 years," she said. "It's stability - I'll always have someplace to go."

New hope Though it might seem harsh, Henry said the forbearance agreement she negotiated for Vasquez would not have been possible six months ago.

Faced with the prospect of taking on massive inventories of abandoned homes, lenders are becoming more flexible in situations where the borrower shows a strong desire to honor their mortgage agreement.
"A lot of the lenders are creating special departments dedicated to what they call 'home retention,'" Henry said, adding that it's a big step forward from the typical "loss mitigation" departments focused entirely on recovering the lender's money.

The home retention staff usually has limited autonomy to negotiate with foreclosure intervention counselors, which makes the process more productive, she said. In some recent cases, lenders have agreed to reduce the interest rate of an adjustable loan to what it was before the reset and fix it at that rate, though such concessions are still rare.

One persisting obstacle to loan renegotiation is that mortgage lenders have a fiduciary responsibility to the investors who have purchased bundles of sub-prime loans, also known as mortgage-backed securities, on the open exchange.

"A lot of these policies are set by the ultimate investor in the loan, and not the people who administer the loan," Murphy said. "They can only go so far, because everybody up the chain has someone to answer to,"
Darren Duarte, spokesman for nonprofit mortgage lender and foreclosure intervention provider Neighborhood Assistance Corporation of America, said his organization also has seen a greater willingness on the part of lenders to make deals with counseling services on behalf of borrowers.
One lender even agreed to reduce the total amount of a client's debt by $20,000 and lower her interest rate from almost 15 percent to less than 7 percent, Duarte said, adding that such deals are not typical.

Neighborhood Assistance Corporation, based in Boston, opened a Phoenix office two months ago and already has helped several Valley residents hang on to their homes, he said. The nonprofit group also offers its own low-interest, fixed-rate mortgage loans to responsible borrowers and lobbies against predatory lending practices.

Duarte said the middlemen of mortgages, including bankers, brokers and investment marketers, are responsible for creating and selling loans that doomed borrowers and mortgage-backed securities investors to failure.
"People took advantage of these people," he said. "We had all these players here trying to make money off them."

Murphy said he believes regulators also failed the borrowers and backers of adjustable-rate mortgage loans, and the half-baked efforts of Congress to bail out borrowers are too little, too late.

"There needs to be more control at the federal level," he said. "This whole mess is the result of lax enforcement by the federal government."

Fed to curb shady home-lending practices

July 2008

WASHINGTON - The Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, its most sweeping response to a housing crisis that has propelled foreclosures to record highs.

To prevent a repeat of the current mortgage mess, Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation's riskiest "subprime" borrowers — those with spotty credit or low incomes — who were hardest hit by the housing and credit debacles.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.

Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

"These new rules ... will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending," Bernanke said.

Consumer groups have complained that the proposed rules aren't strong enough, while mortgage lenders worry that they are too tough and could crimp customers' choices.

The Mortgage Bankers Association urged the Fed to "take a balanced approach in devising final regulations so that the credit crisis is not worsened."

Meanwhile, the Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, warned the Fed that weak regulation and oversight has led to the "worst credit crunch in generations."

The Fed — under former chairman Alan Greenspan — came under attack for not acting early on to crack down on dubious lending. Some critics complained that Greenspan, who ran the Fed for 18 1/2 years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.

Meanwhile, signs emerged Tuesday that the housing market's slump is likely to persist through the summer, and the real estate market may not recover for at least another year.

The National Association of Realtors' pending home sales index slipped by 4.7 percent in May to the third-lowest reading on record. The decline "suggests we are not out of the woods by any means," said the group's chief economist, Lawrence Yun.

In an extraordinary action aimed at averting a financial catastrophe, the Fed in March agreed to let investment houses go to the Fed — on a temporary basis — for a quick, overnight source of cash. Those loan privileges, which are supposed to last through mid-September, are similar to those permanently afforded to commercial banks for years.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said in prepared remarks to a mortgage-lending forum in Arlington, Va.

The Fed's decision to act — temporarily at least — as a lender of last resort for Wall Street firms was made after a run on Bear Stearns pushed the investment bank to the brink of bankruptcy and raised fears that others might be in jeopardy. It was the broadest use of the Fed's lending powers since the 1930s.

Bear Stearns was eventually taken over by JPMorgan Chase & Co., with the Fed providing $28.82 billion in financial backing.
Those controversial decisions have drawn criticism from Democrats in Congress and elsewhere that the Fed is bailing out Wall Street and putting billions of taxpayer dollars at risk.

Bernanke, in appearances on Capitol Hill has said he doesn't believe taxpayers will suffer any losses.

In his speech Tuesday, the Fed chief defended those actions anew. If the Fed didn't intervene, he said, problems in financial markets would have snowballed, imperiling the country.

"Allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy," Bernanke said to the mortgage forum, organized by the Federal Deposit Insurance Corp.

Dodd, meanwhile, praised the Fed's actions in a statement Tuesday, saying, "I am pleased that the Federal Reserve is now taking steps to issue new rules for mortgage lending and to improve oversight of our financial system. As documented by the Senate Banking Committee, it was the lack of regulatory will, not lack of regulatory authority, that contributed to the current credit crisis."

The Fed's consideration of giving Wall Street firms more time to tap the Fed's emergency loan program is part of an ongoing effort by the central bank to bring back stability to fragile financial markets and help to bolster shaky confidence on the part of investors.

Policymakers — in the White House, in Congress and other federal agencies — will need to work together to come up with ways to make the U.S. financial system more resilient and stable and to prevent a repeat of the types of problems that brought about the end of Bear Stearns, an 85-year-old institution, Bernanke said.

Although those efforts are already under way and will be the focus of a House Financial Services Committee hearing Thursday, it will fall to the next president and next Congress to settle them. Both Bernanke and Treasury Secretary Henry Paulson are scheduled to testify at Thursday's hearing.

The Bush administration has proposed revamping the nation's financial regulatory structure. That plan would make the Fed an ubercop in charge of financial market stability. But the Fed would lose daily supervision of big banks. Bernanke said the Fed must maintain this power if it is to be an effective overseer of financial stability.

The Fed, which regulates banks, and the Securities and Exchange Commission, which oversees investment firms, announced an information-sharing agreement on Monday aimed at better detecting potential risks to the financial system.

Over the longer term, though, Congress may need to adopt legislation to bolster supervision of investment banks and other large securities dealers, Bernanke said.

Bernanke recommended that Congress give a regulator the authority to set standards for capital, liquidity holdings and risk management practices for the holding companies of the major investment banks. Currently, the SEC's oversight of these holding companies is based on a voluntary agreement between the SEC and those firms.

Report: May Valley home resales up over April

The Arizona Republic - June 2008

Valley home resale activity increased in May over the previous month but still lagged behind the pace of a year earlier, according to the latest Arizona State University Realty Studies report.

There were 4,265 home resales in May, compared with April's total of 3,760 sales, ASU reported. Both figures exclude foreclosure transactions.

Home resales totaled 4,915 in May 2007, according to the report. Realty Studies Director Jay Butler said May is typically a strong month for home sales.

Still, he said factors such as job losses and layoffs are weakening the economy and likely will add further stress to the housing market.

Smart Ways To Profit From Foreclosures

Forbes.com - June 2008

With 700,000 bank-owned homes on the market, and another one million in some state of foreclosure, according to RealtyTrac, an Encino, Calif., provider of foreclosure listings, you might be tempted to add a distressed property to your portfolio.

Beware. Buying a home in foreclosure is not for the meek. Those with an appetite for risk, however, will find the tumultuous market stocked with plenty of investment opportunities.

These may include the sale of brand new luxury homes in an upscale Nashville community for half their marked value or a bank giving away a foreclosed property in a poor Detroit neighborhood for back maintenance.
But this complex arena is teeming with professionals. Private equity juggernaut Blackstone Group alone this year raised an $11 billion war chest to chase distressed properties, and large homebuilders looking to recapitalize, like Centex and Lennar, unloaded over $1.5 billion in homes to vulture funds between December 2007 and April 2008, for between 30 and 40 cents on the dollar.

Whether you're looking to flip a home, buy into a neighborhood you couldn't otherwise afford or planning to rent the home, you, like these big companies, must have heaps of cash on hand.

There are properties that can be turned within a few months, but the overall market is still slow. Even if you have a renter lined up or have enough money for a 10% to 20% down payment, you should be ready to weather a depressed market for another two or three years.

Go to the county assessor's office and study recent sales for price-per-square foot and time spent on market to determine what sort of price you can expect at resale. Be conservative. If you are renting, calculate a capitalization rate, and subtract 10% or more of the annual yield for maintenance and depreciation. Make sure that your endeavor is still profitable if you incur two to three years of carrying costs and depreciation.
It's also crucial to remember that bad loans that plagued speculators and unprepared borrowers don't simply disappear when distressed owners sell their properties. Unless the property goes through foreclosure auction and becomes bank-owned, outstanding liens and fees are simply transferred to the new owner. If you plan to buy out of pre-foreclosure, make sure the property has a clean title; otherwise you'll just be trading places with the distressed homeowner.

In such situations, outstanding fees, second liens and the like aren't automatically washed away. It isn't always the case that pre-foreclosure homes lack clear title, but once a home goes into the auction on the courthouse steps and is bought back by the bank, it is clear of all the bad loans that got the original owner into trouble. Making sure a home has clean title is a critical first step to a sound investment.

It's also important to note that you make money on a foreclosure the moment you buy the home. You can make a good return if you're selling in a sinking market, for example, by unloading a home at 70 cents on the dollar, if you bought it for 50 cents on the dollar. In heavily hit foreclosure areas, banks are juggling so many properties that offers on distressed homes, out-of-business homebuilders' developments and excess inventory are being entertained at under-listing prices.

Just don't get attached. As in any market, falling in love with a home--and overpaying--is a surefire way to lose money in a highly risky one.
When you've located an appealing property, order a new appraisal and study foreclosure patterns in the neighborhood. You'll also want to explore creative financing options to defer costs.

However you do the math, the most important thing to keep in mind is that the investment has to be worthwhile--even if you can't sell the home at your desired price for two or three years and the current housing market deteriorates a further 10% to 20%.

If that's a model you can live with, it might be time for a subscription to a foreclosure listing service.

Down market doesn't stop some builders from new developments

Tribune - June 2008

For many Valley builders, launching new housing developments amid a languishing real estate market and ailing economy isn't an option.

Experts say most are still busy purging excess speculative houses.
But a few builders are bucking the trend and starting work on new master-planned communities with thousands of homes - betting the right price and location will entice buyers.

Tempe-based Fulton Homes opened sales today for its latest project, called Ironwood Crossing - a 2,100-home master-planned community near Queen Creek.

"Houses are selling if they're priced right, if they're in good shape and in a good area," said Dennis Webb, Fulton's vice president of operations.
Located at Ironwood and Ocotillo roads, the development is closer to the urban center than areas like Johnson Ranch and Florence, but it's still affordable, Webb said.

And price is key.
When Fulton began planning out the project three years ago, prices were originally set from the mid-$200,000s up to $450,000.

Now, houses start at just less than $150,000 for starter homes and reach up to $300,000 for a more-than-4,000-square-foot house.

The company was able to cut prices by redesigning the houses, Webb said. Laminate countertops became standard instead of granite. And 10-foot ceilings were lowered to 9 feet.

"It doesn't sound like a lot, but it makes a big difference," he said.
Fulton isn't the only builder moving forward on projects.

Blandford Homes recently started work on a 1,200-home development, called Mountain Bridge, at McKellips and Hawes roads in northeast Mesa.
"Just because the market is down doesn't necessarily mean it wouldn't be a good time to enter the market," said Ben Sage, head of Houston-based Metrostudy's Arizona division.

Some builders want to be prepared for the market's return. Others have poured so much money into projects, it's not that much more expensive to build some model homes, Sage said. In Blandford's case, the local builder isn't burdened by dozens of other communities like some larger builders, he said.

Fulton, a private company, also has an advantage over big public builders which must answer to stockholders, Webb said. Fulton is still profitable, he added.

"We haven't just given away houses because we had to," Webb said.
John Fioramonti, with Scottsdale-based Meyers Builder Advisors, said this is the first time he's seen Fulton offer homes less than $200,000. Even so, they'll be competing with dozens of other new-home communities and prices that are closer to $120,000, Fioramonti said.

"Queen Creek is just a tough area," he said.
Still, Queen Creek is well-positioned to feed growing employment centers, such as the Phoenix-Mesa Gateway Airport area in Mesa and parts of Gilbert, said market analyst RL Brown.

Blandford also has a good location, which is one of the last areas to build in that part of Mesa and is close to employment centers, Brown said.
"Everybody's commute-sensitive right now," he said.

Some buy a new home to bail on the old

The Wall Street Journal - June 2008

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine, 44 years old, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn't want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home - often at a much lower price - then bail out of the "upside down" mortgage on their first home.

Homeowners are able to pull off this gambit - which some lenders and real-estate agents call mortgage fraud - by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold. And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it. Some blame the phenomenon in part on lenders' unwillingness to cut deals or restructure loans made when home prices were inflated. "It's just a business decision," says Linda Caoili, a Sacramento real-estate agent who is working with Ms. Augustine and others who are considering walking away from their mortgages. "If you're upside-down $250,000, why would you keep it? It just doesn't make sense."

To be sure, walking away from a mortgage, even if legal, has plenty of drawbacks: Borrowers lose the ability to take out unsecured loans, since foreclosures can stay on a credit report for seven years. In some states, lenders can sue for assets, including a new house. Fannie Mae, the government-sponsored mortgage underwriter, recently revised the amount of time borrowers with a foreclosure must wait to receive a home loan to five years from four. Proposed Fannie Mae guidelines, which could take effect later this month, also would require those borrowers to make a 10 percent down payment and meet a minimum credit score after the five-year period.

While buy-and-bail is on the rise, the practice doesn't appear to be widespread. Credit is much tighter now than it was during the real-estate boom, and most families with an upside-down mortgage likely will hold on to their homes and hope the market improves in the future - even though many of them could lose their properties.

Still, with home prices falling rapidly in some parts of the country, a growing number of frustrated consumers are willing to take the risk - especially in so-called nondeficiency states such as California and Arizona, where it is more difficult for a lender to sue consumers who walk away from their mortgages. Borrowers who bought or refinanced their home with a personal line of credit, however, instead of a home-purchase loan - a common practice during the housing boom - could be sued by a lender in those states. Borrowers also could be on the hook if lenders can show that homeowners committed fraud by misrepresenting themselves on their loan application.

Yet even in cases in which a lender could attach a lien on the new home, some homeowners simply assume that lenders are too swamped. "So many people are foreclosing, is it cost effective for lenders to go after all of these people?" says Steve Hawks, a Las Vegas real-estate agent who handles lender-owned properties.

That works in the favor of borrowers such as Blair Morrow. Last year, he rented out his Sacramento home when he moved to Houston for a new job, but he lost those renters in February. He quickly arranged to buy a new home in Houston, fearing that his old residence would be foreclosed and he would take a big hit on his credit.

"I had 30 days to make a decision: Live in a rental house the rest of my life or buy a house and walk away from the one in California," says Mr. Morrow, 56, who works at a car dealership. He wrestled with the decision for a while, but justified it once Countrywide Financial Corp., the lender for his first home, approved the new home loan. "Countrywide didn't say peep," he says. Countrywide didn't return calls seeking comment.

Ms. Augustine, the Sacramento day-care provider, became a first-time homeowner in November 2006 by taking out two loans with nothing down to cover the $426,000 home purchase. With her home valued at about $220,000 now, she is actively looking in nearby communities for another one to buy before the bank forecloses on her current home.

The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae. Although she doesn't have data to quantify the size and scope of the trend, Ms. Muse-Evans says overwhelming anecdotal reports have prompted the agency to draft tougher regulations aimed at closing one big loophole that allows underwater homeowners to qualify for new home loans.

That loophole currently works like this: Homeowners provide a rental agreement showing that they will rent out their first home, and underwriters allow rental income to cover as much as 75 percent of the mortgage payments on the first home when determining whether the borrower can make payments on two homes. This allows homeowners to secure a second mortgage that they might not otherwise afford.

Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and insurance for both residences. The guidelines will make an exception only for borrowers who have at least 30 percent equity in their current home.

Of course, many individuals still can qualify for that second loan because of a strong credit and cash position. If they "have the intention of fraud, then at the end of the day there's really little you can do to totally prevent that," says Ms. Muse-Evans.

Some private lenders aren't waiting for Fannie's lead. In April, underwriters handling bank-owned properties at IndyMac Bancorp Inc. told brokers they would require borrowers purchasing new homes while retaining their existing home as a rental to prove that they could make full payments on both homes to qualify for a loan. A memo sent to a Southern California broker said the policy change was prompted by "losses from individuals walking away from properties after the acquisition of a new home."

An IndyMac spokesman said the bank hadn't changed its policies and had always "underwritten loans with an eye towards insuring that our borrowers could readily rent out their current property and/or reasonably support both payments."

Realtors say the new guidelines could put further pressure on sales, but Lawrence Yun, chief economist for the National Association of Realtors, says the impact of such guidelines on sales would be marginal. He calls Fannie Mae's response appropriate because any artificial increase in home sales hurts the average consumer.

Meanwhile, Mr. Hawks, the Las Vegas broker, says he receives one to two dozen inquiries every week from individuals inquiring about a buy-and-bail. "People are starting to ask how much their good credit is worth," particularly when their home is underwater by hundreds of thousands of dollars.

The tactic doesn't appeal to people such as John Ristuccia, a 48-year-old Buckeye, Ariz., paper-company sales director whose job was moved to Houston in August. He is trying to complete a "short sale" for $425,000 on his five-bedroom, 4,000-square-foot home, which was appraised for $800,000 last year. In a short sale, a lender allows the sale of property for less than the amount due on the outstanding loan and often forgives the remaining debt.

Even though he might be able to qualify for a second home loan, Mr. Ristuccia says he wouldn't consider sticking his bank with his suburban Phoenix property. "Just personally I've got a problem with that," he says. "I really can't put it in terms other than it feels wrong."

Real estate agent boom over, too in Arizona

Tribune - June 2008

In the past year, real estate school instructor John Dyer has watched class enrollments dwindle, as agents struggling amid the stagnant housing market fled the business.

Many of those leaving got into the industry during the boom to make a quick buck, the Scottsdale broker said.

"When it came down to having to know what the heck you were doing, they didn't want to," Dyer said.

A growing number of Valley real estate agents are putting away their for sale signs and jumping into other jobs.

In June, the number of active real estate licenses fell to 69,771, down 5.6 percent from a year ago, according to the Arizona Department of Real Estate. Meanwhile, the number of inactive licenses has risen to more than 16,500, up from roughly 9,400 in 2002.

Some former agents are going back to school or teaching jobs. Others are bartending, waiting tables or selling cars.

Industry professionals say it's tough for inexperienced agents who haven't developed a client base to compete.

In 2001, an agent who wanted to make $100,000 needed to keep nine listings, averaging $250,000, at any given time, Dyer estimated. Now, they need to keep 27 listings to bring in the same amount, he said.

Dyer said his classes, which used to be at least half full with newer agents, are filled mostly with veterans now.

"It's the easiest business to get into. It's the hardest business to succeed at," said Mike Wasmann, president-elect of the Arizona Association of Realtors.
Agents who pushed themselves to become skillful in marketing, sales and other keys to the business are surviving, Wasmann said.

Those staying in the game are also scrambling to become experts in short sales, bank-owned properties and other niches. Dyer's classes on short sales - where a lender agrees to accept less than what a borrower owes - are standing room only these days.

"If you don't know short sales and foreclosures, you only have 20 percent of the market to deal with," he said.

Agents are taking classes on Federal Housing Administration, or FHA, loans, said Bill Gray, chief operating officer of the Arizona School of Real Estate & Business. The government-insured loans don't have specific credit score criteria and allow borrowers to put 3 percent down.

"That's the hottest market you will see today," Gray said.

Enrollment at the school has fallen to 2001 or 2002 levels, but Gray is optimistic.

Foreclosures hit a record high, and more coming

Asociated Press - June 2008

WASHINGTON (AP) — The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too — an alarming sign that the housing crisis and its damage to the national economy may only get worse.

Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices — extending a vicious cycle.

Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.

In fact, Americans' equity in their homes — usually their single biggest asset — now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.

Watching their home values sink, consumers have pulled back on spending, a factor in the economy's slowdown. Buoyed by rebate checks, shoppers did get back in the buying groove in May, but analysts predict that consumers — pounded by galloping gasoline prices — will still be cautious.

“The economy is treading water, and the housing market is one of the undercurrents trying to pull it down,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
Nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the January-to-March period, the Mortgage Bankers Association said Thursday in its quarterly snapshot of the mortgage market. That surpassed the previous high of 0.83 percent over the last three months in 2007.

The report also found that more homeowners slipped behind on their monthly payments. The delinquency rate jumped to 6.35 percent — or 2.87 million loans — compared with 5.82 percent for the previous three months. Payments are considered delinquent if they are 30 or more days past due.

Both the rate of new foreclosures and late payments were the highest on record going back to 1979.

With prices expected to keep dropping, foreclosures and late payments “are going to continue to go up,” Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.

Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.

The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high. Late payments rose to 22.07 percent from 20.02 percent, the previous high.

The association's survey covers just over 45 million home loans.

More problems also cropped up with loans to more credit worthy borrowers.

The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payments rose to 3.71 percent from 3.24 percent.

The numbers were higher for those prime borrowers with adjustable rate mortgages. Initially low rates reset to much higher ones, making it difficult, if not impossible, for homeowners to keep up with monthly mortgage payments. The proportion of those loans falling into foreclosure jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.

The number one problem is the drop in home prices,” Brinkmann said. Declining prices, especially in newer built areas, “are hurting people's ability to recover when they run into trouble — a divorce or loss of job,” he said. “In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure.”
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.

These extra inventories from foreclosures complicate what is already a heavily built situation,” said David Seiders, chief economist at the National Association of Home Builders.

After a five-year boom, the housing market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.

Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June.

Nearly three in 10 people say they are worried their home's value will decline over the next two years, according to a recent Associated Press-AOL Money & Finance Poll. Sixty percent said they definitely won't buy a home in the next two years. That's up from 53 percent two years ago.

As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.

All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.

To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.

The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.