November 23, 2007 by Mimi Miller.

Nearly 16% of Recent Homeowners Have Negative Equity

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RISMEDIA, Nov. 21, 2007-Home values nationwide declined for the fourth consecutive quarter, down 5.7% year-over-year - the largest year-over-year decline in more than a decade, according to Zillow’s Q3 2007 Home Value Report (1) released this week. This brings the U.S. Zindex(R) home value indicator (2) to $244,000, down 2.8% from the second quarter. The Zindex is the median Zestimate(R) valuation and measures all homes in an area, not just those that have sold during the quarter.

According to the company, for many homeowners who bought during the last two years when most local markets reached their peak, subsequent declines in value have left them with negative home equity, owing more than the home is currently worth. As of September 30, nearly 16% (15.6%) of homeowners nationwide who bought in the last year (3) and 17.5% of those who purchased two years ago have current home values that are less than the original mortgage amount. By comparison, less than 2% (1.8%) of those who purchased a home five years ago have seen their equity slide into the negative.

Not surprisingly, markets with the greatest proportion of homes with negative equity were those hit hardest by declining values. For example, people who purchased homes in California’s Central Valley, parts of Florida and Las Vegas during the past year have seen double-digit depreciation and negative equity rates reach up to five times the national median.

“The decline in home values picked up steam in the third quarter, posting the largest nationwide year-over-year drop in more than a decade,” said Stan Humphries, Zillow’s vice president of data and analytics. “Continuing depreciation coupled with the downward trend in the size of mortgage down payments has left many new home owners ‘upside down’ on their mortgage, meaning they owe more than the current value of their home.

“Since homeownership is typically a long-term investment, it’s important to keep in mind that short-term value declines mostly affect homeowners who either must sell or want to withdraw equity,” added Humphries. “The run-up in home values we saw over the last several years had many home buyers counting on continued housing appreciation to drive home equity growth, but the market has proven that this strategy is no longer a safe short-term bet.”

Despite decreasing home values and increasing incidence of negative equity scenarios, most U.S. homeowners still have positive equity in their homes. In fact, many homeowners who purchased in the last two years have seen overall equity increase since they made their purchase. The variances and movements in owner equity depend on many factors such as when the home was purchased, how much was put down and net market appreciation.

Americans who bought a home in the last two years placed a median down payment of 10% and now have a median of 13% equity (4) in their investment. This is the equivalent of owning only about 200 square feet — the size of one standard bedroom — in an average 1,500-square-foot, three-bedroom, two-bath home. Most homeowners who bought five years ago have the benefit of time and the market on their side. After placing a median down payment of 11%, these homeowners watched home values grow at an annualized rate of 9.4% over the past five years and now own a median of 41% of their home.

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November 9, 2007 by Mimi Miller.

More than 2.2 million Americans are in default on their mortgages. And that figure is expected to grow sharply through next year as 2 million more homeowners with adjustable-rate loans face higher payments. In Ohio, whose foreclosure rate is second-worst in the nation, after Michigan, Attorney General Marc Dann has received hundreds of complaints from all over the state.

“The sad part about this particular offense,” Dann says, “is that (the homeowners) lose everything. You lose the little bit of money they had squirreled away, you lose your house and you lose your hope. How do you quantify that?”

In a sweep in August, Dann filed complaints against six companies, including American Housing Authority and Foreclosure Assistance Solutions, and he says he expects to bring a half-dozen more cases in the next few weeks. Phone numbers for the companies were not available.

Regulators and law enforcement in many states are targeting the two most common forms of foreclosure rescue scams: “equity skimming” and bogus or fruitless consulting services.

The first scam works like this: A company offers to take legal ownership of the home temporarily. The homeowners pay “rent” to the company, which promises to return legal ownership to them once they regain their financial footing.

But all too often, con artists borrow as much as they can against the equity in the house — and collect the rent from the original homeowners but never make any mortgage payments. In the end, the property still goes into foreclosure, and any equity the homeowner had built up is gone. Their financial ruin is complete.

The second-most-common foreclosure-rescue pitch goes like this: A company offers to renegotiate the homeowners’ mortgage with the lender or help refinance the property. In exchange, they charge an up-front fee, typically $800 to $1,200.

Frequently, though, the company never contacts the lender, or knows the borrower can’t qualify for another loan. What little extra cash the homeowner could have used to pay the mortgage or move to an apartment has been wiped out by worthless “services.”

There are, of course, hundreds of reputable groups that provide legitimate services for homeowners in trouble. The Department of Housing and Urban Development has certified 2,300 counseling agencies to help homeowners nationwide (www.hud.gov).

HUD and the mortgage industry also support the Homeownership Preservation Foundation, which operates a toll-free counseling hotline, 24 hours a day (888-995-HOPE). Last month, it fielded 22,000 calls from homeowners in financial distress.

When scary letters start piling up

A family that’s more than two months behind on a mortgage will often come home to a mailbox stuffed with brightly colored envelopes and postcards from companies promising to help them save their homes.

One such postcard that Steve and Dawn Reyes received after Steve lost his job as a carpenter was from Mortgage Assistance Solutions, a Florida-based company that’s known by its customers as Fresh Start.

“YOU WILL LOSE YOUR HOUSE IF YOU DON’T CALL US NOW!!!” the postcard said.

When Dawn called, the company promised to refund its $1,200 upfront fee if it couldn’t help them. A month after they signed up, the Reyeses received a summons stating that their house was scheduled for auction on Dec. 12 of last year.

“I called the guy at Fresh Start, and I’m frantic,” recalls Dawn, 27, a stay-at-home mom and first-time homeowner in Machesney Park, Ill. “I said, ‘Look, I got this summons to go to court; I thought you were talking to the bank.’ ”

The reply, she says, was: “Yeah, we’re talking with them. I’ll call them and put a stop to them. We get a lot of calls like this. It’s just a scare tactic; nothing’s going to happen.”

The Reyeses had signed a document in November of 2006 giving Mortgage Assistance Solutions permission to negotiate with the family’s lender. But the Illinois Attorney General’s office, which filed a lawsuit against Mortgage Assistance Solutions two months ago, told Dawn that their lender didn’t receive that document by fax until Dec. 14 — two days after Dawn received the summons, and called them.

Angry, Dawn demanded her family’s money back. Mortgage Assistance Solutions sent her $700 and said it was entitled to the remaining $500 because of the time it spent on her case.

Yet soon after Dawn canceled the services, she says, she received another green-and-white envelope in the mail from Fresh Start. It read: “FORECLOSURE COMPLAINT NOTICE. Your House Is Scheduled To Be Sold At Auction. National Bank.”

Michael Stoller, a Los Angeles attorney and owner of Mortgage Assistance Solutions, says, the Reyeses were “denied a repayment plan because of insufficient income and lack of supporting documentation.” The family wasn’t entitled to a full refund, Stoller explains, because the company charges $150 an hour for time spent negotiating with the lender.

When USA TODAY told Stoller that a non-profit counselor was able to help the Reyeses obtain a new fixed-rate loan with a much lower interest rate in June, he suggested that lenders are more willing to modify delinquent loans to help an owner stay in a home than they were before.

Mortgage Assistance Solutions, Stoller says, has handled more than 6,000 cases this year and refunded $1.1 million this year to homeowners it couldn’t help. “That’s not a company that takes money from customers and runs away,” he says. “Our goal was always to help homeowners.”

Still, Stoller says his company is winding down its operations and will stop doing business by early next year, because of increased regulation and competition.

Marilyn Libby, 55, a nursing assistant, says Mortgage Assistance Solutions helped her modify her subprime loan with her lender. She says she feared she “was getting the shaft” from the company, because she had received few updates about her loan and was getting threatening letters from her lender to foreclose on her home in Stout, Ohio.

Libby obtained a lower fixed-rate loan last week, and afterward, she says, “I called Fresh Start and said: ‘Thank you, thank you. I can sleep now.’ ”

But Bob Campbell, executive director of the Rockford Area Affordable Housing Coalition, the non-profit counseling service that helped the Reyeses, says: “I’ve got a file sitting here on Fresh Start. We sent quite a few names to the (state) attorney general because that was a name we kept running into.”

The Better Business Bureau says it’s received 106 complaints nationwide against Mortgage Assistance Solutions in the past year.

Preying on the victimized

Two months ago, Massachusetts Attorney General Martha Coakley permanently banned foreclosure-assistance companies from taking title of homes and then renting them back to their cash-strapped owners. She’s also filed lawsuits against the people operating three such companies.

Consumer complaints about such scams have spiked this year, and she says she expects that trend to continue for the next year or two.

What’s most heart-wrenching, Coakley says, is that many victims of foreclosure-rescue scams had already been cheated by predatory lenders.

Those predators, she says, persuaded the victims to take out loans with unfavorable terms, knowing the borrowers probably couldn’t afford the payments they’d face once their introductory “teaser” rate reset to a much higher rate.

“We saw this as an egregious problem at the end of a bad process,” Coakley says. “We saw people in trouble, in foreclosure, and it appeared to my folks that this was really, in that sense not serious in terms of impact but in terms of perdition. People were coming in to pick at the carrion.”

Why people get behind

The most common reasons that lead people to fall behind on their mortgages are job or income loss, health problems or a death in the family. Yet fear, shame or distrust of their lenders keeps about half of borrowers from calling those lenders, according to Freddie Mac.

That communication gap can leave homeowners vulnerable to fast-talking con artists who buy mailing lists of homeowners in default or slap their business ads on telephone poles.

Back at the Legal Assistance Foundation of Metropolitan Chicago, Lindsey says the saddest stories he hears are from retirees who have lost the only home they’ve ever owned, thanks to a foreclosure “rescue” fraud.

“That property is their entire life, most of their wealth, they’ve raised their children there, they are completely emotionally invested in it, and that’s exactly the last thing they want to lose,” he says. “The vulnerability they are experiencing gets exploited by these ‘rescuers.’ ”

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November 8, 2007 by Mimi Miller.

Dump This House: Unloading
Your Property in a Slow Market

By Jonathan Clements
From The Wall Street Journal Online

It could be the kindest cut of all.

Look at the prices of homes getting sold, and the property market’s decline seems no worse than a rough day in the stock market. Look at the number of unsold homes, and you realize there’s a world of financial pain out there.

True, these unsold homes may eventually get bought at decent prices. But in the meantime, the owners are often bleeding money — and many of them would be smart to slash their asking price and go for the quick sale.

• Taking time. As you can see from the accompanying chart, home prices are down just 4.5% from their July 2006 peak.

Yet even as prices appear pretty much unchanged, the number of unsold homes has soared. At the current pace of sales, it would take more than 10 months to clear this backlog, according to the National Association of Realtors.

Personal finance columnist Jonathan Clements answers a reader’s question about claiming social security. He says half of Americans claim social security at 62, the earliest age to claim, which could be a big mistake.
Sure, it would be emotionally draining to have your home on the market for more than 10 months. But it probably wouldn’t be a financial disaster — as long as you’re still in the house and you can comfortably cover the mortgage.

Maybe, however, you have an adjustable-rate loan that’s now unaffordable. Maybe you’re trying to unload a vacation home. Maybe you moved cross-country for a new job, but your old house still hasn’t sold.

The monthly cost of carrying a vacant home could equal 1% of a home’s value, figures Charles Farrell, an adviser with Denver’s Northstar Investment Advisors. After all, you still have to pay utilities, insurance, property taxes, maintenance and, of course, the mortgage.

What if the mortgage is paid off? There’s still an opportunity cost. The equity in your home could instead be invested in, say, bonds yielding 5%.

To make matters worse, “prices could be lower a year from now,” Mr. Farrell warns. “There’s also the risk of owning a physical asset. I’m thinking about things like fire, broken pipes, theft.”

• Cutting deeply. Despite all this, sellers are loath to cut their asking price, which is the reason prices have barely budged — so far.

“People focus on what their home was worth two years ago, or how much they’ve sunk into it, or on their desire not to bring a check to the closing,” notes financial adviser Bert Whitehead, author of “Why Smart People Do Stupid Things With Money.”

His advice: Ditch these emotional hangups — and unload your property now. “If you really want to sell your house, you have to cut deep,” Mr. Whitehead says.

Good advice? Here’s how to decide for yourself:

• Ask your real-estate agent how many properties are on the market in your town today and how many sold in each of the past six months, advises Chris Mayer, director of Columbia Business School’s Milstein Center for Real Estate.

“If there are 2,000 houses on the market and 200 houses sold last month, that means it’s taking 10 months to sell a house,” Prof. Mayer says. “That’s pretty simple math, but nobody ever does it. If you price your house like everybody else, it might take 10 months to sell it.”

• Suppose you price your home like everybody else and it does indeed take 10 months to sell. Figure out how much you would be out of pocket over that stretch, either because your home is vacant or because the mortgage has become unaffordably large.

• Spend your Sunday going to open houses in the neighborhood. That should give you an indication of what you need to ask if you want to get your home sold now. Given the cost of carrying your home and the risk prices will fall further, would it be cheaper to slash your asking price?

If you’re going to lower your price, Prof. Mayer advises doing it right away — or waiting until early next year. He notes that very few houses sell between Thanksgiving and mid-January.

“The best scenario is that prices fall through the spring and then stabilize,” Prof. Mayer says. “But I’m more pessimistic than that. I would sell now.”

Email your comments to rjeditor@dowjones.com.

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