Creative Solutions For Selling a House Fast Increasing On-line The American residential real estate market is laboring under the steadily accumulating weight of bankrupt mortgage lending companies, rising mortgage defaults for subprime and even prime borrowers, home foreclosures, house price declines, and a frequent inability of homeowners to sell a house fast. Last week’s significant stock market declines are tied in part to the troubles of the housing sector and the connection it has with credit available for prospective homeowners as well as for businesses. This can have a trickle down effect for those who want to buy a home.

California: Golden Dream Or Foreclosures By The Sea?  “The golden dream by the sea” is how Gov. Arnold Schwarzenegger has fancifully described California. Yet for thousands who bought homes during the Golden State’s latest housing boom, foreclosures have turned recent months into a nightmare.Economists disagree whether soaring foreclosures in California suggest the world’s eighth-largest economy is poised to slump or if it is just seeing its share of disarray from the subprime segment of the mortgage lending industry.Whatever experts call it, Dorothy Hicks, 74, a retired federal employee in Oakland, California, is seeing her American dream of owning a home teetering on the edge of collapse. After refinancing into an adjustable-rate mortgage last year, she faces possible foreclosure on her home of nearly 40 years.Hicks says she was told the mortgage was a fixed-rate loan, but was soon overwhelmed by soaring payments when its interest rates rose. “By the time you pay (utility) PG&E, the telephone and the mortgage, you don’t have any money,” she said.

SAN FRANCISCO (Reuters) - “The golden dream by the sea” is how Gov. Arnold Schwarzenegger has fancifully described California. Yet for thousands who bought homes during the Golden State’s latest housing boom, foreclosures have turned recent months into a nightmare.

Economists disagree whether soaring foreclosures in California suggest the world’s eighth-largest economy is poised to slump or if it is just seeing its share of disarray from the subprime segment of the mortgage lending industry.

Whatever experts call it, Dorothy Hicks, 74, a retired federal employee in Oakland, California, is seeing her American dream of owning a home teetering on the edge of collapse. After refinancing into an adjustable-rate mortgage last year, she faces possible foreclosure on her home of nearly 40 years.

Hicks says she was told the mortgage was a fixed-rate loan, but was soon overwhelmed by soaring payments when its interest rates rose. “By the time you pay (utility) PG&E, the telephone and the mortgage, you don’t have any money,” she said.

Christopher Thornberg of Beacon Economics in Los Angeles says California’s economic outlook will darken as a growing number of households slash consumer spending to meet rising mortgage payments, especially on adjustable-rate and subprime loans that became popular for those with weak credit.

“We have a lot more of these shady mortgages out here, so that doesn’t bode well,” he said. “We’re due for a very traditional consumer-led downturn.”

RECESSION OR RESILIENCY?

Analysts had expected California’s economy to cool because its housing market has slowed from the torrid pace of recent years. Prices, long far above the national average, are flat or slipping as sales decline.

A report last week by DataQuick Information Systems pointed to additional trouble. The real estate trend tracking service tallied a record 17,408 homes in the state falling to foreclosure in the second quarter.

While a fraction of California’s 8.4 million residential properties, the foreclosures marked a jump of nearly 800 percent from a year earlier, propelled by markets awash in subprime loans.

Countrywide Financial Corp., the largest U.S. mortgage lender, last week slashed its 2007 forecast, suggesting that rising delinquencies and defaults may spread beyond subprime borrowers to borrowers with stronger credit.

“Business is picking up and I think it’s going to continue,” said Patrick McGilvray, president of http://www.TheHomeBuyingCenter.com, a Sacramento firm that matches distressed homeowners with investors and home buyers.

Other experts say California’s mortgage troubles will be largely contained to risky borrowers who bought houses more expensive than they could afford, as well as their lenders. But they see no signs of a slowdown in consumer spending or recession.

Howard Roth, chief economist for the state Department of Finance, said the economy of California, the most populous U.S. state, is fundamentally solid. Its current housing troubles pale compared with the beating the housing market suffered in the early 1990s from gutted aerospace payrolls, he said.

The state’s unemployment rate was 5.2 percent in June, compared with nearly 10 percent in late 1992 and early 1993, when Californians desperate to leave the state were parting with their homes at fire-sale prices.

“In the early 1990s we were losing a major industry and losing it for good. Now we’re paying the price for a housing bubble, but housing will come back,” Roth said. “We really haven’t lost jobs yet. That may happen. But in the early 1990s we lost over 500,000 jobs.”

http://www.nytimes.com/reuters/world/lifestyle-economy-california.html?_r=1&oref=slogin

Discount Listing Service Helps Homeowners Avoid Foreclosure By Making On-Line Home Photos And Descriptions Available to Millions of Web Surfers

Next year will likely bring a second annual decline in existing home sales, the National Association of Realtors predicted on Monday.

Sales of existing homes are expected to decline 8.6 percent to 6.47 million for 2006 and contract another 1 percent to 6.40 million units next year. Still, the housing sector should see a rebound by the end of next year, said David Lereah, the association’s chief economist.

“By the fourth quarter of 2007, existing-home sales will be 4.6 percent higher than the current quarter,” Lereah said.

Sales of new homes should fall a sharp 17.7 percent this year and another 9.4 percent next year, the Realtors said.

About three-quarters of the country will see a sluggish expansion of existing home sales next year, Lereah said.

The health of housing markets across the country will vary, he said, but “general gains in value next year will be modest by historic standards.”

In the last three months of 2005, homes across the nation were appreciating at a 12 percent rate, according to the Office of Federal Housing Enterprise Oversight. From July to September this year, home price appreciation had slowed to a 3.5 percent rate.

Lereah also predicted that 30-year mortgage rates would increase to 6.7 percent by September. Those rates were at 6.11 percent last week, mortgage finance company Freddie Mac reported.

http://www.TheHomeBuyingCenter.com

WASHINGTON (AP) - Mortgage delinquency and foreclosure rates are on the rise, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers, some experts said Monday.Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get home loans “without taking unnecessary risks.”

“Expanding opportunities for more people to buy a home is a good thing. But we do not want Americans to become overextended and see their dream end in foreclosure,” Paulson said at a conference on the housing market organized by the Office of Thrift Supervision, a Treasury Department agency.

Some experts are concerned that the increase in mortgage foreclosure rates could affect the banking system’s financial health.

There have started to be “early signs of credit distress” in financial institutions’ holdings of so-called “subprime” mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.

In the sizzling housing boom that waned in the latter half of last year, many people took out subprime mortgages - higher-interest loans for people with blemished credit records who are considered higher risks - with adjustable interest rates.

When interest rates rise, as happened last spring, it can raise monthly payments for people with adjustable-rate mortgages, potentially creating a strain if they stretched to buy a home and don’t have a financial cushion in their savings.

William Longbrake, a senior policy adviser to the Financial Services Roundtable, an industry group, said he is among a minority of experts “who believe the worst is still ahead in the housing market” for home prices to continue to fall.

“There is worse to come. … The bottom is probably still many months ahead,” Longbrake said. He noted that the rise in delinquencies and foreclosures in subprime mortgages particularly affects low-income families.

Mortgage defaults could snowball in the coming months, a situation that bears close watching, he said.

The Mortgage Bankers Association reported in September that mortgage foreclosures climbed in the second quarter as higher interest rates and energy prices made monthly payments harder for some homeowners.

The percentage of mortgages that went into the first stages of the foreclosure process in the April-to-June quarter rose to 0.43 percent, up from 0.41 percent in the first quarter and the highest level in just over a year. Foreclosure rates were highest for subprime borrowers.

Also in September, the federal banking regulators directed financial institutions to properly explain the risks posed to borrowers from interest-only and other nontraditional mortgages. Such mortgages have exploded in popularity in recent years and raised concern that there could be a sizable number of defaults if borrowers cannot meet rising mortgage payments.

The regulators also said banks must make sure the loans they made were “consistent with prudent lending practices, including consideration of a borrower’s repayment capacity.”

Paulson said Monday the Treasury Department wants to “make sure that we have the right guidance in place to help people access home financing without taking unnecessary risks.”

http://www.TheHomeBuyingCenter.com

Foreclosure filings for 2006 nearly toppled 1 million, a 51-percent increase from 2005.

In the Northeast, foreclosures peaked at 64.6 percent. The region closed the books for 2006 with 96,101 foreclosure filings, up from only 58,394 in 2005. In the midst of rising foreclosures, the region did have states that actually showed decreases in foreclosure filings. Maryland (down 26.1 percent) and Delaware (down 32.9 percent) could be a glimpse of what may be ahead.

The Southeast region ended the year with a 37-percent increase. For 2006, the region reported 220,189 foreclosures compared with 162,259 in 2005. Florida alone filed 120,989 foreclosures but fell second to California for the highest number of foreclosures in one state.

Manufacturing layoffs and a tough economy fueled the 70-plus-percent increase for the Midwest region. The region filed 204,656 foreclosures. Illinois, Michigan, Missouri, Nebraska, and North Dakota faced increases of 80 to 96 percent, while Iowa and Kansas struggled with triple-digit increases.

The Southwest region led the nation in foreclosures for 2006, where one out of every 2.2 foreclosures in the nation took place. California, the nation’s leading state in foreclosures, filed 157,417 foreclosures. Colorado increased 55.4 percent with 68,310 filings. Texas increased only 35.2 percent to 106,845. Possibly indicating that better times are ahead, Louisiana, New Mexico, Oklahoma, and Oregon showed slight drops in fourth-quarter filings compared to third quarter.

The housing market terrifies me. It was recently announced that median new home prices fell 9.7% year over year, the largest such drop in 35 years. And I think that it could get worse. Consumers are over-leveraged, they’re used to low interest rates, and they’ve purchased expensive real estate using unconventional mortgages. This combination could lead to disaster. Big bad debt
Consumer debt has grown significantly during this housing boom. In 1985, the ratio of household debt to disposable income was about 73%. Today, this ratio is well above 125%. I see several reasons for this huge amount of debt. First, instead of paying off their mortgages, consumers are borrowing money against the equity in their homes. In the third quarter of 2005, homeowners borrowed $235.9 billion against their equity — a huge number equal to 10.4% of their after-tax income. The amounts declined in 2006 to $152 billion in the second quarter and $113.5 billion in the third quarter, but still represent about 5% of after-tax income. 

Second, housing prices have gone up, forcing consumers to shell out more money for housing. Yale professor Robert Shiller examined housing prices from 1890 to the present. According to his calculations, if you exclude inflation, a house that sold for $100,000 in 1890 was selling for about $110,000 in 1997. During that 107-year-span, even at the peaks of the market, that house never sold for more than $125,000. Yet in 2006, that home was selling for almost $200,000. So we’re way higher than we’ve ever been before. A third reason for consumers’ increasing debt is that unconventional adjustable-rate mortgages like hybrid ARMs and option ARMs are enabling homebuyers to increase their debt by reducing their initial payments. Hybrid ARMs typically have a low fixed “teaser” interest rate for several years, after which the interest rate resets to the market rate. Option ARMs allow borrowers to pay only the interest on the loan, or sometimes even less. After years of payments, the buyer can owe more than they did initially. The initially low rates of unconventional mortgages can be deceptive. If homebuyers believe that their short-term mortgage payments are representative of their long-term cost, they may purchase more expensive houses than they can actually afford. 

These loans have become common — in the first quarter of 2006, 26% of new loans were interest-only or negative amortization. And option-ARM borrowers aren’t paying them off. According to UBS, about 70% of option-ARM holders make the minimum payment. A catalyst for a crash
The combination of these effects is startling. In 1985, the equity-to-value ratio for homeowners was 69% — homeowners owned 69% of their homes. Today, we’re at an all-time low below 54%. My concern is that the huge consumer debt load combined with unconventional mortgages could cause a housing crash. When the market’s going up, option ARMs are manageable, since growth in the house’s value accrues to the homeowner, increasing equity. When the market’s going down, the option ARM borrowers’ equity can vanish quickly, leaving them with more debt than the house is worth. Combine this observation with Schiller’s observations that housing prices are way higher than they’ve ever been before, and it seems like there’s room to fall. 

If you’re searching for a catalyst, you don’t need to look any farther than the hybrid ARMs. According to Fannie Mae (NYSE:FNM), in 2006, the teaser rates disappeared on about $300 billion worth of mortgages. But in each of 2007 and 2008, $1 trillion in mortgages will reset — roughly 12% of all mortgages each year. Furthermore, borrowers have to adjust to more than just the loss of the teaser rates. Market rates are higher as well. Some borrowers could see interest rate increases of 4%-5%, causing a huge spike in their monthly mortgage payments. The results could be catastrophic. The virtuous cycle that pushed up housing prices and allowed consumers to increase leverage and spending on the way up could turn into a vicious cycle on the way down. A housing crash could hurt the entire economy, and not just through job losses. If 5%-10% of consumer spending is a direct result of people borrowing equity in their homes, that money could quickly dry up. Investment opportunities
However, uncertainty also can also bring the opportunity for profit. If you are prepared to consider a very risky short strategy, then homebuilders and lenders might seem like obvious targets. I’d start by looking for the most leveraged companies. And when it comes to lenders, I’d look at mortgage lenders like Countrywide Financial (NYSE: CFC) and consumer finance operations like Capital One Financial (NYSE: COF), since most lenders are likely to be hurt. 

One “problem” with these companies is that they’re relatively cheap on a P/E basis. If a crash doesn’t materialize, then they may actually increase in value. So, another way to play the short side is to target the entire market. If a housing meltdown causes consumers to reduce spending, most companies would be hurt. I’ve bought a few SPDRs (AMEX: SPY) puts to guard against such a scenario. If you’d rather focus on the long side, it can be challenging finding investments that will benefit from a housing bust, since most companies suffer during a recession. However, collection agencies like Portfolio Recovery Associates (Nasdaq: PRAA) could potentially gain business.  The best strategy might be to wait for the depths of the bust, then buy the companies with the strongest balance sheets and biggest competitive advantages. I’m thinking about companies like Lowe’s (NYSE: LOW) in home improvement and LandAmerica Financial (NYSE: LFG) in title insurance. At that point, these businesses will likely have unusually low profits and be trading at low multiples.  The Foolish bottom line
I think this is where investors will reap maximum profits — by buying great companies at the point of maximum pessimism. Just look at how well the survivors of the savings and loan crisis of the early 1990s have done. Some of those companies went on to become 50-baggers. In 15 years, we may see the same from the survivors of the housing crash.