Subprime loans defaulting even before resets

It turns out that massive interest rate spikes aren't the problem -- many borrowers couldn't afford these mortgages even at the low, introductory interest rates.

By Les Christie, CNNMoney.com staff writer

February 20 2008: 10:40 AM EST

NEW YORK (CNNMoney.com) -- For months, we've fretted about the Armageddon that will hit when subprime adjustable rate mortgages start resetting to much higher interest rates.

What's happening is even worse: Many of these loans are defaulting well before their rates increase.

Defaults for subprime loans issued in 2007 - none of which have reset yet - hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued, according to Friedman, Billings Ramsey analyst Michael Youngblood.

Defaults are spiking well before resets come into play thanks to the lax lending environment of the past few years. Many borrowers were approved for mortgages that they had little chance of affording, even at the low-interest teaser rates .

"I was rather shocked by the characteristics of the 2007 loans," said Youngblood.

Hybrid ARMs start with very affordable fixed-rate terms of two or three years. After that, rates can jump three percentage points or more, and then re-adjust even higher every six months to a year. On a $200,000 mortgage, a reset could add nearly $400 to the monthly mortgage payment.

Originally, concerns about these loans focused on the fact that that most homeowners wouldn't survive such pricey resets. In late 2006, the Center for Responsible Lending (CRL), predicted that 2.2 million subprime ARM borrowers would lose their homes in the following two years due to reset shock.

But these mortgages were doomed from the start.

For instance, in both 2006 and 2007, well over 40 percent of subprime borrowers were awarded mortgages with either little or no documentation of their ability to pay. With these so-called "liar loans," borrowers did not have to show proof of either earnings or assets.

And even when borrowers did go on the record about their earning power, it didn't bode well. Both 2006 and 2007 saw a large proportion of loans with high debt-to-income ratios (DTI), which indicates the percentage of gross income required to pay debt. In 2007 subprime originations, the DTI hit 42.1 percent, up from 41.1 percent in 2006. Borrowers were simply taking on more debt that they could afford.

What's more, many borrowers started out with low- or no-down payment loans, which left them with almost no equity in their home.

During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills - including their mortgages - through home equity loans.

But prices fell starting in 2006,leaving borrowers with less home equity to draw upon when they run into financial problems.

Median home prices fell 5.8 percent nationally, and by double digits in many areas. That, along with the deterioration in underwriting, changed the default math.

Owners with mortgages worth more than their homes simply began walking away from their homes when costs become unmanageable.

Lenders were slow to react

By late 2006, lenders knew that the housing market was heading south. Foreclosure filings took off during the third quarter that year, up 43 percent from 12 months earlier, according to RealtyTrac, the online marketer of foreclosure properties. And home prices began to drop.

But instead of cutting back on risky loans, lenders kept lending. Why?

"Because investors continued to buy the loans," said Doug Duncan, chief economist of the Mortgage Bankers Association.

Despite their quality, subprime mortgages were as profitable as any other for lenders like Countrywide (CFC, Fortune 500) and Wells Fargo (WFC, Fortune 500), who were able to quickly securitize the loans and sell them in the secondary market. The loans sold easily because they carried the promise of high yields.

"As long as you could sell the loan, you made the deal," Duncan said.

Lenders needed the fees that these loans generated because their finances were weakening. Their cost of borrowing money was rising, while competitive pressures were keeping mortgage interest rates low.

"By 2006 many lenders were running into red ink," said Youngblood.

So, they revved up lending to increase short-term profits. And, to outside analysts, there appeared to be nothing wrong with loan quality.

"There were very few overt changes in industry underwriting guidelines," said Youngblood. What did change, he said, was that lenders made more exceptions to their standard practices, approving people with poor work histories or insufficient proof of income.

"These exceptions generally amounted to no more than 5 percent [of subprime loans] before 2006," said Youngblood, "but they represented the majority of these loans issued in 2006 and 2007."

The reason for that shift: Lenders depended on independent mortgage brokers for much of their business, and brokers pushed them to approve subprime loans because they delivered big profits for the brokers.

"Lenders felt they had to take the loans to preserve their access [to the rest of the loan pool]," he said. They accepted some risky subprime loans so that the brokers would also send them safer prime and Alt-A loans.

Of course that's a bet that went bad. And it's likely to get worse as resets for ARMs issued in 2006 and 2007 kick in this year.

Homeless find shelter in vacant and foreclosed houses

Do not let your properties sit vacant, the homeless are moving in and it's not always easy to get them out.

Vacant dwellings prove inviting to street people

CLEVELAND - The nation's foreclosure crisis has led to a painful irony for homeless people: On any given night they are outnumbered in some cities by vacant houses. Some street people are taking advantage of the opportunity by becoming squatters.

Foreclosed homes often have an advantage over boarded-up and dilapidated houses abandoned because of rundown conditions: Sometimes the heat, lights and water are still working.

"That's what you call convenient," said James Bertan, 41, an ex-convict and self-described "bando," or someone who lives in abandoned houses.

While no one keeps numbers of below-the-radar homeless finding shelter in properties left vacant by foreclosure, homeless advocates agree the locations — even with utilities cut off — would be inviting to some. There are risks for squatters, including fires from using candles and confrontations with drug dealers, prostitutes, copper thieves or police.

"Many homeless people see the foreclosure crisis as an opportunity to find low-cost housing (FREE!) with some privacy," Brian Davis, director of the Northeast Ohio Coalition for the Homeless, said in the summary of the latest census of homeless sleeping outside in downtown Cleveland.

The census had dropped from 40 to 17 people. Davis, a board member of the National Coalition for the Homeless, cited factors including the availability of shelter in foreclosed homes, aggressive sidewalk and street cleaning and the relocation of a homeless feeding site. He said there are an average 4,000 homeless in Cleveland on any given night. There are an estimated 15,000 single-family homes vacant due to foreclosure in Cleveland and suburban Cuyahoga County.

In Texas, Larry James, president and chief executive officer of Central Dallas Ministries, said he wasn't surprised that homeless might be taking advantage of vacant homes in residential neighborhoods beyond the reach of his downtown agency.

"There are some campgrounds and creek beds and such where people would be tempted to walk across the street or climb out of the creek bed and sneak into a vacant house," he said.

Bertan, who doesn't like shelters because of the rules, said he has been homeless or in prison for drugs and other charges for the past nine years. He has noticed the increased availability of boarded-up homes amid the foreclosure crisis.

In search of a ‘fresh building’
He said a "fresh building" — recently foreclosed — offered the best prospects to squatters.

"You can be pretty comfortable for a little bit until it gets burned out," he said as he made the rounds of the annual "stand down" where homeless in Cleveland were offered medical checkups, haircuts, a hot meal and self-help information.

Shelia Wilson, 50, who was homeless for years because of drug abuse problems, also has lived in abandoned homes, and for the same reason as Bertan: She kept getting thrown out of shelters for violating rules. "Every place, I've been kicked out of because of drugs," she said.

Michael Stoops, acting executive director of the National Coalition for the Homeless, hasn't seen evidence of increased homeless moving into foreclosed homes but isn't surprised. He said anecdotal evidence — candles burning in boarded-up homes, a squatter killed by a fire set to keep warm — shows the determination of the homeless to find shelter.

Davis said Cleveland's high foreclosure rate and the proximity of downtown shelters to residential neighborhoods has given the city a lead role in the homeless/foreclosure phenomenon.

Many cities roust homeless from vacant homes, which more typically will be used by drug dealers or prostitutes than a homeless person looking for a place to sleep, Stoops said.

Police across the country must deal with squatters and vandalism involving vacant homes:

• In suburban Shaker Heights, which has $1 million homes on wide boulevards, poorer neighborhoods with foreclosed homes get extra police attention.
• East of San Francisco, a man was arrested in November on a code violation while living without water service in a vacant home in Manteca, Calif., which has been hit hard by the foreclosure crisis.
• In Cape Coral, Fla., a man arrested in September in a foreclosed home said he had been living there since helping a friend move out weeks earlier.

Bertan and Wilson agreed that squatting in a foreclosed home can be dangerous because the locations can attract drug dealers, prostitutes and, eventually, police.

William Reed, 64, a homeless man who walks with a cane, thumbed through a shoulder bag holding a blue-bound Bible, notebooks with his pencil drawings and a plastic-wrapped piece of bread as he sat on a retainer wall in the cold outside St. John Cathedral in downtown Cleveland. He's gone inside empty homes but thinks it's too risky to spend the night.

Even the inviting idea of countless vacant and foreclosed empty homes didn't overcome the possible risk of entering a crack house.

"Their brains could be burned up," said Reed, who didn't want to detail where he sleeps at night.

Difficult to track
Sometimes it's hard to track where the homeless go.

In Philadelphia, the risk is too great to send case workers into vacant homes to check for homeless needing help, said Ed Speedling, community liaison with Project H.O.M.E. "We're very, very wary of going inside. There's danger. I mean, if the floor caves in. There's potential danger: Sometimes they are still owned by someone," Speedling said.

William Walker, 57, who was homeless for seven years and now counsels drifters at a sprawling warehouse-turned-shelter overlooking Lake Erie, has seen people living in foreclosed homes in his blue-collar neighborhood in Cleveland. He estimated that three or four boarded-up homes in his neighborhood have homeless living there from time to time.

Sometimes homeless men living in tents in a nearby woods disappear from their makeshift homes, Walker said. "The guys who were there last year are not there now. Are they in the vacant (foreclosed) homes? I don't know. They are just not in their places," Walker said.

Northern California Home Auctions Triple

By Pamela Tom

OAKLAND, CA (KGO) -- Much of the downturn in the economy is blamed on the housing crisis. As foreclosures rise, so do home auctions.

The bank foreclosed on a six-bedroom, two-bath home in West Oakland. It wouldn't sell at $400,000 dollars, so the bank turned down offers at $370,000. Now it's on the auction block.

"Everybody's bargain hunting right now," said Real Estate Broker Kenny Sessions.

Real estate broker Kenny Sessions has more than a dozen listings going to auction in the next two weeks. He says the banks usually sell at 80 to 90 cents on the dollar.

"Some of it is properties I've had on the market for 90 to 120 days and other properties I've had for 30 to 60 days so there really is on set pattern of what they choose to take to auction," said Sessions.

He says the home's condition can be good or bad but all are in foreclosure.

"A Web site called Foreclosure Radar tracks California's foreclosure rates. The site's latest numbers show out of 51 counties, Alameda County ranks 25th in foreclosures while Contra Costa Co. comes in tenth.

Similarly, more and more homes are being auctioned but U.C. Berkeley economics professor John Quigley points out that the bidding wars of a couple years back were essentially an auction -- just implicit rather than explicit.

Quigley encourages buyers to do their homework, check the current prices of comparable properties but warns against trying to time exactly when to buy.

"It's probably a mistake for individuals to think they can do a great deal about timing the market for the purchase of their single house. If you want to time the real estate market, you can do that in real estate investment trust or other more liquid ways of investing in housing," said U.C. Berkeley professor John Quigley.

The California Budget Project of Sacramento says Bay Area home prices remain unaffordable, and the number of qualified buyers is decreasing due to stricter lending practices. But Kenny Sessions says there is hope for the working class. In one month, he sold 17 homes.

America's Free-Falling Housing Markets

Matt Woolsey, 02.12.08, 2:40 PM ET

Residents of Sacramento, Calif., where home sale prices for November 2007 fell a startling 18.6% over the year before, are likely breathing a sigh of relief today.

That's because homeowners there stand to benefit from the Bush administration's initiative, announced today, aimed at helping homeowners facing foreclosure. Called "Project Lifeline," and assembled by six of the nation's largest financial institutions, which service almost half of the country's mortgages, the program allows qualified homeowners to suspend proceedings for 30 days while providing them with rewriting and refinancing assistance.

"There'll be homeowners who still take no action, and some will still walk away," said Treasury Secretary Henry Paulson at a news conference today. "But some borrowers facing immediate foreclosures may find solutions."

While resetting rates on many of these mortgages are causing homeowners to default, falling prices, which lead to negative equity, are also playing a part. Negative equity occurs when the homeowner owes more on the home than the home is worth, and thus has little incentive to make payments.

Then there are the homeowners who took out "piggyback" loans--getting a second mortgage to pay the down payment on the first--leaving them saddled with mounting debt, yet unable to unload a home that's dramatically dropping in value.

Behind The Numbers
To assess which cities are hardest hit, we used data from Radar Logic, a New York-based real estate research firm. Radar Logic differs from the more familiar Case-Shiller index in that it tracks more markets (25), includes data on foreclosures, condos and new construction, and is a spot price, not a running average.

ZipRealty (nasdaq: ZIPR - news - people ), a San Francisco-based real estate tracking firm that aggregates multiple listing service data, provided us with the number of homes on the market that have been relisted below their initial asking prices.

In Sacramento, 43.6% of homes on the market have been lowered in price. There are currently 36,097 homes on the market there, with very few potential buyers.

Just lagging Sacramento is Las Vegas, where between November 2006 and November 2007, prices plunged 17.2%. What's more, from December 2006 to December 2007, the number of homes on the market surged by 30%, further stalling sales, and likely leading to more price depreciation down the road.

A city you might have expected to see higher on the list-- Detroit--finished ninth. Simply put, there just isn't much further for the city's housing prices to fall; in percentage terms, it doesn't look as depressed as other (once over-inflated) markets. In some areas of Motor City, banks are literally giving homes away if the buyer agrees to bring it up to code.

Florida nabbed three spots on the list of 10 fastest-falling markets, with Tampa down 11.7%, Miami depressed by 10.6% and Jacksonville in an 8.7% decline from last year.

The one sign of good news in these markets is that construction has all but stopped, and sellers are starting to get realistic about cutting prices.

For full-year 2007, almost every market experienced an inventory spike, but in the last month of the year, according to ZipRealty's numbers, inventories started to decline nationwide. Even in Sacramento and Las Vegas, inventory numbers have started to fall, if only marginally.

Major lenders put freeze on foreclosures

Banks will halt foreclosure proceedings to give lenders time to work out delinquency solutions. It's the latest attempt to tackle the housing crisis.

By Les Christie, CNNMoney.com staff writer

February 12 2008: 4:46 PM EST

NEW YORK (CNNMoney.com) -- Six of the nation's largest mortgage lenders, in a joint effort to cool the raging foreclosure crisis, have agreed to temporarily stop foreclosure proceedings on homeowners who have fallen seriously behind in their house payments.

Under a program unveiled Tuesday, legal efforts to oust seriously delinquent borrowers from their homes will be postponed for 30 days while lenders and borrowers try to work out payment options.

The effort, known as Project Lifeline, will not be confined to borrowers with adjustable rate mortgages. So-called ARMs have recorded the highest rates of delinquencies, even as default for loans of all types have risen dramatically over the past couple of years.

"For many families, Project Lifeline will temporarily pause the foreclosure process long enough to find a way out. Loan modifications may follow," said Alphonso Jackson, Secretary of Housing and Urban Development. "This program is not only available to subprime borrowers but to people with any kind of home mortgage."

The banks so far participating in the program are Citigroup (C, Fortune 500), Countrywide (CFC, Fortune 500), Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Washington Mutual (WM, Fortune 500) and Wells Fargo (WFC, Fortune 500).

Project Lifeline was put together with the backing of Jackson, Treasury Secretary Henry Paulson and Faith Schwartz, director of Hope Now, the government-backed, foreclosure prevention coalition.

Paulson said the effort won't be a magic bullet.

"There'll be homeowners who still take no action, and some will still walk away," Paulson said. "But some borrowers facing immediate foreclosures may find solutions."

Throwing homeowners a lifeline

Under the program, homeowners 90 days or more behind in their mortgages will get a letter from their lenders asking them to call. Borrowers will be asked if they want to stay in their homes; if so, they will be offered financial counseling.

Loan modifications are not automatically granted. Borrowers will have to provide up-to-date information about their wages and debts. At that point, the lenders decide whether to pause the foreclosure process.

During the moratorium, foreclosure prevention specialists will determine if there's a good possibility that a loan modification will work. In other words, will a borrower be able to regain his footing and start paying his mortgage again?

Any loan modifications - such as lowering interest rates, balances or both - will be provisional. After homeowners make payments on time for three months, the changes to the terms of loans will become permanent.

For lenders, repossessing homes has become an increasingly unprofitable venture. As real estate markets have turned down, many at-risk mortgage borrowers are upside-down - meaning they owe more on their loan than their home is worth.

These days, lenders often lose money when they foreclose on and resell properties - an average of $50,000 per home. It's cheaper to work out a deal with defaulting borrowers.

Reaction: Applause and questions

The moratorium idea has been raised before.

"Many people have been calling for a moratorium on foreclosures," said John Taylor, chief executive of the National Community Reinvestment Coalition. "I look on it as a good thing."

Last April, civil rights groups, noting that minorities were bearing the worst impact of the foreclosure crisis, called for a six month halt in foreclosure proceedings. In May, the California Reinvestment Coalition, a community advocacy group, lobbied state legislatures for a similar, statewide plan. This past December, Sen. Hillary Clinton went on record supporting a 90-day halt.

Jim Rokakis, treasurer of Cuyahoga County in Ohio, which has been hard hit by foreclosures questioned the initiative.

"Does this mean you're going to do it again in 120 days?" he asked. Subprime resets will peak again in the spring and Hope Now's effort includes notification of resets 120 days in advance.

"If they really want to make an impact they will require mandatory counseling before foreclosure can be completed. If you can't do it, you can't foreclose," Rokakis said.

As the foreclosure crisis deepened - more than 2.2 million foreclosures were filed in 2007, according to RealtyTrac, an online marketer of foreclosure properties - government forces and industry players expanded the scope of prevention efforts.

Jackson, the HUD secretary, said that Project Lifeline is just one effort to tackle the mortgage crisis. He cited FHASecure, which is refinancing many adjustable rate mortgage borrowers into government insured fixed rate loans; a five-year rate freeze, brokered by the Treasury Department, for many subprime ARM borrowers; and the provisions of the economic stimulus package that increase cap limits for loans eligible for purchase by Freddie Mac and Fannie Mae.

"The sum total of these actions is a powerful correction to the downward spiral of the housing market," said Jackson.

Still, the nation's housing crisis is deep and unlikely to ease up soon.

"In terms of subprime, the worst is just beginning," said Treasury Secretary Paulson.

Why Your Nest Is Not Your Nest Egg

By Johnathan Clements
From The Wall Street Journal Online

A house isn't a stock.

To be sure, you probably don't regularly confuse the bricks and mortar you occupy with the investments listed on your brokerage statement.

Yet thinking about the differences between the two helps explain why folks love owning real estate -- but also why some homeowners are in such trouble today. Here are five key ways that homes differ from stocks and stock mutual funds.

1. You don't know the price until you sell. With a few minutes of spare time and an Internet connection, you can find out the share price of every stock and stock fund you own. But you don't really know what your house is worth until a buyer makes an offer.

This leaves ample room for mental mischief. You can happily imagine that your house is a wonderfully stable investment, because -- unlike your stocks -- you aren't receiving continuous price updates. You can also happily imagine that your home sports some grand valuation.

But if you are a seller in today's rocky housing market, a happy imagination can be a big drawback. If you insist on getting a lofty price, you likely won't find a buyer. Indeed, if you have already moved and your house is sitting empty, your stubbornness could cost you big bucks.

2. The expense ratio is huge. What big bucks? Think of your home as a stock fund with an exorbitant expense ratio. Each year, between maintenance costs, property taxes and homeowners insurance, you might be paying a sum equal to 3% or 3.5% of your home's value.

In addition, you will have utilities and probably mortgage payments. These costs don't seem so dreadful if you're getting good use from your home. But if you have an unoccupied house you are aiming to unload, these costs mean you're bleeding money every month that goes by without a buyer.

3. You will pay a hefty commission to sell. Real estate isn't just costly to hold. It's also moderately expensive to buy -- and horribly expensive to sell.

Purchasing a property can involve home-inspection costs, lawyers' fees, title insurance, moving costs and mortgage-application fees. Selling can also mean moving costs and lawyers' fees. But the big hit is the real-estate commission, which might snag 5% or 6% of your home's selling price.

Trading stocks, on the other hand, is fairly cheap if you use a discount broker.

In fact, you can avoid all trading costs if you favor no-load mutual funds and deal directly with the fund companies involved.

4. You can't get a margin call. It's common to take out a mortgage to buy a house, while only aggressive investors use a margin account to buy stocks. This isn't a big surprise. Buying real estate with borrowed money is a whole lot safer than buying stocks with borrowed money.

How so? If the stock market plunges and you own shares on margin, you could receive a margin call from your broker, asking that you add more cash or securities to your account. If you don't pony up, part or all of your holdings will be sold, locking in your losses.

By contrast, as long as you make your mortgage payments, your neighborhood mortgage banker can't force you to cough up more cash or sell your home, no matter how far your home's price plunges. This ensures you won't be bulldozed into a snap decision. Still, because homeowners don't receive margin calls, it makes it easier to procrastinate over selling and to entertain fanciful ideas about your home's value.

5. The dividend is impressive -- but it isn't in cash. If you buy a collection of U.S. stocks today, you might notch a 2% dividend yield. Clearly, the hope is that you will do far better than that, thanks to handsome share-price gains.

Meanwhile, with a home, you shouldn't expect much in home-price appreciation. According to home-finance corporation Freddie Mac, home prices have climbed at less than 6% a year over the past 30 years, versus 4% for inflation.

Moreover, even if you notch this sort of price gain, much of it will be offset by the 3% or 3.5% "expense ratio" mentioned above.

Instead, with real estate, the biggest part of your gain should come from the dividend, which is the rent you receive. Most of us, of course, don't have tenants. Rather, we live in our own homes and effectively rent to ourselves.

The good news is, this "imputed" rent is pretty valuable. If you rented out your house, you might collect rent equal to 7% of your home's value each year. That's an indication of how much value you're getting from living in your own home.

An added bonus: It's tax efficient to rent to yourself, because you don't have to pay tax on this imputed rent.

So what's the bad news? You may be getting real value from your home -- but you aren't getting your dividend in cash.

The implication: You want to own a home that's the right size for you and your family, but no bigger. What if you purchase a house that's much larger than you really need? It's like renting a mansion -- and living in just two rooms.

Home sales for the past two years have peaked in the first two months.

By Jim Wasserman

For years in the business of selling houses, the weekend after the Super Bowl was the time when people started house hunting.

Industry trackers say that tradition went out the window during the 2001-05 housing boom. People had to shop vigorously all winter to stay ahead of rising prices.

That's no problem now. Yet if this year is like the last two, the Super Bowl is now just the last game of the season, not the opening shot of the home- selling year.

Indeed, there's a chance the peak buying activity of 2008 may have already happened.

In both 2006 and 2007, escrow closings – where all the paperwork is done and buyers get the keys – peaked in March, according to La Jolla-based DataQuick Information Systems. That means the homes were likely sold sometime in January or early February.

A March peak isn't something the industry likes or wants to see again this year. In 2006, a March peak showed there wouldn't be a big spring rebound and proved the downturn was real. In 2007, the subprime crisis arrived in March and pushed down sales for the rest of the year.

So far this year, builders and real estate agents say they're seeing the usual rise in sales compared with December. New-home sales are "slightly better than they were in December," said Jane Enger, analyst with the Danville-based Ryness Group, which counts sales weekly in the area.

Chicago-based Kimball Hill Homes, too, saw an "uptick" in January, said Derek Baker, Sacramento division president.

Tina Wilks, who owns the midtown Sacramento office of Prudential California Realty, said investors, more than first-time buyers, are driving activity she's seen. Many are picking off houses repossessed by banks.

"Under $200,000 is where it's come together quickly," she said.

Builders, however, still have inventory to sell. Last weekend, Miami-based Lennar Corp. found a successful way to sell eight houses in the region. Its offer of 30-year fixed-rate loans at 4.875 percent and no closing costs triggered five sales in Rancho Cordova, two in Gridley and one in Roseville, said Laura Stickelman, vice president for sales in the builder's Sacramento division.

Nationally, Lennar sold 223 houses with the promotion last weekend, she said. The deals applied to what the industry calls "standing inventory," finished houses without buyers.

With 590 sales last year, Lennar ranked second among builders in El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties. First with 665 sales was Dallas-based Centex Homes, according to the Gregory Group in Folsom.

Coldwell Banker growing

In every big economic shake-out one rule holds true: The big always get bigger.

That's what is happening at Coldwell Banker Residential Brokerage, which claims to be the biggest real estate brokerage in Northern California. The com- pany's Tahoe-Sacramento division has added more than 200 real estate agents in the past year as smaller brokerages flame out under the stress of a downturn. The brokerage has added 670 agents across all of Northern California.

"They come to us, and our managers are calling and recruiting from other firms, especially top producing agents," said Bob Bronswick, Tahoe-Sacramento division president.

The moves give agents a bigger company's marketing prowess and bring the company a larger share of commissions.

Seeking help that works

The foreclosures keep piling up across the Sacramento region, which means workout solutions between borrowers and lenders often aren't working.

One that did, though, was between Minneapolis-based GMAC Mortgage and Sacramento resident Chiara Teruel. She had a subprime loan that promised to bring trouble when it reset. She said this week that two months of back-and-forth with GMAC brought her a fixed-rate loan that she can afford.

"I believe it really helped that I was current in all my payments," Teruel said.

GMAC is one of the firms that signed onto Gov. Arnold Schwarzenegger's voluntary agreement last November to work harder with borrowers.

Real Estate Auctions Thrive As Home Sales Plunge

By Jilian Mincer
From The Wall Street Journal Online

As home sales have plunged, the real-estate auction market has soared.

Individuals and developers unable or unwilling to wait are turning to live auctions for fast sales. While still only a small percentage of housing sales, the real-estate auction market climbed 5.3% in 2007, generating $58.4 billion, according to a recent report from the National Auctioneers Association, which is based in Overland Park, Kan.

The Commerce Department said new-home sales fell 26% in 2007, the steepest drop since records began in 1963. Last week, the National Association of Realtors announced that sales of previously owned single-family homes suffered the biggest annual drop in 25 years.

In contrast, auctioneers such as Joe R. Wilson had their best year in 2007. Mr. Wilson predicts the sluggish real-estate market and growing awareness about auctions will make 2008 even stronger. "Sellers like it because it's fast, efficient and effective," said Mr. Wilson of Wilson Auctioneers Inc. in Hot Springs, Ark. "Buyers like it because they believe they're getting a deal." He said more developers are turning to auctions to sell new developments.

Bill Johnson, who has been a builder for almost 40 years, recently opted for an auction. One reason is that he was getting more online traffic from potential buyers than visits to model homes. Recently, he sold 18 of the 40 Minneapolis-area properties he auctioned. "We thought that if we sold 10, it was going to be a good weekend," he said. Buyers, he said, have been "paralyzed." "They don't know what's a good deal and what's not," he added.

Auctioneer Marty Higgenbotham said auctions give buyers confidence that they are paying a fair price. About a week ago, he sold 188 of his 200 new homes and townhouses in an auction in Minneapolis. He had hoped that prices would be close to 60% of asking price; they were 55% to 57%.

"A lot of people think auctions are a last resort, but it could be the best choice for many," says Harlan Rimmerman, director of education for the National Auctioneers Association. "An auction will tell you what the true market is."

That is because it puts buyers and sellers together and creates a sense of urgency.

Tommy Williams, president of the National Auctioneers Association, said another reason for the growth is that people "are getting more familiar, more comfortable with auctions."

"It's fair, it's open; everything about it is transparent," he said.

Mark Bratton decided to sell his Arkansas lake house by auction because another cabin home had sat on the market. Mr. Bratton's house sold for $25,000 more than the minimum bid of $250,000. "It was so easy," he said. "We showed the house for two weekends, and it sold effortlessly."

Another sign of the growing interest in auctions is that more real-estate agents are taking classes. Mr. Rimmerman said his association has had to increase the number and size of classes to meet demand. "The market is in a downturn, and what the auction provides is another option for agents to offer their clients," Mr. Rimmerman said.

A winning bidder at an auction almost always needs to have a certified check or cash of about $10,000 to $20,000 for a down payment, which is nonrefundable. Most sales must be completed within 30 to 45 days.

Sellers can find reputable auctioneers through friends, family, real-estate agents and professional associations. They typically pay an upfront marketing fee, which varies but is usually about 1% to 2% of the sale price. The auctioneers use the money to advertise on the Internet, newspapers and postcards to prospective buyers. The seller decides ahead of time whether a sale is "absolute," meaning the property will be sold no matter what price is offered, or a reserve, meaning the seller has the right to accept or decline any or all bids. Some auctioneers charge a fee for an auction that doesn't result in a sale.

Celebrity Real Estate Losers

Dorothy Pomerantz 02.06.08, 6:00 AM ET

LOS ANGELES -Even Hollywood's rich and famous can't avoid the housing downturn that's sweeping the nation. In Los Angeles, only 4,430 homes were sold in December, down 48% from the previous year. And prices fell 11% to an average $470,000.

Of course, celebrity homes cost much more than that. An entry-level house for an up-and-coming star costs at least $1.4 million in L.A., say experts. Realtor Barry Sloane of Sotheby's International Realty says it's the owners trying to sell homes in the $3 million to $6 million range that are having the most trouble.

"A lot of those people are involved, in one way or another, with the strike," says Sloane. "They're upgrading from lesser houses that they're having trouble selling because of the market, so it's like a domino effect."

Young rocker Avril Lavigne has had to reduce the price on her five-bedroom, six-bath house in Beverly Hills from $6.9 million to $5.8 million. The property is currently in escrow. The Hollywood Hills home is in a gated community just off Mulholland Drive, and includes a tennis court and pool. Since she put the house on the market in February 2007, two offers have fallen through. In the public listing, her agent calls the house "One of the best values on the market today."

When it comes to real estate, stars generally aren't treated any differently than other rich people. Mark David, who runs the celebrity real estate site The Real Estalker says homes generally don't demand a premium just because a celebrity was living there. At the same time, famous buyers are unlikely to get any kind of a bargain, since sellers often push famous folks to pay full price.

Former Guns N' Roses guitarist Slash (also known as Saul Hudson) feels he overpaid for his Spanish-style Hollywood Hills home, which has a pool, a separate gym and stunning views. He bought the house in January 2006 for $6.2 million. He sold it last December for $5.7 million. Slash is suing his former real estate agent, claiming the house was neither as big nor as private as the agent claimed. The case is ongoing in California Superior Court.

Television star Wilmer Valderrama had to accept $200,000 less for his five-bedroom home in the relatively unfashionable Valley neighborhood of Tarzana. He sold the house in January for $1.75 million.

Johnny Carson sidekick Ed McMahon is also having real estate troubles. He put his 7,000-square-foot Beverly Hills home on the market In July 2006 for $7.7 million. He has since reduced the price three times, and the house is now selling for $5.7 million.

At the $20 million-plus end, it's not unusual for houses to stay on the market for months at a time, because there are so few potential buyers. Sloane was originally trying to privately sell a historic Neutra home on Mulholland Drive, owned by Vidal Sassoon, for $25 million. When an offer fell through, he lowered the listing to $20 million. That was a year ago.

"There's usually a waiting list for homes over $20 million," says Sloane. "Now, it's slowing down a tiny bit--for the first time in years."

Hidden victims of mortgage crisis: Pets

Owners abandoning their dogs and cats after foreclosure

Marcio Jose Sanchez / AP In Stockton, Modesto and other nearby cities with some of the highest foreclosure rates in the nation, animal shelters and rescue groups are inundated.

updated 1:10 p.m. PT, Tues., Jan. 29, 2008

STOCKTON, Calif. - The house was ravaged — its floors ripped, walls busted and lights smashed by owners who trashed their home before a bank foreclosed on it. Hidden in the wreckage was an abandoned member of the family: a starving pit bull.

The dog found by workers was too far gone to save — another example of how pets are becoming the newest victims of the nation’s mortgage crisis as homeowners leave animals behind when they can no longer afford their property.

Pets “are getting dumped all over,” said Traci Jennings, president of the Humane Society of Stanislaus County in northern California. “Farmers are finding dogs dumped on their grazing grounds, while house cats are showing up in wild cat colonies."

In one such colony in Modesto, two obviously tame cats watched alone from a distance as a group of feral cats devoured a pile of dry food Jennings offered.

“These are obviously abandoned cats,” Jennings said. “They’re not afraid of people, and they stay away from the feral cats because they’re ostracized by them.”

The abandoned pets are overwhelming animal shelters and drawing fury from bloggers, especially as photos of emaciated animals circulate on the Internet.

The first people to enter an abandoned house, such as property inspectors and real estate brokers, have discovered dogs tied to trees in backyards, cats in garages, and turtles, rabbits and lizards in children’s bedrooms.

Marcio Jose Sanchez / AP Sady Lima, left, and Cecilia Martinez hug a puppy which has been put up for adoption at the Stockton Animal Shelter in Stockton, Calif.

No one keeps track of the numbers of abandoned pets, but anecdotal evidence suggests that forsaken animals are becoming a problem wherever foreclosures are climbing. Stockton and Modesto have some of the nation’s highest foreclosure rates.

Despite months of warning before a foreclosure, many desperate homeowners run out the clock hoping to forestall an eviction. Then they panic, particularly if they are moving to a home where pets are not permitted.

The situation has become so widespread that the Humane Society urged home owners faced with foreclosure to take their animals to a shelter.

Shelters are trying to keep up, but the spike in abandoned pets comes at a time when fewer people are adopting animals. Home sales are plunging to their lowest level in decades, and new homeowners are often the most likely to seek a pet.

Even people who are buying homes are not adopting pets.

“People are not bringing home puppies because times are tough, and animals cost money,” said Sharon Silbert, president of Animal Rescue of Tracy, a community near Stockton.

The mortgage crisis showed few signs of easing Tuesday after a real estate tracking company announced that many homeowners started to fall behind on mortgage payments in the last three months, setting the stage for more foreclosures this year.

The San Joaquin Animal Shelter in Stockton is fielding more desperate calls from animal owners about to be evicted. Many call as a last resort after being turned down by various rescue groups with no room for more animals.

“They’re usually breaking down on the phone,” said Kathy Potter, a shelter dispatcher. “I’m quite direct with them that there’s a 50-50 chance the animals might be put down.”

Still, shelter operators say, half a chance is better than none.

Marcio Jose Sanchez / AP Feral cats are fed a supply of cat food at a park in Stockton, Calif.

“They may be euthanized at a shelter,” said Stephanie Shain of the Humane Society of the United States. “But they’ll be fed and have water and have a humane euthanization, as opposed to spending the last days of their lives eating carpet or wallboard.”

Bloggers are furious with the “foreclosure pet” phenomenon, especially after seeing photos of emaciated animals on the Internet. Some critics say the pet owners have already proved they are irresponsible by buying houses they could not afford or mortgages they did not bother to understand.

“They see a pet as property, no different than a worn sofa tossed into the alley when the springs pop,” says a posting about foreclosure pets on About.com.

The problem is exacerbated because most people grappling with foreclosure are returning to rental housing or moving in with relatives — two situations where it can be difficult or impossible to bring pets.

“What we’ve always known is that when times are hard for people, they’re hard for their pets,” said Stephen Zawistowski, a vice president at the American Society for the Prevention of Cruelty to Animals.

Abandoning animals is illegal in most states under anti-cruelty laws, but the laws are not rigidly enforced.

In Stockton, shelter workers recently reunited a family with two rottweilers they had left behind in their foreclosed house. The family was staying in a homeless shelter, the dogs being cared for by neighbors at the family’s behest. Shelter workers were able to find housing for the family and their dogs.

But happy endings elude a majority of foreclosure animals.

“Their best shot is for the owners to plan ahead some,” Jennings said. “But they didn’t plan when they bought their house. I don’t see that happening anytime soon.”