By Rex Nutting
From The Wall Street Journal Online

Home builders' confidence in the U.S. market improved for a second straight month in November, an industry trade group said Thursday.

The housing market index improved to 33 in November from 31 in October, the National Association of Home Builders reported. The index had fallen for eight months in a row to a 15-year low of 30 in September.

The index shows that about one-third of builders are optimistic about the housing market. A year ago, the index was at 61 and it peaked at 72 in June 2005.

Economists surveyed by MarketWatch had been predicting the index would remain at 31. See Economic Calendar.

"More and more builders are seeing light at the end of the tunnel," said David Pressly, president of the NAHB and a builder based in Statesville, N.C. "Our members are telling us that the market is steadying after a significant downward correction. We look for sales to stabilize and gradually move up in the coming months."

"The data tell us that the worst of housing is behind us," said Robert Brusca, chief economist for FAO Economics. Realtors also see "signs of recovery."

"It is still too soon to definitively confirm" that a bottom has been reached, wrote Brian Carey, an economist for Moody's Economy.com.

The report comes one day before the Commerce Department discloses data on U.S. home construction for October. Economists are looking for a 4.5% decline in housing starts to a seasonally adjusted annual rate of 1.69 million.

All three components of the NAHB index moved higher in November:

• The single-family sales index rose to 33 from 32.
• The future sales index rose to 46 from 42.
• The traffic of prospective buyers' index rose to 26 from 23.

The index improved in two of four regions, and it fell in the other two.

Specifically, builder confidence in the Northeast improved to a reading of 37 from 35, while the index rose to 40 from 38 in the South. Confidence fell to a cyclical low of 34 in the West and matched a cycle low of 16 in the Midwest

 

 

 

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By Matthew Heimer

From The Wall Street Journal Online

After hurtling along for years, the nationwide real-estate boom has come to a screeching halt. In 2005, home prices in the U.S. rose more than 12%; this year, the National Association of Realtors expects appreciation to reach just 1.9% -- the lowest gain since 1992.

Rising mortgage rates and selloffs by skittish real-estate investors have helped depress housing prices in many metropolitan areas. But there's another factor that many observers miss: the relationship between home prices and incomes.

When the cost of housing in a given area grows far faster than local wages and salaries, the pool of potential buyers shrinks, and prices are much more likely to sink.

For the past five years, SmartMoney magazine has worked with Ingo Winzer, president of the consulting firm Local Market Monitor, evaluating home-sale prices against local income to determine whether a given market is overvalued, undervalued or fairly valued. Mr. Winzer relies on more than 15 years of housing and income statistics to find out where prices are headed.

According to Mr. Winzer, any market that's more than 30% overvalued is due for a correction. In the fall of 2003, only eight markets on the list of 152 fit that description; on this year's list, 37 did. Sure enough, price decreases are beginning to pop up in many of the markets that have shown up year after year as the most overvalued -- especially in Florida and California.

What to do if you're in a falling market? Obviously, that's a promising climate for a bargain-hunting buyer. A savvy real-estate agent can help you craft a bid that's low enough to save you money, but realistic enough to be accepted. When one of Frank Borges LLosa's clients finds an appealing home, the Northern Virginia broker searches the history of the selling agent -- data not available to consumers -- on the local multiple listing service. If the agent frequently sells below the asking price, Mr. LLosa knows he can be aggressive.

Listing archives can also help buyers figure out the right bidding range. Ask your agent to comb the MLS for "pending sales," deals that are in contract but haven't yet closed, to get an up-to-date sense of price ranges in your market.

In an ideal world, you wouldn't sell a house at all while prices were falling. But if you must, experts agree that it's best to act quickly, before prices slide further.

Often, that means gritting your teeth and offering the best price to get potential buyers in the door. Here again, getting your agent to tap pending-sales data can pay off. Pay attention to the pricing per square foot for homes similar to yours, and set your asking price at the bottom of, or even below, that range.

South Florida broker Mike Morgan recommends that his clients take 1% to 3% off the price every week until they get an offer.

Another way to motivate a potential buyer: Motivate his broker. In a typical sale, a commission of 6% is split evenly between the buyer's and seller's agents. But you can ask that a higher percentage go to the buyer's agent, or even offer extra money out of your own pocket, so that she'll steer customers your way.

David Lereah, chief economist of the National Association of Realtors, expects that nationwide prices will bounce back in 2007.

He adds that one-third of the country is primed for growth -- a claim that Mr. Winzer's research supports. And if you don't have to sell your home, the short-term turmoil underscores the point that it seldom makes sense to obsess over your home's value the way you'd obsess over, say, your Google shares. Better to sit back, enjoy your mortgage-interest tax deduction, and wait for better days.

 

 

 

 

 

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By Jeff Bater

From The Wall Street Journal Online

An index of pending home sales in October tumbled again, suggesting more softening demand for the housing sector.

The National Association of Realtors' index for pending sales of existing homes decreased at a seasonally adjusted annual rate of 1.7% to 107.2 from September's 109.1, the industry group said Monday. Its index, based on signed contracts for used homes, was 13.2% below the level of October 2005.

Although the gauge declined for the eight time in a year, David Lereah, NAR's chief economist, expects a "fairly steady pace" of home sales for the next two months.

"It's important to focus on where the housing market is now -- it appears to be stabilizing, and comparisons with an unsustainable boom mask the fact that home sales remain historically high -- they'll stay that way through 2007," Mr. Lereah said.

"In addition, a temporary correction in prices distracts from the fact that it is primarily the number of home sales that affects the economy, and the number for this year will be the third highest on record," he said.

By region, the index showed a 2.1% decline in the Northeast in October from September -- and a 13.5% decrease since October 2005. It decreased 0.6% in the Midwest -- and was down 15.4% in the 12-month span. The West saw a 2.7% drop -- and a 17.4% decline in the past year. The index for the South fell by 1.7% -- and was 9.3% lower since October 2005.

The NAR's pending home sales index was designed to try measuring which way the housing market is going in the future. It is based on pending sales of existing homes, including single-family homes and condominiums. A home sale is pending when the contract has been signed but the transaction hasn't closed. Pending sales typically close within one or two months of signing.

Last week, the NAR reported sales of existing homes in the U.S. climbed for the first time in eight months during October. The median home price, at $221,000, was 3.5% lower than the level a year earlier, the largest decline on record. The inventory of unsold homes on the market climbed; at the latest selling rate, it would take 7.4 months to clear the backlog; a year earlier, 4.9 months would have been sufficient.

 

 

 

 

 

 

 

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By James R. Hagerty

From The Wall Street Journal Online

PITTSBURGH -- In an era when million-dollar houses are no longer exceptional, some homes sell for less than the price of a Brooks Brothers suit.

At an auction of foreclosed real estate here in April, Monte Lowderman struggled to entice someone to bid for a two-bedroom house in one of the city's roughest neighborhoods.

"Now, folks, I'm not telling you it's ready to move into," said the auctioneer. He paused, then added: "You know, the way to make money is recognizing potential."

Charles Lantzman, a real-estate investor here, didn't find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.

Nationwide, about 3,800 foreclosed homes sold for $1,000 or less in the first 10 months of this year, according to First American Real Estate Solutions, a data provider in Santa Ana, Calif.

Sales like these tend to occur in places like Detroit, Cleveland and Pittsburgh, where dying industry has left behind a surplus of what once was middle-class housing in neighborhoods now known for crime and bad schools.

More distressed homes are headed for the block. As the national housing boom fades, foreclosures are rising on subprime loans, those for people with weak credit records. A recent report from mortgage analysts at UBS AG in New York found that about 2% of subprime loans packaged into securities this year were in foreclosure by October, nearly double the year-earlier rate.

Foreclosed homes generally aren't a huge bargain. Savvy local investors know their value and compete to buy them. Still, as Mr. Lowderman noted, there is always the chance that one investor will spot potential where other bidders don't see any. And as lenders find themselves owning more foreclosed property, they become more eager to unload it as quickly as possible. The longer lenders hold these homes, the more they pay in taxes, insurance, lawn care and other maintenance.

In recent years, lenders and mortgage brokers have heavily promoted subprime loans. Many of the borrowers are people in poor neighborhoods who refinance their homes to take out cash or pay off credit-card debt.

The Pittsburgh house bought by Mr. Lantzman ended up at the auction because of one of those subprime refinancings that went bad. Allegheny County records show that CitiMortgage, a unit of Citigroup Inc., granted a $33,600 mortgage to the previous owner in February 2001, at an initial interest rate of 11.5%, which eventually would adjust twice a year, based on prevailing market rates, up to a maximum of 17.5%. In January 2002, the loan was sold to Household Finance, a unit of HSBC Holdings PLC. Household acquired the home through a foreclosure last year and put it on the block a few months later.

As is common in auctions, Household reserved the right to reject bids it deemed too low. A few days after the auction, Household asked Mr. Lantzman to consider raising his bid to $5,000 from $500. Mr. Lantzman sent back a list of problems he had spotted at the house, including damaged plumbing. As his trump card, Mr. Lantzman also mentioned a possible mold outbreak. (Banks hate owning houses with mold, he explains: "They don't want to hear about that.") He told Household his final offer was $700. Household accepted. Mr. Lantzman paid an additional $3,000 or so in auction fees and other transaction costs.

Citigroup and HSBC, Household's parent, both declined to comment on the case, citing customer privacy.

Busy with his day job as the owner of a small construction company, Mr. Lantzman didn't inspect his $700 house again for several months. Finally, one afternoon in August, he parked his sport-utility vehicle on Olivant Street in front of the narrow, two-story house with light-blue siding. The windows and doors of several houses on the street were boarded up. Mr. Lantzman walked warily around his house and noted signs of minor fire damage on one side. He discovered that the back door had been broken open. Shards of glass lay on soggy carpeting in the entryway. "Probably turned into a crack house," he muttered.

Once he began examining the inside with a flashlight, though, Mr. Lantzman was relieved. There were no signs of squatters.

"It actually doesn't look as bad as I thought," he said. He expects to spend $5,000 to $10,000 on renovations. Then he believes he will be able to rent the place for around $600 a month. Eventually, Mr. Lantzman hopes, the neighborhood will recover and house prices will increase.

At an auction in January, Jesse L. Thompson paid $1,000 for a three-bedroom house on East 97th Street in Cleveland. The house, white with mint-green trim, has been sold a dozen times since 1980, and lenders have foreclosed on it three times in that period, according to public records compiled by RealQuest, a unit of First American Corp. Mr. Thompson, who has been investing in real estate for more than 30 years, says the house needed replacements for a hot-water tank, heating ducts and water pipes stolen from the building during the latest foreclosure. After spending about $8,000 on repairs and redecoration, Mr. Thompson found a tenant to pay $550 a month.

It hasn't been easy, though. Shortly after Mr. Thompson bought the house, vandals broke in, spray-painted obscenities on the walls and sliced through electrical wires.

Mary Krawiec isn't impressed by $1,000 home purchases. Eight years ago, she bought a Victorian boarding house in Troy, N.Y., for $10.

The previous owners of the house had a $98,500 mortgage from KeyBank, a unit of KeyCorp, Cleveland. KeyBank foreclosed on the house in late 1996. At the time, an appraiser estimated the value of the house and lot at $52,000. The foreclosure led to an auction of the property, held by a court-appointed referee in the lobby of the Rensselaer County courthouse in Troy. At an initial auction in October 1997, no one bid for the house.

The referee, Richard T. Morrissey, held a second auction in November 1998. Ms. Krawiec says several other people attended, but she was the only one who showed any interest in bidding. Her opening offer was $1. She says the referee gave her a sour look. She raised her bid to $10 and held firm. The referee gave her title to the home in exchange for a $10 bill.

Ms. Krawiec acquired the house free of any liens from lenders or others but did have to pay an overdue water bill of about $2,000.

Usually, when bids at a courthouse foreclosure sale are far below the property's appraised value, a representative of the lender bids enough to purchase the home and then seeks to resell it later at market value. In this case, KeyBank made no attempt to acquire the house. Justin Heller, an Albany, N.Y., lawyer who represented KeyBank in the foreclosure, says he believes the bank decided that costs of renovating the house to make it salable might exceed its market value. A KeyBank spokeswoman declined to comment.

The boxy three-story house, in a middle-class neighborhood a few hundred yards from the Hudson River, is sheathed in pale yellow aluminum siding. Inside, years of neglect have left their mark, including a bowed stairway wall, crumbling plaster and a leaky skylight. Ms. Krawiec and her husband, Mark Peabody, are renovating the building's nine apartments. They estimate the total cost of fixing up the $10 house will be $65,000.

Ms. Krawiec and Mr. Peabody, a carpenter, do all the renovation work themselves. "I bought her a nail gun once for Christmas," Mr. Peabody says.

For now, the $10 house has three tenants, producing rental income of nearly $15,000 a year. Once all nine apartments are renovated, Mr. Peabody estimates, the house will yield rental income of $50,000 a year.

 

 

 

 

 

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By Ruth Simon

From The Wall Street Journal Online

Get a mortgage from another lender and we will pay you $250.

That is the latest marketing twist from Bank of America Corp. With competition for home loans increasing, the Charlotte, N.C., lender is encouraging its customers to apply for a mortgage with the bank and then shop around. If they decide to get their home loan elsewhere, Bank of America will write a $250 check to cover a portion of their closing costs.

The Bank of America offering is the latest sign some lenders are beginning to emphasize price, service and stronger customer relationships in the face of slowing loan volume. Mortgage originations fell 29% in the third quarter compared with the same period last year, according to the Mortgage Bankers Association, as the housing market cooled and rising interest rates made it less attractive for borrowers to refinance.

Last week, Charles Schwab Corp. said it would give most of its bank and brokerage customers a 0.25 percentage point discount on the rate for a new adjustable-rate mortgage or home-equity loan and a 0.125 percentage point discount on the rate for a fixed-rate mortgage. Until now, the discounts were available only to clients who had combined bank and brokerage account balances of more than $250,000.

 

In August, E*Trade Financial Corp.'s mortgage unit began offering $500 off mortgage closing costs to the company's banking and brokerage customers who have less than $100,000 in total assets at E*Trade. E*Trade customers with assets of $100,000 or more get a 0.125 percentage point mortgage-rate discount.

Other lenders are using rewards programs to try to boost customer loyalty. National City Corp. gives customers enrolled in its rewards program 50,000 bonus points when they take out a mortgage with the bank. Customers also earn bonus points for tapping a new home-equity line of credit. Citigroup Inc. offers special reward points to customers with a Citibank mortgage or home-equity loan, provided they also have a Citibank checking account and debit card. The points can be redeemed for a variety of rewards, from gift cards to plane tickets.

The offers represent a new tactic for lenders, which for years vied for customers by rolling out mortgage products that allowed borrowers to lower their monthly payments. These include interest-only mortgages that allow borrowers to pay interest and no principal in the loan's early years, option adjustable-rate mortgages that let borrowers make a minimum payment but can lead to a rising loan balance, and mortgages with 40-year terms. But the flow of new products has slowed and bank regulators have raised questions about the risks some nontraditional mortgages may pose to borrowers and lenders.

Some lenders are wooing customers with pricing guarantees. LendingTree.com, a unit of IAC/InterActiveCorp, is offering a $500 price guarantee to certain borrowers who use its loan network to shop for a home mortgage. The offer, which runs through year end, applies only to borrowers taking out standard fixed-rate mortgages for $417,000 or less. To qualify, borrowers must document they received a better offer from another source on the same day an application was submitted to LendingTree, an online service that matches borrowers with lenders. LendingTree will pay the $500 if it can't get one of its partners to meet or beat the offer. So far, only one customer has put in a request for the $500 payment, but the request was declined because the loan was for less than $100,000, the company said.

Bank of America's "Best Value Guarantee" program is designed to attract borrowers who think they would get a better deal from a mortgage broker or another competitor. To qualify for the payment, customers must have a checking, savings or other account with the bank, apply for a mortgage and then provide proof they obtained the home loan elsewhere. During the pilot tests, only a handful of bank customers claimed the payment, said Senior Vice President Eric Telljohann. The offer is being rolled out in a number of East and West Coast markets and should be available nationwide by January, the bank said.

 

 

 

 

 

 

 

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By Alex Frangos

From The Wall Street Journal Online

The unexpectedly rapid decline of the nation's housing market will mean an overall drop in construction spending next year, with spillover effects in areas such as job growth and real-estate development.

In a closely watched report expected to be released today, McGraw-Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005. McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. But the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends.

"Single-family housing has fallen more steeply than what we had anticipated and the correction is taking place faster," says Robert Murray, vice president at McGraw-Hill Construction, a unit of McGraw-Hill Cos. The industry "no longer has single-family housing to bolster total construction."

The construction industry accounts for almost a tenth of economic activity, and its contraction could have a ripple effect through the economy as it is a major buyer of finished products and generator of jobs. Local governments' ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could suffer as well.

The McGraw-Hill forecast comes on the heels of a report yesterday by the Census Bureau showing that home builders have had to slash prices to sell homes. Although new-home sales for September rose 5.3% to a seasonally adjusted annual rate of 1.075 million, the median price fell to $217,100 from $240,400 a year earlier. That was the lowest price in two years and the biggest year-over-year decline since December 1970.

Meanwhile, at a conference yesterday in Washington, David Seiders, chief economist of the National Association of Home Builders, predicted average prices of single-family homes will drop next year. It is the first time the trade association has predicted a price decline in roughly a decade of providing estimates.

Mr. Seiders blames a confluence of factors for the anticipated declines, including overbuilding, prices that have outpaced incomes, and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders.

In the second quarter of 2006, the annual rate of single-family starts fell 41.2% to 1.53 million, while "permits are in free fall," Mr. Seiders says.

To be sure, prices still remain higher than several years ago and many consumers maintain hefty amounts of equity in their properties. Moreover, mortgage rates remain near historical lows and prices remain stable in many markets. Yet the latest news has prompted some economists to question whether the construction industry will become a drag on economic growth or whether the worst has already been felt.

Yesterday, former Federal Reserve Chairman Alan Greenspan said he saw "early signs of stabilization" in the housing market. Mr. Greenspan noted in a speech to the Commercial Finance Association that a weekly index of applications for home-purchase mortgages, compiled by the Mortgage Bankers Association, has "flattened" at relatively high levels. The index plunged in the second half of 2005 and early this year, but lately has been steadier. It is currently 18% below the year-ago level.

"We've already had the hard landing," Angelo Mozilo, chief executive officer of Countrywide Financial Corp., the nation's largest home-mortgage lender, said in a conference call this week. Mr. Mozilo said he expects the mortgage market to "tread water" in 2007. "In 2008," he added, "we'll have one hell of a year for people who remain in the industry" as demand rebounds.

U.S. home prices rose an average of 58% in the five years ended Dec. 31, according to an index produced by the Office of Federal Housing Enterprise Oversight. In some cities, prices more than doubled in that period. Over the past year or so, house prices have declined moderately in many areas -- including Massachusetts, the Washington, D.C., area and parts of California, Florida and Arizona -- but they remain far above their levels of a few years back.

Some of the negative effects from the housing slump are likely to linger well into 2007 and perhaps much longer. Some economists think housing prices will continue to drift downward through much of next year. That may damp consumer confidence, and it will diminish consumers' ability to borrow against their homes to finance spending. And foreclosures are expected to rise at least modestly; that could prolong weakness in housing as lenders dump properties on the market.

"We're not out of the woods yet," says Peter Kretzmer, a senior economist at Bank of America in New York.

Mr. Murray at McGraw-Hill Construction concurs. Just weeks ago, he was figuring there would still be growth next year. "We thought the correction [in the housing market] would be, in the words of Fed chairman, 'orderly,' " he says. But recent data have shown it is "not as orderly as what people thought."

But the decline won't be limited to housing. Also expected to see a falloff is the construction of retail centers, whose development has been consistently strong in recent years as consumer spending and housing formation grew.

The link between retail construction and home building is strong. "When there's a new neighborhood, there's a new grocery store and pizza parlor in a small shopping center," says James Haughey, director of Research and Analytics at Reed Construction Data, a Norcross, Ga., publisher of building information and a unit of Reed Elsevier Inc. He doesn't see retail falling off right away, however, as retailers are still catching up to consumer growth. "It will be a delayed impact because the pipeline of shopping centers is so full," Mr. Haughey says.

The continued rapid construction of a wide range of other commercial projects -- hospitals, schools, offices, hotels and factories -- will keep bulldozers and backhoes somewhat busy and the massive construction industry active. That, of course, could be reassuring news for the economy. Spending on commercial construction, including multifamily dwellings, will increase 2.5%. Among the fastest-growing segments are hotels and manufacturing buildings, as well as schools and health-care facilities.

Construction activity has a major impact on the overall economy. Census Bureau estimates of construction spending, which rely on McGraw-Hill's numbers while adding other spending categories, showed $1.2 trillion of spending on construction in the year ended August.

The fallout is being felt at some of the nation's largest home-building companies, which are downsizing staffs. Pulte Homes Inc. of Bloomfield Hills, Mich., said yesterday it has reduced its work force by about 10%, or 1,400 full-time jobs, since Jan. 1. The cuts have been made throughout the company and across the country. "We've taken these measures in response to lower housing demand, which has resulted in a reduction in construction volumes," Pulte spokesman Mark Marymee said.

Centex Corp., a large builder based in Dallas, said this week that its salaried work force has been reduced by about 10% since April 1 to around 6,400 employees.

In the Phoenix area, construction accounts for 10% of salaried jobs, "and they are pretty good-paying jobs," says Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University. He sees the slowdown in the home-building sector being offset somewhat by strength in health care, schools, convention centers and highways. He cautions, however, that local governments that rely heavily on fees garnered from home builders could face fiscal crises. Several municipalities in his area, he says, are considering instituting or augmenting fees on commercial developers to make up for the projected shortfall.

Some developers could benefit from the housing downturn as demand for materials such as gypsum, copper electrical wire and lumber drop. Already this year, prices for those products have fallen. Falling house prices would also bring welcome relief to buyers who have been buffeted by steadily rising price tags.

Certain sectors of the commercial construction industry could continue to grow. Hotel construction spending, for instance, was up 64.4% to $21 billion in August on a seasonally adjusted annual basis, according to the Commerce Department. Though McGraw-Hill predicts no growth in hotel spending, others think the increase is likely to continue in 2007. "The rebound in [hotel] construction is everywhere," says Bjorn Hanson, head of the hospitality-and-leisure practice for PricewaterhouseCoopers LLP.

About 70% to 80% of the hotels, says real-estate consultant Patrick Ford, are popping up near freeway exits with limited meeting spaces and food service. The area around Dulles International Airport in Virginia is adding 22 hotels, most in that mold, according to Mr. Ford, president of Lodging Econometrics in Portsmouth, N.H.

Manufacturing and industrial construction will grow thanks partly to the mushrooming of ethanol plants in the wake of federal legislation mandating increased supplies of the fuel additive. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol trade group, says there are more than a "couple hundred" ethanol plants in development, with 46 under construction.

The office-building sector is also expected to grow as it reacts to recent job growth and business expansion. Office-vacancy rates nationally hit 13.5% in the third quarter, the lowest since the third quarter of 2001, says Sam Chandan, chief economist at Reis Inc., a New York-based research firm. And bond issues passed in several states to accommodate growing school-age populations has meant a classroom building boom. Fast-growing states such as Arizona and Nevada are adding dozens of schools a year.

 

 

 

 

 

 

 

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By Lingling Wei

From The Wall Street Journal Online

Mortgage lenders are finding themselves a strong ally in preventing foreclosures: community groups.

Consider East Side Organizing Project, a Cleveland neighborhood organization founded more than a decade ago to focus on improving local schools. J. White, among hundreds of other local residents, credits the group for preserving homeownership in the community by serving as a liaison between financially strained borrowers with their mortgage lenders.

Mr. White, 57 years old, turned to East Side a year ago as he was seeking help with negotiating with his lender about modifying the terms of an adjustable-rate loan that Mr. White says he and his wife were duped into by a mortgage broker. The Whites accepted the loan in 2003 out of the desire to lower their monthly payment and pay off other bills that had piled up since Mr. White lost his job a year earlier because of the shutdown of the commercial-printing company where he worked.

Two years after the refinancing, the couple saw their mortgage payment almost double to $2,035 a month. "We did a stupid thing by refinancing with the people we refinanced with and not recognizing the fact that we had an option to just get out of the chair and not take the loan," Mr. White says.

Facing the prospect of turning their house over to the lender, Mr. White and his wife contacted the Department of Housing and Urban Development, the local United Way, and then East Side. "They are very good at working out deals with lenders," Mr. White says of the neighborhood group. Under an agreement brokered by East Side, another lender came through for the couple, agreeing to lend them $147,000 to pay off their existing $167,000 mortgage, and the original lender agreed to waive the $20,000 difference. The Whites got to keep their home.

Amid rising mortgage delinquencies and defaults, community groups like East Side, together with some nonprofit housing counselors, are becoming valuable to financially stressed homeowners to battle against foreclosure. A powerful tool in their arsenal, says Mark Seifert, executive director at East Side, is the fact that "contrary to the common myth, the lender loses, too, when someone goes to foreclosure."

A Federal Reserve study estimates that foreclosure can cost a lender anywhere between 30% and 60% of the outstanding loan balance because of legal fees, forgone interest and property expenses.

"Every party to a foreclosure loses -- the borrower, the immediate community, the servicer, mortgage insurer and investor," says Mike Fratantoni, a senior economist at the Mortgage Bankers Association, of Washington, D.C.

According to the industry group's analysis, three out of four borrowers who enter the foreclosure process leave it through something other than a forced foreclosure sale, in which a lender repossesses a borrower's house and sells it. It means that through lenders' "loss-mitigation" efforts, they either pay off the arrears through agreed-upon payment plans with their lenders or sell their homes to avoid foreclosure and to protect their credit ratings and their ability to borrow again.

Foreclosure prevention has proved challenging for borrowers and lenders. Delinquent borrowers may feel too wary of creditors to reach out to them, while lenders often find borrowers hard to reach. That is where community groups and nonprofit housing counselors come into play.

The East Side group is affiliated with the National Training and Information Center, or NTIC, a Chicago resource center for community organizations that has conducted several studies on financial companies' lending practices. The East Side group is able to help homeowners negotiate with lenders such as Citigroup Inc.'s CitiFinancial Credit Co., J.P. Morgan Chase & Co., and Ocwen Financial Corp. by tapping into the partnerships they have formed over the years with them. The partnerships call on the lenders to be committed to combating predatory lending and foreclosure.

"It's not in the corporate mind-set to work with community groups," says David Rose, a director at NTIC. But lenders "see us as a bridge to reach out to their troubled customers as early as possible." When a lender calls a homeowner about a delinquent loan, Mr. Rose says, the homeowner may not call the lender back. "Borrowers don't see lenders as partners, but as somebody only trying to get money out of them."

That may explain why borrowers never contact their lenders in more than half of all foreclosure cases. A study conducted last year by Freddie Mac, of McLean, Va., and Roper Public Affairs and Media, a unit of market-research company GfK NOP LLC, of New York, found that nearly two-thirds of delinquent borrowers surveyed weren't aware of lenders working out options to avoid foreclosure. Among the common options are forbearance, which temporarily delays or reduces payments, and loan modifications, which changes the payment terms for a fixed period.

If the borrowers knew about those options, "they would be more willing to work with servicers," says Bill Merrill, director of default-asset management at Freddie Mac. Other reasons cited by borrowers for not contacting lenders included embarrassment, fear and "not knowing whom to call."

The survey results, mortgage-industry executives say, serve as a reminder to lenders of the need to strengthen their borrower outreach-and-education programs -- especially when national delinquency and foreclosure rates, though historically low, are creeping up from their year-ago levels.

"We're working to move that contact much earlier," Donna Sheline, head of J.P. Morgan Chase's homeownership-preservation office, says of the interaction between lenders and delinquent borrowers. "The earlier the detection," she says, "the easier the prevention" of foreclosures.

A recent report by online foreclosure-data service RealtyTrac, of Irvine, Calif., showed that nationwide, there was one foreclosure filing for every 1,030 households in September. It projected that more than one million borrowers would see their properties put in foreclosure by the end of the year. The Midwest rust belt has the highest foreclosure rates because of the loss of manufacturing jobs in recent years.

In addition to partnering with community groups, an increasing number of mortgage lenders are embracing the idea of appointing a senior executive as an ombudsman to listen to customers' complaints and make recommendations to senior management as to how to resolve the disputes. More mortgage companies -- such as Freddie Mac and General Motors Corp. finance unit General Motors Acceptance Corp.'s ResCap residential-mortgage arm -- are sponsoring outside housing counselors to offer free foreclosure-prevention and financial counseling to borrowers.

Latisha Carlisle, a housing counselor at NID-HCA, an Oakland, Calif., community-based counselor network, says lenders have become "more receptive" in terms of working with housing counselors. "They realized that we're not trying to get into a blame game for why the borrower enters foreclosure," she says. "We are able to realistically discuss the potential...solutions for the borrower."

 

 

 

 

 

 

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By Aaron Lucchetti

From The Wall Street Journal Online

Few businesses have installed as many visible security measures since the 2001 terrorist attacks as the New York Stock Exchange. The Big Board keeps several nearby streets closed to traffic and erected steel pylons around its perimeter. Visitors have to go through a gantlet of security measures to get into the building.

Now, one of its landlords says things have gotten out of hand.

NYSE Group Inc., the exchange's parent company, said in a regulatory filing this week that the landlord for one of its buildings is arguing the NYSE is in default of certain lease covenants because of its massive security effort. The security has made it difficult for tenants of Vornado Realty Trust, the landlord, and visitors to get into the building, according to people familiar with the matter. This could drive down the value of office space in the building, hurting Vornado.

New York-based Vornado, which leases the land under the building from an NYSE unit, is demanding the Big Board fix the situation by Dec. 15. NYSE said in the filing that it believes the claims are without merit. Vornado wouldn't comment on the terms of the lease.

The dispute illustrates the balancing act that firms face when juggling commerce with protecting employees. The NYSE, as one of the most well-known symbols of capitalism, has good reasons to be vigilant. The World Trade Center site is just blocks from its headquarters and after a terror scare in 2004, the Department of Homeland Security raised the terror-threat level for the New York financial sector, citing NYSE as one of a handful of possible terror targets. The exchange was also forced to close its popular visitors' gallery.

The NYSE beefed up security in 1993 when terrorists detonated a bomb in the World Trade Center, killing six and injuring more than 1,000. These days getting inside the NYSE makes airline security look downright easy.

The streets closest to the NYSE are closed to traffic, and steel blocks have been erected around its perimeter. The building is patrolled by gun-toting guards. NYSE guests have to wait outside until an escort from the building brings them in. Visitors are photographed, their bags searched and many guests are required to give personal information including Social Security numbers. Then, visitors are forced to walk through metal detectors. On rainy days, guests at the exchange's south entrance have been encouraged to stay dry in a local bank branch while waiting to get inside. One big issue for Vornado, according to a person familiar with the matter, is that guests are forced to wait outside, often for some time, something that is unusual at other buildings.

The added security has kept the exchange safe. At the same time, the bigger security footprint has caused some local businesses to suffer. In 2004, Wall Street Garage Parking Corp. sued the exchange over its decision with the city to block traffic near the exchange, scaring potential customers away from his operation. The NYSE prevailed in court, and the streets remain blocked.

Other local businesses have felt the hit. At Champs Gourmet Deli near the exchange, revenues are down 40% since 2001, according to Greg Signorile, who founded the place with his father and two brothers 17 years ago. He says the NYSE's security policies are "strict, but I don't blame them." The deli used to deliver Italian heroes and roast-beef sandwiches by the dozen to a holding room in the exchange, but that ended in 2001. Now traders come to him.

The issue at dispute with Vornado concerns 20 Broad Street, one of the four major buildings that the NYSE occupies in Lower Manhattan. The white-brick tower is next to the famous landmark building that the exchange moved into in 1903. It contains an annex to the Big Board's original trading floor and has office space above that primarily houses NYSE officials and private financial firms, many of whom rent from Vornado and do business at the NYSE. It is unknown if any firms have left because of the security issue.

It's not the first time that the intense security has caused issues for the NYSE. In 2003, several NYSE employees were fired for previous crimes when a new terror-inspired fingerprinting policy uncovered previously undisclosed crimes.

In April, the well-known Stock Exchange Luncheon Club, located above the trading floor shut down, in part because stepped-up security discouraged patrons.

And on a competitive note, the Big Board's electronic rivals often point to the security issue, saying it is just another reason why their system is better. In fact, the NYSE said this week it is planning to close 20% of its trading space by 2008, though it isn't in the Vornado building.

As for the NYSE, it still considers the floor an asset because its traders are often able to step into trading in dicey situations and bring order to the market.

 

 

 

 

 

 

 

 

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By June Fletcher and Ruth Simon

From The Wall Street Journal Online

A little over a year ago, buyers couldn't wait to sign contracts to purchase homes. Now, many can't wait to get out of them.

With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves. At a semiannual housing forecast conference last week in Washington, D.C., economists reported that contract-cancellation rates for big builders were running around 40% -- about twice as high as last year's levels. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.

Some of the cancellations are by people who signed new-home contracts at one price months ago, haven't yet closed, and are now stunned to see the builder drastically cutting prices on identical properties. Some are by speculators caught short by other investments they can't unload. And some are by people trapped in a chain reaction: They can't sell their old home -- or the buyer has canceled the contract -- so they are being forced to cancel the deal on a new house they are buying somewhere else.

"There are a whole lot of people running from contracts," says Alexandria, Va., real-estate attorney Beau Brincefield. He is currently representing more than 50 buyers who are seeking to get out of contracts on single-family homes, townhouses and condos, compared with none a year ago.

Even though it may mean losing a deposit that could run tens of thousands of dollars -- deposits typically range from 1% to 5% of the purchase price -- many buyers are deciding that is less onerous than the alternative. With median new-home prices already 9.7% below last year's levels, according to the U.S. Commerce Department, bailing out now may be less painful than committing to an expensive, and possibly depreciating, investment.

It's a far cry from the home-flipping exuberance of the past few years, when rising home values fueled a buy-and-sell mentality among millions of homeowners, and trading up became a staple of reality TV and home-improvement shows.

New-home builders are taking a big hit from record numbers of contract cancellations, or "kickouts." Fort Worth, Texas-based D.R. Horton Inc., the nation's biggest developer, says its cancellation rate is currently 40%, compared with 29% a year ago. Meritage Homes Corp., in Scottsdale, Ariz., is reporting a 37% kickout rate, compared with 21% a year ago. And Standard Pacific Corp. says that 50% of its contracts fell through in the third quarter of this year, compared with 18% for the same period last year. The Irvine, Calif.-based developer built 11,400 homes across the country last year. Among its current projects: Glenmeadow, a gated community in Simi Valley, Calif., where three- and four-bedroom homes range from $1.1 million to $1.3 million.

Caught Between Two Mortgages

Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2% range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.

Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22% of his sales have fallen apart before closing this year because the buyers backed out, up from 10% last year. With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly, Mr. Shallis says. To reduce the chances of cancellation, he is advising his clients to close their deals as quickly as possible after the offer is accepted, and to put fewer contingencies in the contract. "The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change."

Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer after his father-in-law's illness scotched the planned move. "My exit strategy was if they didn't move into it, we could sell it or rent it," Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. At the same time, higher short-term interest rates made it unlikely that he would be able to cover his mortgage payments and other costs if he found a renter. Instead, Mr. Shallis walked away from the contract and lost his $30,000 deposit.

A sinking home appraisal quashed the deal for retirees Denis and Michael Budge. The couple put their two-bedroom house in Carson City, Nev., on the market a little more than a year ago at $495,000, so they could move to another home they had already bought in Waldport, Ore. After some nail-biting months with few showings and no offers, they finally landed a buyer, who signed a contract in June for $425,000.

Rising Interest Rates

But during the escrow period, as prices in their area continued to slide, the appraisal came in -- at $395,000. The Budges were still willing to sell, even at that greatly reduced price, but the buyer backed out the day before the closing. (Through his agent, he declined to comment.) The Budges pocketed the $1,000 deposit, of course, but now they are stuck with two mortgages -- a hardship on their fixed incomes. "We thought we were going to relax and enjoy our retirement," says Ms. Budge. "Not any more."

Kickouts were high nationwide in the late '80s, and in California and New England in the early '90s, spurred by massive job losses. But until now there's never been a period where cancellations have spiked in the absence of a recession, according to Amy Crews Cutts, deputy chief economist at Freddie Mac. Ms. Cutts says the current jitters are largely a result of investors fleeing the housing market in the last few months, which "slammed [it] into reverse," and consumers' fears that the bubble had burst. Rising interest rates earlier this year also gave buyers who hadn't yet closed on their homes cold feet. The result: a huge backlog of unsold homes, which could further depress prices.

But mortgage rates have fallen recently, and if they stay below 6.5%, Ms. Cutts expects that buyers will regain their confidence by late spring, causing cancellations to ease up. Vienna, Va., housing economist Thomas Lawler agrees, but says builders must continue to cut their production and sell off their inventory so supply and demand can get back in balance. "Builders need to take a bullet," he says.

Buyer's remorse does have legal consequences, but the laws vary from state to state and depend on how the purchase contract was written. Usually, a buyer who defaults will have to give up the "good faith" or "earnest money" deposit that was made when the contract was accepted. But typically there is also some wiggle room written into contracts that allows buyers to cancel without penalty -- for instance, if they can't get financing, if the home inspection uncovers defects that the seller won't correct, or if the seller doesn't make certain disclosures. Just changing your mind, however, isn't a valid excuse to cancel. A court could find that a buyer who got cold feet is in breach of contract and liable for the seller's expenses, plus damages -- or could even force the sale.

Of course, it is better not to wind up in court. To keep deals from falling apart, builders are offering everything from free vacations and cars to help with closing costs and mortgage-rate buy-downs -- and they are cutting prices, too. "They're hungry," says Gopal Ahluwalia, director of research at the National Association of Home Builders, the organization that sponsored last week's forecast conference.

Upgrades Required

Most of these incentives are dangled to attract new customers. But as the market has cooled and kickout rates have risen, nervous builders have also been quietly sweetening the pot for buyers they have already snagged but whose contracts haven't yet closed -- just to keep them from bailing out of the deal. Some are even offering to drop the selling price after contracts have been signed.

Two years ago, Rosemary and Paul Owen, both federal employees, signed a $350,000 contract on a three-bedroom condo in Cape Canaveral, Fla., that was yet to be built. Since they knew it would take a long time for the building to be completed -- and the housing market was rapidly rising -- they took their time getting their old house in West Melbourne, Fla., ready for sale. By the time they were ready to sell their three-bedroom home this January, buyers weren't biting. Though they lowered their asking price to $359,000 from $439,000, only 18 people looked at their home over a 10-month period, and no one made an offer.

So they went to the builder in Cape Canaveral to get out of the deal and to get back the $22,000 they had paid for a deposit and upgrades. He wouldn't allow that, but he did offer to lower the price of the condo by $21,000 to $329,000 -- the amount he was asking new buyers to pay for a unit that was identical to the one the Owens had purchased two years ago. He also extended the deadline for closing until the end of November. The Owens haven't decided whether they will walk away from their deposit if they can't sell their old home by then. "We don't need two places," says Ms. Owen.

Meanwhile, builders' willingness to lard up their incentives is putting added pressure on sellers of existing homes to do the same. Many are finding it necessary to add thousands of dollars in upgrades to compete with what builders are giving away. Jim Parker, an exclusive buyer's agent in Atlanta, says that in the last quarter, three out of the five buyers he's been working with have bailed out of a contract, while no one canceled during the same period a year ago. "Before, if something was not perfect, they'd buy it anyway. Now they won't," Mr. Parker says. Buyers are also demanding more upgrades. "They're asking for everything, right down to the flat-screen television," he says. "They're comparing houses to a brand-new house, and they expect the house to be updated with new paint and carpeting."

Since most people who are buying are also selling -- seven out of 10 households already own homes -- some are finding themselves of two minds when it comes to kickouts. Glenn Nudell, a shipping executive, recently got $115,000 in concessions, including help with closing costs and fix-up money, when he bought a 12-year-old five-bedroom home in Skillman, N.J., for almost $1.1 million. If the seller hadn't agreed, he says, "I'd have backed away." But then he had to sell his eight-year-old, four-bedroom home in Princeton, N.J. He made sure it was as polished as a builder's model, with new wood floors and carpeting, new cabinets and even a newly finished basement -- but he couldn't sell it until he had knocked $70,000 off of his original $630,000 asking price. Is he concerned that the buyer of his house might back away from the deal before it closes next month? "Of course," he says.

 

 

 

 

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