October really was Fall according to Case-Shiller

The news yesterday regarding the Case-Shiller home index was bleak - but expected. The news was bad - an 18% drop year-over-year average in the 20 index cities. Here is a sad little excerpt from the NY Times article -

Prices in Miami fell by 29 percent. There, homeowners who tried to wait out the market are paying a price, said Madeline Romanello, a real estate agent with Douglas Elliman. Sellers who turned down offers of $700,000 for a house they had listed for $900,000 are now scrambling to sell for $550,000, she said.

This article from The Record we see that not everyone is doing badly - House prices drop nationwide, Bergen County stable. Lets take a look -

October home prices in the New York area fell 7.5 percent since last year, and 0.9 percent monthly since August. according to Standard & Poor's Case-Shiller home price index, released today.

The index reported record drops in national home prices this October over a year ago. Home prices in 20 U.S. cities fell 18 percent, the fastest annual drop recorded by the index. In a composite 10-city gauge, prices fell 19 percent, also a record drop.

And in 14 of 20 metro areas, home prices have fallen more than 10 percent compared to October 2007 , returning to March 2004 levels, said David M. Blitzer, Chairman of the S&P's Index Committee.

But in Bergen County, there are signs of hope, says Bill Gilsenan, director of RealSource Association of Realtors in Waldwick, which serves 3,500 Realtors.

According to the New Jersey Multiple Listing Service, county-wide median home prices stayed stable in September and October at around $420,000 and dropped only 6.25 percent over the last 12 months, compared to Case-Shiller's higher 7.5 percent for the New York area.

In other words bad but as not as bad as the others. The dead-tree edition of the Record comes with a handy guide of price dropping comparisons for change in prices of single family homes from Oct. 2007 to Oct. 2008:

• Boston: -6%
• NY Metro: -7.5%
• Las Vegas: -31.7%
• Los Angeles: -27.9%
• Miami: -29%
• Phoenix: -32.7%
• San Diego: -26.7%
• San Francisco: -31%
• Washington: -18.7%

People will be chasing down the market for some time. And those falls from their highs are pretty scary - especially for those that bought at peak. All that paper wealth is gone.

Hopefully we will see the bottom in the upcoming year. Hopefully.

Option ARM Intervention in Ohio

We are not fans of the Option ARMs or Pick-A-Payment mortgages. Not even mention the tidal wave of foreclosures coming as they reset, it is a loan that most people can not afford nor understand. We know that many people can not afford the full payments (see here). We also wonder how many fully understand the financial consequences they are when when they picked this loan. And from this article in the Columbus Dispatch titled Mortgage plan could keep 8000 in homes - we are not the only ones. Lets take a look -

Countrywide was accused of misrepresenting "the true nature of escalating payment obligations inherent in (adjustable-rate mortgages), the diminished home equity resulting from its Payment Option ARMs, and its borrowers' financial ability to afford their loans and/or refinance their mortgages."

About 400,000 of the company's 9 million mortgages fit into these categories, Countrywide spokeswoman Jumana Bauwens said.

In some payment-option mortgages, Bauwens said, borrowers paid only the interest on their loan. Others paid even less than that, which meant their principal increased every month.

"These borrowers are eligible for the opportunity to write down the principal to 95 percent of the current market value," she said.

...
"There are two groups," [Columbus bankruptcy lawyer Scott Needleman] said, "the very intelligent who knew what they were getting into and thought they'd be selling their house for a profit in five years -- and the other half who had no idea what they were getting into, which is fraud through and through by Countrywide."

...
"Loans will be modified based on what people can afford," Bauwens said, adding that the mortgage will be no more than 34 percent of a homeowner's income.

While we agree with Mr. Needleman that there are two groups getting the Option ARMs - we do not think they are split evenly in half. We think a just a very small percentage really understood the full consequences of the loan.


Ohio is also going to make significant write-downs. Changing many from probably over 50% of income to only 34%. Are these going to be adjusted of current income figures? How will they take the newly unemployed into account?

We believe the Ohio program is only for Countrywide customers - so those unlucky Wachovia customers may still owe 125% of the original purchase value while their Countrywide neighbor gets a huge reduction. That is going to go over well.

No More HELOC for College

It is almost universally agreed that not all debt is bad. Debt for educational purposes - like college - will almost always pay off in the end. Most parents want to send their children to the best college they can - which often means unaffordable tuition. HELOCs were often used to fill the gap between what a family could otherwise afford.

Now with HELOCs being shutoff - the next generation can get shut out of college or at least downgraded. Four year privates will go to public. Public univerisity will go to the local community college. Colleges will eventually feel impact - and perhaps stop raising their tuitions at double digit levels. But that will not help people in the middle of their studies. Which brings us to an article from the Chicago Sun Times titled Frozen home loan hurts family. Lets take a look -

[T]he home equity line of credit [Jim and Cindy Ranallo] were relying on to get both boys through school was unexpectedly frozen by JPMorgan Chase weeks before their elder son's recent tuition payment was due.

On Sept. 13, the account's balance went from $44,004 to $0.00.

They had never been late on a payment for either mortgage, and their shock quickly turned to panic. After learning that Chase received $25 billion in federal bailout funds, and after getting no response from a host of elected officials they contacted, they're angry.

...
Chase froze 200,000 home equity lines this year, a bank spokesman said. Bank of America, Countrywide Financial and other banks large and small have taken similar measures, anxious in a depressed housing market that they may not recoup money they lent.

...
"The reality is that homes are unfortunately not worth what they had been a year or two or three ago," said Tom Kelly, spokesman for JPMorgan Chase. "We're trying to protect both the borrower and the bank from borrowing more than the house was worth."

Translation for what Chase is really saying - we would rather lose you as a customer then own your property. During the boom years lenders readily gave over 100% financing and/or equity access. Now most places are capped at 80% - and some of the super bubble areas with big declines require even more equity.

But do not let the lenders fool you - the cost benefit analysis of shutting off a HELOC is worth it. Either the customer spends their own money and hires and an appraisers and/or a lawyer they have almost no chance of getting access to their equity. The loss of the customer is much less than the loss of foreclosing a property.


Although the lender has been infused with taxpayers dollars, taxpayers will see little benefits. The 7 and 8 figure paychecks of Chase upper management are too important. Upper management probably needs hefty pay and retention bonuses so they do not leave for Lehman Brothers , Bear Sterns , Indymac , a magical company that will pay significantly more than they are making now. These are the smartest people in the country, not the ones who helped cause the problems.


Perhaps the Ranallo's can take comfort in knowing that by losing their HELOC they are helping those who are more fortunate than they are.

Credit Cards and HELOCs - No Money Left

During the housing bubble people relied on credit to pay for everything. Why pay in cash when credit was better. Credit seemed to be never ending and with low rates and easy access one could live any lifestyle they wanted. When you used up the excess credit - just roll it up into a HELOC or ReFi and voila you have more available credit.

That was the life. But now it seems just the opposite is happening. With credit once readily available, now it seems to be drying up at every turn. And the fees, the FEES! Jumping so high on little warning that the fees alone are pushing people into trouble. This brings us to an article from the Asbury Park Press titled Changing credit-card terms are squeezing consumers. Lets take a look -

Aggressive rate increases on credit cards are threatening to push struggling consumers into financial ruin, accelerating home foreclosures and the nation's descent into recession.

The growing problem is reflected in cases such as that of Dennis Spaulding, of Corona, Calif. He bought two last-minute plane tickets for his father's funeral in 2006, a purchase that increased the amount of credit he was using and made him appear riskier to banks. The result: Banks raised the interest rates on four of his credit cards — to 24 percent and higher — doubling his monthly payments to about $2,000.

...
Across the nation, a growing number of consumers and financial experts are complaining that sudden credit-card limit reductions and sharp interest rate increases are triggering a domino effect that makes it harder for consumers to juggle bills, stay in homes and avoid going broke. No official data are available on how many people are being pushed into financial distress by credit cards rather than mortgages. But credit counselors, bankruptcy lawyers and legislators say banks increasingly are pummeling consumers for making the smallest payment error — or making no error at all.

The shift comes as regulators and legislators have spent the last year pointing to toxic mortgages and overextended home buyers as the culprits behind the financial crisis. Credit cards, by encouraging a society of spenders rather than savers, have played a significant role in loading up consumers with unaffordable debt whose rates and terms can change at any time.

...
USA TODAY, in previous articles in its "Credit Trap" series, has reported that during the housing boom, banks sharply raised card limits, in part, because of a surge in home equity, then guided borrowers to use mortgages to pay off card balances. The series also found that banks' practice of packaging and selling credit-card debt to Wall Street has given them a powerful incentive to raise card rates and fees.

Funny how the ones getting the help from the little guys (read the bailout) are not doing anything to return the favor. In fact, they are raising the rates and cutting access. But don't worry in 2010 - if nothing changes - the credit card industry will be facing some new regulations. Until then it is more of the same - socialize the loss and privatize the profit.

Foreclosure Scams

As foreclosures rise so will foreclosure scams. Some things to note that the debt consolidator is scamming you - you are asked to pay a significant fee for the services, you are asked to transfer the title over, they will resolve all your problems with little effort on your part. If any of those three are being offered - watch out!

The foreclosure scammers are there not there to help you - they just want to help themselves to your equity. Once what little you had left is gone - you will be too. This brings us to a video from CBS News that was with an article titled For Desperate Homeowners, Scams Abound. Lets watch -





Here are some snippets from the accompanying article -

The company's agreement promises that clients have "sufficient equity in your home" for "paying off debt liability," "repairing your current credit," and most importantly that they'll "remain in your home without further concerns or worries."

It's a classic foreclosure rescue scam, says attorney Debra Zimmerman.

"There should be a huge red flag for anybody who offers to do this for money, because there is no reason to pay for help," said Zimmerman, of Bet Tzedek Legal Services. "Loan modifications can be done for free."

In the typical scam, the homeowner transfers title to a third party who promises to secure a lower interest rate on the mortgage. But what often happens is the third party cashes out the home's equity, leaving the homeowner as a renter.

"This is the American dream, and they're losing it. And somebody is coming and they're going to rescue them," Zimmerman said. "[The scam] is very, very appealing."

Of course people want to do anything to save their homes. And with all the stress when faced with foreclosure it may be harder to notice the red flags of a scammer. Hopefully by Alexendria Craig sharing her story (from the video) there will be fewer people faced with the issues in the future. Hopefully.

Borrowing in Boonton

The illusion of wealth became more than an illusion during the bubble. Every year it seemed one's property increased by 10%. This increase in property value was easily accessible through a HELOC that one could use to keep up with the Joneses - or in some cases pass them. The middle class was suddenly purchasing the same items as the rich and famous. Everyone could afford a BMW, Tiffany jewelry, and a coach bag over their shoulder to pick up groceries at Shoprite. Things did not make any sense - but it seemed they did not have to.

All one needed to was to refi and become rich again. Now those who did have no equity left. The portion that was not spent has disappeared with the falling property values. The lucky ones are not underwater, the unlucky ones have nothing left to show. Sometimes it is hard to tell which is which. In today's example from Boonton, the financial future of the property owner will probably depend on whether they were in HELOC heaven (or at least just a bit) or just took out the HELOC for a safety net. If they indulged they will be bringing a check to closing - if they abstained (and how many really did???) they will walk away with a little more than their original investment. Well, lets take a look -

Here is the property -

The front of the house.

The living room with a stone fireplace.

The outdated kitchen.

Here is the property info -

Status: Active County: Morris Year Built: 1938 5 total bedroom(s) 3 total bath(s) 3 total full bath(s) 9 total rooms Style: Tudor Master bedroom Living room Dining room Family room Kitchen Basement

Laundry room Bathroom(s) on main floor Bedroom(s) on main floor Master bedroom is 22x21,Includes: Full Bath Living room is 21x10 Dining room is 12x11,Formal Dining Room Family room is 23x19 Kitchen is 11x07 Basement is Unfinished Hardwood floors Fireplace(s) Fireplace features: Family Room, Insert Parking space(s): 14 2 car garage Parking features: Built-In Garage, On Site

Heating features: 4 Units, Baseboard - Hotwater, Multi-Zone,Gas Water Heater,Gas-Natural Central air conditioning Cooling features: 2 Units, Ceiling Fan Inclusions: Home Warranty Exterior construction: Composition Shingle Roofing: Asphalt Shingle Community tennis court(s) Pets allowed Waterfront property Lot features: Lake Front Approximately 0.27 acre(s)

Here are the financials -

• The property was purchased in June 2003 for $570,000.

• The first mortgage originated with the home purchase in June 2003 for $456,000 with Countrywide Financial.

• A second mortgage was signed the same day for $57,000 with Countrywide Financial.

• A HELOC was opened in August 2004 for $75,000 with Provident Bank.

• The property is currently listed with a realtor for $619,000.

The first things we can tell is that the owner put a 10% downpayment - which was $57,000. That was a huge downpayment during the bubble and still quite respectable.

Now the big question is how much of the HELOC was utilized. If the sellers were in HELOC heaven (or just visited entirely the one time) they will stand to lose $6,140 if the house sells for full asking price and the realtor receives the standard commission. If the HELOC was only opened as an emergency (not the vacation, new car, new clothes, coach purse type of emergencies that were common during the bubble) the homeowners will walk away with $68,860. That is just $11,860 more than the original downpayment. Not great but at least not a loss.

So the economic future the homeowner now depends on how much of that HELOC was touched. And boy were HELOCs tempting during the bubble - how else could we all suddenly feel rich.

Losing It All

Who knew there was a push to grab all the equity out of a property and put it into the stock market??? And this push was heavily onto to the senior population??? Now whatever equity was left has disappeared and the stocks have lost significant value. For a population that needs their reserves the most do not have it anymore. We wonder where the push was taking place. When we asked a few of our older, homeowning friends if they had heard of this investing ideology we received a negative reply. However this article from the Washington Post titled When and How To Pay Off Mortgages makes it sound like this was a common situation people found themselves in. Lets take a look -

The financial crisis has torpedoed the retirement planning of many seniors.

Those foolish enough to have followed the advice of investment advisers who preached that homeowners should convert all their home equity into investments now find that their home equity is negative because of declining home prices. At the same time, the value of common stock they purchased by mortgaging their houses to the hilt is probably way down because of the sharp decline in stock prices.

This seems pretty questionable advice - maybe some really had an objective rather than making commission off of the investment. But we assume many just saw it as a means to gain commissions from the home equity line and then another commission for the stock transactions. Hopefully there will be some investigations into these activities.

Lets take a look at some of the guidelines regarding future investments that were dispensed -

· The core principle is that repaying a mortgage is an investment: The yield on mortgage repayment is the mortgage interest rate. Repaying a 6 percent mortgage yields 6 percent, the same return as acquiring a 6 percent bond. Note: Bonds and mortgages have different interest compounding periods, which affects their "effective return," but not by enough to worry about.

· Before-tax and after-tax returns: In comparing the return on mortgage repayment with the return on alternative investments that are taxable, it doesn't matter whether the comparison is made before-tax or after-tax. If you are comparing repayment of a 6 percent mortgage with acquisition of a 5 percent bond, for example, the before-tax comparison is 6 percent vs. 5 percent. The after-tax comparison, assuming the borrower is in the 40 percent tax bracket, is 3.6 percent vs. 3 percent. If mortgage repayment earns the higher return before-tax, it also earns the higher return after-tax. If income on the alternative investment is not taxable, however, returns should be compared after-tax.

· The investment decision: In general, borrowers should repay their mortgage when their mortgage rate is higher than the return on alternative investments of comparable risk. Because mortgage repayment carries no risk, the safest application of this rule would limit alternative investments to government securities, insured deposits and other federally guaranteed assets. The returns available on such assets would usually be below the mortgage rate.

· Allocating excess cash flows: Borrowers are faced with two types of mortgage repayment decisions. In one, they invest excess cash each month over an indefinite future period. They should allocate excess cash flow to mortgage repayment if the mortgage rate is higher than the return, adjusted for risk that can be earned that month on newly acquired financial assets. The owner confronts a new investment decision every month.

· Liquidating assets to repay the mortgage: Many seniors are faced with a different type of decision -- whether to liquidate financial assets to repay the entire mortgage loan balance. In making a one-time investment decision that is irrevocable, the borrower can't adjust to future changes in the investment rate. He has to look ahead and anticipate what these changes might be and how long he will be around.

While the article is written to seniors, the advice can be applicable to people of all ages. Comparing the yields - investing in a 3% CD versus paying off a 6% mortgage. Comparing the before and after tax rates to know which investment is better. Evaluating the risks of various investments. Lots of good advice for anyone who still has any equity or other funds left.

ReFi Fever

With rates falling many long-time homeowners are looking to reduce rates. These reductions can easily shave off well over a hundred dollars per month for most moderately valued homes here in New Jersey. This may mean money that can be saved or used elsewhere - very important in times like these. Naturally, the brokers who earn commission for ReFi's are also pushing them strong. (Better than reverse mortgages we suppose.)

ReFi's can save people money, but first one has to qualify. They still need to have approximately 20% equity in their property. They need to have a good credit score. They need to have an ability to repay. Things that were not necessary during the bubble when so many of us bought houses. This of course excludes an ever-growing segment of the population. But for those you may qualify, an article titled Refinancing home leans an option, experts say from the Daily Record has some advice. Lets take a look -

Homeowners with good credit may be well-positioned to refinance their mortgage with interest rates at historic lows, according to Morris-area financial experts.

Despite the economic crisis and tough lending market, banks are willing to refinance mortgages for homeowners with good credit and homes that have not depreciated significantly in value.

The first steps are basic ones, financial planners said. Check your credit score, and check your home's value. Since many neighborhoods have seen home values drop by 15 to 20 percent, it's important to find out how much your home is worth. In cases where home values are lower than a homeowner's debt, banks won't consider refinancing, experts said.

Next, be honest about your credit, your income and your debt, said Dave Muti, a registered mortgage adviser and senior mortgage planner with Millennium Home Mortgage LLC in Parsippany. These days, a good credit score is considered to be in the 700s. If you've had some late payments in recent months, get payments back on track and wait a few months, experts agreed.

Gone are the "no-document" mortgages where banks gave out loans without checking a borrower's credit history, income or job status, Muti said. No one is giving out money without full background checks now, he said. So be prepared to fill out a lot of paperwork. And don't bother to waste everyone's time if you aren't employed and are heavily in debt, he said.

So to sum up - if you have been untouched by the recession so far you may be in a better position. But if you lost your job, your equity, your credit standing, and feel the recession in your everyday life you will not qualify. Good for some but not good enough for enough people.

Holiday Cheer

During this season it's easy to get caught up in the shopping frenzy. Before the bubble burst it was easy overspend. Money was basically easy come, easy go. All one needed to do was request for credit and voila - they had more money to spend.

We know this holiday season is different. Whether we are spending less by choice or by force - it really is making a difference this year. That brings us to this article from CBS News titled Save, Don't Spend, During The Holidays. Lets take a look -

[Not holiday shopping] is, of course, exactly the opposite of what Washington officialdom wants you to do. I don't know exactly how this line of spendthrift thinking started, but my hunch is that its recent antecedents came from President Bush's post-9/11 line that Americans should "take their kids on vacations" and "ought to go to ball games." Bush's more recent suggestion was "I encourage you all to go shopping more."

...
The reality is that Americans have been on an unprecedented and unsustainable consumption binge for at least a decade. They paid bills with borrowed money. Savings was out, while leased BMWs, large-screen TVs charged to credit cards, and zero-down option ARMs were in.

Now, as the economy is trying to heal itself and return to normal, consumer spending has dropped off. This should be no surprise: When unemployment is rising, people save more because they're worried about losing their jobs. This is prudent and sensible; what's irresponsible is politicians urging visits to the mall when saving may be the wiser option.

A catalyst is that many consumers have pushed their credit cards to the limit and extracted as much as possible from their homes during the real estate bubble. Now that credit card issuers are becoming more restrictive, and the home equity loan spigot is being turned off, more debt is no longer as attractive (or as possible) an option.

...
Americans are planning to cut their Christmas spending by 50 percent this year, from $859 last year to $431 this year, according to American Research group, a market research firm. That indicates that, after many years of borrowing, people are starting to live within their means. It also shows they have more common sense than their elected representatives in Washington.

While it is going to hurt at first in the long run a new and sustainable economic paradigm is vital. Spending well beyond ones means is only asking for trouble. Perhaps the mindset will trickle up to Washington.

(If we are unable to post tomorrow - have a wonderful holiday!)

Even more on reverse mortgages

When we post about reverse mortgages one thing we often hear is how safe they are. While some of them are insured by the Federal Housing Administration (FHA) - these would be the Home Equity Conversion Mortgage (HECM). There are many that are not. All things not being created equal - and private reverse mortgages may not be.

In an article titled How to Fund Retirement Living from the Wall Street Journal, the different reverse mortgages are discussed. Side note - this is a good article for those of us getting up there in age or who have loved ones that are. Now lets take a look -

The amount you can borrow will depend on your age, how much your home is worth and current interest rates. For a HECM the limit is $417,000, but proprietary products may allow you to borrow more.

Payments can be taken as a lump sum, in regular installments or as needed, or through a combination of these options. The accrued principal and interest comes due when the last borrower dies, sells the home or moves out permanently.

A big drawback of a reverse mortgage is the high fees, which closely mirror the closing costs on a regular mortgage.

For this reason, says Sue Hunt, a housing counseling programs manager for Consumer Credit Counseling Service of Greater Atlanta, reverse mortgages tend to make the most sense for people who want to spend the rest of their lives in their homes and whose total income, including the loan, will be sufficient to cover all their future expenses, she says.

With any type of loan, it's important to ensure you understand the fees, interest rates and repayment terms.

For instance, an important safety feature of an HECM is that your payments from the lender are guaranteed by the federal government. Plus, if your home is sold for an amount lower than the value of the loan, neither you nor your heirs will be liable for the balance, which isn't always the case with proprietary products.

While these may be good for certain segment of the population it will probably not be the best choice for many.

We often wonder what the status will be for people with reverse mortgages another 30-40 years down the road. Since they can be acquired at 62 there will be people who have no equity left in the property after they have significantly aged. Will there be a push for them to vacate the property? Probably in private reverse mortgages. But what will happen to the HECM in another 30 years?

We also notice a big push for reverse mortgages of late - perhaps it is seen as the only growth area seen in the mortgage industry.

Looking at Reverse Mortgages

One of our favorite topics outside of HELOCs is fast becoming Reverse Mortgages. A still vital sector of the mortgage industry that sometimes seems almost to good to be true. Just like those Option ARMs were a few years ago. Of course the government is telling people these are safe vehicles to use your equity - but if we recall they also told us that we were not in a recession and the lending industry was strong. We all are seeing how that turned out.

So today we see two new warning on Reverse Mortgages in the papers. The first article we will look at is from the Orlando Sentinel titled Beware of bogus debt relief. Lets take a look -

Also on the state's watch list is the reverse-mortgage business -- a fast-growing part of the troubled mortgage industry.

Available only to homeowners at least 62 years old, reverse mortgages have been embraced by many seniors as well as the Federal Housing Administration. They enable seniors to borrow from their home equity and receive a steady monthly income until they leave the home or pass away. Then the homeowner's heirs sell the home to repay the loan balance.

Though it has generated few complaints to date, regulators are concerned about abuse in the sale of the complicated financial products. Two companies already have been investigated for using potentially misleading marketing promotions that made it sound as if they were acting as agents of the government.

Overall, seniors need to know what they're getting into before they buy a reverse mortgage, regulators said. They need to shop around and make sure they understand the exact terms, benefits and costs, said Meg Burns, director of single-family mortgage products for the Department of Housing and Urban Development.

"The reverse-mortgage business is a safe, very well-regulated business, and it offers seniors some incredibly flexible cash-flow options," she said. "But what we're concerned about is when someone selling a reverse mortgage starts trying to take control and tell seniors what to do with their money."

Still, some seniors aren't happy about their reverse-mortgage deals. Lois Radley, 67, an Orlando resident who took out a reverse mortgage in early 2008, said that she had to pay $12,000 upfront, including fees, taxes and closing costs. And her monthly payout is half of what she expected.

"I was never told they'd be taking that much out of my monthly income," Radley said. "Now I'm stuck with it, and I still don't have enough money to pay my bills. . . . I just want other seniors to know that this is what could happen if they aren't careful."

That seems to be the number one complaint - exorbitant closing fees. The mortgage lenders put it a strong push, and as with the industry as a whole they get the big payout up front. Although many people think of leaving their homes to their heirs - reverse mortgages also makes this an unrealistic dream. Unfortunately Lois Radley story will be echoed by others across the nation in the next few years.

Our next warning comes from SB Wire and is titled The Truth About Reverse Mortgage Refinancing Revealed By Florida Reverse Mortgage Expert. While some parts are flat out falsehoods, the article does have a few bits of useful information. 9Warning - lots of snark below. Lets take a look -

Robbins offers these tips when considering a Reverse Mortgage:

* You should get a significantly lower rate for a Reverse Mortgage to make sense. Don't rush to refinance unless it's truly worth your while. If you're working with a mortgage broker rather than going it alone, you can be assured that they're bringing you the best offers out there. If you're going it alone, you'll have to do the legwork for yourself.

Of course mortgage brokers always look out for the best interest of the client. They never have and never would steer people into loans that give them the biggest commission. And Florida only has honest mortgage brokers (see here, here and here) so seniors have nothing to worry about.

* Consolidating unsecured debt with a refinance loan can be a dangerous idea. You may not be in financial trouble now, but if in a few years things change, instead of simply missing a credit card payment or two, you'll now be in danger of losing your home as well. With a Reverse Mortgage you can totally eliminate your debt for ever!

With a Reverse Mortgage you can totally eliminate your debt for ever! That is some promise. Buy and house and you will be rich beyond your wildest promises The author seems to make contradictory statements. First do not consolidate your unsecured debt but if you do you will be debt free forever!!!

* Your credit score does not count in a Reverse Mortgage, nor does your income. If you've had credit problems in the past like a bankruptcy, it might make sense to not wait to make application and secure your home for life. Most lenders make it hard for people with less than perfect credit to get the best deals. But, again, if you choose to let an expert like a Reverse mortgage broker get involved in the process, they can help you find the best Reverse Mortgage, that most seniors homeowners over the age of 62 didn’t even know existed - which can save you thousands over the long haul.

See you can pay off your debt with your mortgage. Even though directly above it is recommended not to use your property to pay off unsecured debt - if you follow that advice the mortgage broker will not get his commission. So forget that bad credit and get your reverse mortgage today! Be debt free forever by getting a reverse mortgage today. (/snark)

Seriously, Reverse Mortgages are still very new and will probably bring as many new problems to people. While they may be a short term solution we will have to wait and see how they hold up over the long term. We are also concerned about the long-term viability of people who use up all their equity and need to reside somewhere else as they age. The equity that may have provided them the funds to go into a nicer facility or living arrangement will no longer be there. The other options we have seen are much less desirable. All for a payout, like Lois Radley's that still does not cover present expenses...

Unlucky in Mount Olive

Home ownership is supposed to a happy times in ones life. Opening new doors and new possibilities. Sometimes home ownership can close and end more than it opens. That is the case of our unlucky homeowners in Mount Olive. Lets take a look -

Here is the property -

Front of the house

The living room with beautiful hardwood floors

Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Year Built: 2004 4 total bedroom(s) 3.5 total bath(s) 3 total full bath(s) 1 total half bath(s) 11 total rooms Approximately 4100 sq. ft. Style: Colonial Master bedroom Dining room	Basement Master bedroom is 22x18,Includes: Full Bath, Sitting Room, Walk-In Closet Living room is 13 Dining room is 17x13,Formal Dining Room Family room is 20x19 Kitchen is 20x19 Den is 16x20 Basement is Full, Unfinished Hardwood floors Fireplace(s) Fireplace features: Living Room 2 car garage	Attached parking Parking features: Garage Door Opener Heating features: 2 Units, Multi-Zone,Gas Water Heater,Electric Forced air heat Central air conditioning Cooling features: 2 Units, Ceiling Fan, Multi-Zone Cooling Exterior construction: Brick, Vinyl Siding Roofing: Asphalt Shingle Approximately 0.44 acre(s) Lot size

Here are the financials -

• The property was purchased for $675,332.32 in September 2004 directly from the builder.

• The original mortgage at time of purchase was for $440,000 using an ARM with K Hovnanian American Mortgage.
  

• A Lis Pendens was filed against the property in December 2006.

• After an apparent divorce one of the owners was deeded the property in July 2007.

• On the same day as the new deed a new mortgage was taken for $500,000 using a balloon payment with Nationstar Mortgage.

• A private mortgage with a 2-year term (which looks to be interest free) with an apparent family member was also taken in July 2007.

• The property is currently for sale with a realtor for $625,000.

Lets take a look at what we know. The owners put a hefty down payment of almost 35% - or $235,332. That is a very significant investment - bubble or not. Most likely this was someone moving up not a new buyer. Non-payment of loan happened early but things appeared to have been resolved and ownership resumed along a steady course.

Until the deed was changed along, apparently along with the home owners marital status during home ownership. The owner then went from a $440,000 mortgage to a $570,000 mortgage. Not easy during good times with two owners, much harder in bad times with one owner. Especially difficult when $70,000 must be paid back within two years.

Now the property is up for sale. If the property sells for full asking price and the realtor takes the standard commission the owner will net $587,500. With outstanding mortgages there will be a small cushion of approximately $17,500. But since the owner put a significant amount down on the original purchase they will have lost $87,832 during the four years of ownership.

Actually, this homeowner looks like a lot was lost during the home-ownership period - a marriage, their credit rating, along with the $87,832. Not a lucky house.

Justice in Jefferson

The housing bubble helped with scams. So much money was flying around so fast that sometimes it was hard to know what was legit and what was not. Somethings stand out as definitely not - like an $85,000 commission on a $245,000 home equity loan. One of the perpetrators of this crime, and a slew of others, was sentenced yesterday. Now we have one less mortgage scammer running free in Northern New Jersey. The Daily Record brings us the info in an article titled Woman gets 10-year term in $2.7M mortgage scam. Lets take a look -

A 50-year-old woman who aided her boyfriend in a $2.7 million mortgage scam so they could enjoy homes, luxury cars and boats was sentenced Friday to 10 years in state prison despite her claims of being influenced and abused by the ex-beau.

Morganville resident Crystal Velitschkow pleaded guilty in June to money laundering, with the understanding that the state Attorney General's Office was recommending a 10-year term behind bars. Defense lawyer Joseph Ferrante on Friday made a pitch for a seven-year term to Superior Court Judge Salem Vincent Ahto in Morristown, but the judge said he believed the decade stint was warranted.

"Her conduct and that of Mr. Pollatos has wreaked havoc on these people," the judge said of some 20 victims, many elderly Greek people, who Velitschkow and boyfriend Spiro Pollatos, 45, swindled from 2003 to December 2007. Some of the victims live in Morris County.

...
Pollatos, who has a prior conviction for theft by deception related to a mortgage fraud, was the mastermind who set up a company called Lenders Capital Mortgage Co. of Hackensack, which preyed upon unsophisticated investors.

So that is what happened. But what about the back story. Lets take a look at some of the scams -

Authorities said that Pollatos embarked on a slew of scams that allowed him to funnel more than $2.7 million through a Commerce Bank account in Velitschkow's name.

To get the money, he targeted victims in the Greek community and advertised his mortgage company in a Greek newspaper.

He offered to secure hefty loans for victims who could not otherwise get them, and then charged clients excessive loan commissions and fees.

In one case, Pollatos got an $85,000 commission on a $245,000 home equity loan. Another time, he kept $133,000 in check proceeds that he was supposed to use to pay down a first mortgage for the borrower.

He mortgaged homes well beyond their value, including one case in which he urged a borrower to secure $418,500 in loans on a Keansburg property that was worth only $215,000.

There were probably many more out there that did the same thing but just with lower numbers. Instead of pocketing $85,000 they may have just taken just an extra $5000-$10,000. The way that money was flying around during the bubble allowed for dishonest people to take funds, as well as normally honest people to take a little extra off the top. The floodgates to fraud were open during the bubble. Wonder how many more like this couple are out there.

Walking Away in NJ? Not as Likely

There are states that have non-recourse loans which makes it very easy to walk away from the property. New Jersey is not one. Therefore we will probably never experience the walking away phenomena the way some states are. The Washington Post has an article titled Walkaways high in 'non-recourse' states that explores the whys and the whats of walking away. Lets take a look -

Mortgage law experts say the incentive to walk away from a home loan is highest in states that have anti-deficiency statutes, which prohibit lenders from suing borrowers for additional funds after foreclosure.

"These anti-deficiency laws make a huge impact on foreclosure rates because they are basically 'get out of jail free' cards," said Todd Zywicki, a law professor at George Mason University and senior scholar with the Mercatus Center think tank who's writing a book on consumer bankruptcy and consumer credit.

This handful of non-recourse mortgage states includes the high-foreclosure states of California and Arizona, which not coincidentally also are leaders in the numbers of mortgage walkaways.

The full list: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah and Washington.

One thing to note - there are three super bubble states on the non-recourse list - Arizona, California and Florida.

Underwater News

While we may get snowed in today, but it is better than being underwater. Once a homeowner is underwater there are a new set of questions to ask "Should I stay or should I go?" As The Clash noted - "If I stay there will be trouble, and if I go there will be double." The song may not have been written about post-bubble issues, but it applies perfectly. Staying is trouble, walking away may be worse - or maybe the other way around depending on your financial situation.

This bring us to another article on the walking away phenomena that the housing bubble brought us. Along with NINJA loans and 100% financing we get walking away and jingle mail. This is explored in an article from the Associated Press titled Falling house prices spur jump in mortgage walking. Lets take a look -

Walking away from a mortgage has always been a homeowner's last resort — it flies in the face of the American dream. And experts say it should remain a worst-case scenario.

But with the deepening economic crisis fast adding to the 12 million mortgages already "underwater" — the term for when a home's debt exceeds its market value — it's an option more are likely to consider as home prices continue to fall.

Mortgage and financial experts hesitate to recommend a voluntary action that not only threatens to wreck your credit score for years but can result in authorities coming after other assets. But depending on state laws, they acknowledge it makes sense to at least look at it in certain situations.

"You have to make the best decision for yourself, business-wise, which could be walking away from the house," said Nicole Gelinas, a chartered financial analyst and senior fellow at the Manhattan Institute, a conservative think tank.

Mortgage walking surfaced as a phenomenon in the wake of plummeting housing prices.

The housing bubble is having many foreseen and unforeseen consequences. However, people will always do what is in their best interest. If it will take less time to repair your credit history than to pay down exorbitant debt then that will be the choice many will make. In state's with non-recourse loans and big property value declines this will probably become quite common as the unemployment rises.

Where is the bailout money going?

Two very interesting articles related to the bailout. Before we go into this remember one thing - financial mismanagement on Wall Street is OK, financial mismanagement everywhere else is a sign of failure. Wall Street speculators vital to the economy, mom and pop housing speculators
are the foils that did us all in. There are two articles today that pretty much spell these out. First we will look at an ABC News article titled Morgan Stanley Is One Bank That Cites a Loan From TARP Money. This article tries to take a peak at where the bailout money is really going. Lets take a look -

Goldman Sachs reported Tuesday that it paid $10.93 billion in compensation for the year, which includes salaries and bonuses, payroll taxes and benefits. That is down 46 percent from a year ago. Goldman Sachs received $10 billion from the Treasury.

"Bonuses across Goldman Sachs will be down significantly this year," a bank representative told ABC News. The spokesman refused to disclose the size of the bonus pool or how much of the compensation fund of $10.93 billion was planned for bonuses.

"We do not break down the components of compensation; however, most of that number was not bonuses," he said. Goldman Sachs added, "TARP money is not being paid to employee compensation. It's been and will continue to be used to facilitate client activity in the capital markets."

...
Fred Cannon, chief equity strategist with Keefe Bruyette and & Woods, an investment bank that specializes exclusively in financial services, said, "It is difficult to say what the TARP funds are directly used for. In terms of compensation, while TARP funds may not directly pay for compensation, the funds do provide additional overall cash to the companies."

...
Last week Congress was angered to learn that giant insurance company American Insurance Group, which received $150 billion in TARP cash to stay afloat, was paying more than $100 million in "retention bonuses" to 168 employees.

One of our favorite AIG responses is that other divisions are making money, we can not punish them all. Too bad that does not seem applicable to other industries. In an opinion piece from The Los Angeles Times titled UAW busting, southern style illustrates some of the big differences and preferential treatment the bailout is taking. Lets take a look -

They claimed that they couldn't support the bill without specifics about how wages would be "restructured." They didn't, however, require such specificity when it came to bailing out the financial sector. Their grandstanding, and the government's generally lackluster response to the auto crisis, highlight many of the problems that have caused our current economic mess: the lack of concern about manufacturing, the privileged way our government treats the financial sector, and political support given to companies that attempt to slash worker's wages.


When one compares how the auto industry and the financial sector are being treated by Congress, the double standard is staggering. In the financial sector, employee compensation makes up a huge percentage of costs. According to the New York state comptroller, it accounted for more than 60% of 2007 revenues for the seven largest financial firms in New York.


At Goldman Sachs, for example, employee compensation made up 71% of total operating expenses in 2007. In the auto industry, by contrast, autoworker compensation makes up less than 10% of the cost of manufacturing a car. Hundreds of billions were given to the financial-services industry with barely a question about compensation; the auto bailout, however, was sunk on this issue alone.

It is interesting trying to distinguish why some industries and companies are more vital than others. Why some pay-rates can be congressional fodder for weeks while other compensation packages do not even warrant a glance. It is interesting.

Mortgage Meltdown

How did we miss this? Found it over at Irvine. Well worth the watch -



Watch CBS Videos Online


Here is the description of the video "Scott Pelley reports on the mortgage crisis that's far from over, with a second wave of expected defaults on the way that could deepen the bottom of the U.S. recession."

How does the Fed's interest cut affect you?

Huge news yesterday that the federal reserve cut the interest rate to a record zero. Now the acromonym ZIRP - or zero interest rate policy will come into standard everyday language. It will be the new "staycation" if you will.

So this means that banks (lenders) will have to pay nothing on the money on the money they borrow from the government. Basically free money. So will trickle down work in this case? Other than HELOCs, it does not sound likely. Lets take a look at a few articles at what to expect -

From the Baltimore Sun, an article titled Most Consumers unlikely to see any big savings -

But for many other types of consumer credit, from auto loans to credit cards, the rate cut might not translate to significant monthly savings. Many rates were low already. And at a time when lenders are more averse to risk and tightening credit standards, they probably won't pass a rate cut on to customers.

"It's largely window dressing," said Greg McBride, senior financial analyst with Bankrate.com.

And the article describe what affects this cut will have -

Adjustable-rate mortgages, home equity lines: The Fed move indirectly influences ARMs, and homeowners with resetting mortgages could see their payments stay the same or go down; home equity lines probably will fall if you're lucky enough to have one.

Credit cards: Customers with sterling credit could see a rate reduction; everyone else, not so much.

Auto loans: Interest rates have not budged much in the past year; car buyers probably won't get much of a break.

Savings accounts, CDs: Rates will continue to slide, but banks need deposits, so you still might get better returns than elsewhere.

From the Sacramento Bee in an article titled Borrowers may get break, Savers' suffering to worsen -

You could be a winner if you have a home equity line of credit. But if you've socked away money in a savings account, you could be a loser.

Generally, though, it takes a while for the average person to see any effects at all. That's because even though cuts in the federal funds rate eventually tug most consumer interest rates downward, they're not directly linked.

And some experts believe these newest tugs may be limited, as lenders struggle with bad loans.

"What's driving consumer loan rates right now is loan loss rates. They're at all-time highs right now, and that constrains how much lenders can reduce their rate," said Henry Wirz, president and chief executive officer of Sacramento-based SAFE Credit Union.

...

"The fed funds rate being lowered has no direct bearing on mortgage rates," said Hawe. "But rates did drop today because of the inflationary numbers being very tame and housing starts being the lowest since 1959."

We will have to wait see if anything trickles down. But it is not likely.

Lost - $2 Trillion in Property Values

The $2 trillion lost in property values is just in 2008 alone. Forget the 2007 numbers. And we know there is still more pain to come. More disappearing equity. More underwaters. Just a few years ago, during the housing bubble prices only seemed to go one way - up. The descent down has been pretty fast. This brings us to a Yahoo News article titled Home values seen losing over $2 trillion during 2008. Lets take a look -

Homes in the United States have lost trillions of dollars in value during 2008, with nearly 11.7 million American households now owing more on their mortgage than their homes are worth, real estate website Zillow.com said on Monday.

U.S. homes are set to lose well over $2 trillion in value during 2008, according to an analysis of recent Zillow Real Estate Market Reports.

Home values declined 8.4 percent year-over-year during the first three quarters of this year, compared to the same period in 2007, the reports showed.

U.S. home values lost $1.9 trillion from the first of the year through the end of the third quarter, and will probably fall further in the fourth quarter. One in seven of all homeowners, or 14.3 percent, were "underwater" by the end of the third quarter, the reports showed.

...
"In general, homeowners in most areas we cover are struggling with foreclosures pouring into the market, large amounts of negative equity and dropping home values. On the positive side, in the third quarter, some markets - particularly those hit hardest in the downturn - showed smaller year-over-year declines than in the prior quarter," [Dr. Stan Humphries, Zillow's vice president of data and analytics] said.

According to Zillow 1 in 7 homeowners is underwater. That is all homeowners. It is often reported that approximately 31% have no mortgage. However we would like to see more recent data on these numbers. With the great number of home equity loans and lines that were generated during the bubble, along with the strong push for reverse mortgages a new figure needs to reflect these changes.

The bubble attitude changed the view on mortgages - remember taking out equity was no longer flouted as a "second mortgage." Rather the view was that one was using their money own money, now. The post-bubble and economic decline may increase reverse mortgages - something we do not look forward too. However, given the choices people are facing between eating, health care expenses and outright home ownership - outright ownership will probably come in last.

Trillions lost in equity. Trillions lost from retirement accounts. Over $9 trillion lost as we watch the Dow decline. Is anyone adding all this up?

The Warren Report

Recently we posted about what seems to be the lack of a coherent plan on the bailout. The Congressional Oversight Panel (called COP for short) has a new website up www.COP.Senate.gov. The home page also has the following video from Elizabeth Warren with 10 questions the COP will be looking into regarding the bailout. Lets take a look -




All of them are very good questions. The full report with the 10 questions (plus many more sub-questions) are on the website.

Unfortunately we have not been able to read the entire report yet. And with our non-blog obligations today we will not have a chance too. Hopefully we can give our take soon. Though if any reader cares to share opinions we would love to see them.

And make sure to visit once a month for future reports. Any new videos - we will be sure to post.

The final report may easily be one that is read by future generations - some reading it in not believing that it could really have happened, other with shock and repulsion that things got so out of hand. Meanwhile we have to go through this man-made disaster watching our equity disappear, our 401Ks diminish, our homes foreclosed and our futures in disarray. Remember may you live in interesting times is a curse.

Renting from the Bank in Dover

One of the most interesting phenomenon of the housing bubble was when lenders decided to become landlords. This is called renting from the bank or in bubble terminology - loanowership or loanowner. The lenders basically own the property in cases where the prices went down - if prices went up the proceeds went to the "owner."

During the housing bubble people regularly rented from the bank - put no money down, and perhaps paid even less than standard monthly carrying costs (principal and interest). For some reason lenders really thought this was a great idea - one that would always remain profitable.

There is a great quote from Todd Sinai, an associate professor of real estate at the Wharton School of Business at the University of Pennsylvania found in the International Herald Tribune -

"There's a whole lot of people who would've been stuck as renters without these exotic loan products. Now it's like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren't any worse off than renting, and you got a chance to do extremely well. If it's heads I win, tails the bank loses, it's worth the gamble."

Putting zero percent down was worth the gamble. Adding an interest only ARM or an Option ARM makes the gamble even better. The puts nothing in but can win big. It seemed like lenders were giving money away no questions asked. Logic was lost on the greed of the transaction. Which brings us to today's example were we find a buyer that was lucky enough to find a lender that was willing to let them gamble with the banks money. Lets take a look at today's Dover property -

Here is the property -

The front of the house.

The cute kitchen.

And the nice living room with hardwood floors.

Here is the property info -

Property Features
Single Family Property Status: Active County: Morris Year Built: 1957 4 total bedroom(s) 2 total bath(s) 2 total full bath(s) 7 total rooms Style: CapeCod Master bedroom Kitchen Basement Bathroom(s) on main floor	Bedroom(s) on main floor Master bedroom is 19x15 Living room is 16x11 Kitchen is 13x11 Basement is Finished Hardwood floors Fireplace(s) Fireplace features: Living Room, Wood Stove-Freestanding 1 car garage Attached parking Heating features: 1 Unit, Baseboard - Cast Iron, Multi-Zone,Gas Water Heater,Gas-Natural Cooling features: House Exhaust Fan	Inclusions: Home Warranty Exterior construction: Vinyl Siding Roofing: Asphalt Shingle Pets allowed Approximate lot is 50X112 Corner lot Approximately 0.13 acre(s) Lot size is less than 1/2 acre Utilities present: Cable TV Available, Garbage Service Included,Public Sewer,Public Water,Gas-Natural

And here are the financials -

• The property was purchased in January 2006 for $370,800.

• The original mortgage at the time of purchase wash for $296,640 using the interest only ARM payment plan with First Magnus Financial.

• On the same day another mortgage was taken for $74,160 utilizing a balloon payment also with First Magnus Financial.

• The property is currently for sale with a realtor for $270,000.

• Incidentally, the house was previously purchased in December 2004 for $339,900.
  

First thing to notice is that this was a 0% down payment purchase. Second thing to notice is that the mortgage was an interest only ARM - so none of the principal has been paid down yet - so the loan is probably still for the original $370,800 purchase price.

Then we see that the property is selling through a realtor - so the real lender (whomever was the last one holding this loan) will be losing at least $117,000 on this property if it sell for full price and the realtor takes their standard fees. Yes, we are assuming this will be a short sale - all the evidence points in that direction. If the buyer had no funds to put down, and did not pay any principal, chances are very high that there is no way they will come to closing with a check.

On a side note, 2e have profiled another property that was 0% down and they were also financed with First Magnus Financial (see here). First Magnus has long closed up shop. Now lets get back to today's example.

With the 0% down the "owners" were renting from the bank. And between the balloon payment and interest only arm (we are surprised they did not get an Option ARM) they were being subsidized by the bank while renting from them. Pretty good deal they had - no money in as the price went down, but could have sold for a profit if only the bubble continued.

Our guess, the three years of the interest only is just about up, a new monthly payment is unaffordable and the owners are trying to get out before they lose the property. This is a smart "owner" - probably negotiated a short sale so their credit won't take a huge hit if they can get out before the rates reset. But in the current market this sale will be a real nail-biter - Will they sell the house first or eventually wind up in foreclosure?

Some stories don't make sense

There is an interesting letter today in the Wall Street Journal. Columnist June Fletcher answers a readers question, but the question is probably either made up, exaggerated or slightly delusional. The title of the article is Buy New or Remodel? Lets take a look -

Q. My husband and I are trying to decide if we should buy a $330,000 home in our neighborhood that, at 2,300 square feet, is twice the size of our current home (the monthly payment would be only about $50 more a month than our current payment), or renovate our old house using a home equity line of credit, then refinance at a lower rate and pay off the equity line.

The extra money we would need for the larger home's down payment would be around $25,000, and the renovation we'd like to do would cost the same. The renovation would up our square footage by 750 square feet and allow us to stay in our home for longer. We bought the home for $280,000 three years ago and have a private buyer who will give us what we paid for the home. Do you have any advice on whether buying new or renovating is wiser?

The second paragraph is very interesting. We are not sure why a house that is only $50,000 more would need an additional $25,000 down (unless the first property was with a 0% down loan). And finding a buyer willing to pay 2005 prices - that seems unbelievable. This may be one of those offers that never really materializes.

At least the answer is realistic - it advises to look at the closing and moving costs, the overall cost per square foot comparison, the ages of the properties, the overall economy. And the final statement is -

The bottom line: If you remodel your house instead of moving, you'll be able to get exactly what you want and will have total control over the final result. But given the costs, uncertainties and hassles of remodeling -- and the fact that you have a buyer in hand for your current home -- if I were you, I'd trade up.

It would be interesting to find out how everything turns out... if this a real situation.

Will there ever be a rebound?

As for property values - probably not. Prices will have to stay in line with incomes. All bubbles pop eventually and this is one that hopefully will never be inflated. There is a great (we mean really great!) article in the USA Today titled Why home values may take decades to recover that illustrates how out of hand the bubble really was. Lets take a look (but make sure to read the entire thing!) -

As painful as the decline has been, history suggests home values still may have a long way to drop and may take decades to return to the heights of 2½ years ago.

"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."

The boom in home prices — fueled by heavily leveraged loans built on low or even no down payments — made it easy to forget that housing values had been remarkably stable for a half-century after World War II, rising at roughly the same pace as income and inflation. Prices soared in most of the country — especially in Arizona, California, Florida and Nevada and metro areas of Washington, D.C., and New York — during a brief period of easy lending, especially from 2002 to 2006. That era's over.

So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income, according to a USA TODAY analysis of home prices since 1950. In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom.

...
Inflation could help homes recapture their old prices, if not their value. But when inflation is factored in, home prices might not return to their 2006 peak for many years. Housing prices are meaningless if you don't adjust for inflation, says Schiff, the investment manager.

That is still a long way to tumble. Of course, the article has Lawrence Yun from the stating prices will be back to bubble heights in a few years. Always the optimist. Well lest look at the three standard measures used for real estate values -

When the housing bubble began to deflate in 2006, history had a sobering lesson to teach. Home values had closely tracked three common-sense measures for many years:

• Income —Home values floated at about three times average household income from 1950 to 2000. In 2006, the average household income was $66,500. Under the traditional model, home prices should have been about $200,000. Instead, the typical home sold for $301,000.

• Rent —Homes traditionally have sold for about 20 times what it would cost to rent them for a year. In 2006, houses were selling for 32 times annual rent.

• Appreciation —Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005. Housing prices began to fall in the second quarter of 2006.

What appeared to be unrealistic growth - was. House values were growing at unsustainable rates. The article also outlines what changed that helped inflate the bubble. Lets review -

• Optional payments on principal —In 2005, 29% of new mortgages allowed borrowers to pay interest only — not principal — or pay less than the interest due and add the cost to the principal. That was up from 1% in 2001, according to Credit Suisse, an investment bank.

• No verification of income —Half of mortgages generated in 2006 required no or minimal documentation of household income, reports Credit Suisse.

• Tiny down payments —In 1989, the average down payment for first-time home buyers was 10%, reports the National Association of Realtors. In 2007, it was 2%.

One of the worst ideas ever - the pick-a-payment mortgage. Mix those in with No Income, No Assets loans and we were just looking for problems. And how many 0% down payment loans do we see. In our examples we find those regularly in the foreclosure listing. The 0% down were really just renting from the bank, and if they used a pick-a-payment loan with 0% down they really had a good deal going on.

Well, lets end with some good advice regarding helping homeowners, not just the lenders and financial institutions that helped get us into this mess.

[Economist Dean Baker of the liberal Center for Economic Policy Research in Washington, D.C.] and [Susan Wachter, professor of real estate at the University of Pennsylvania] want the U.S. government to take aggressive steps to help homeowners, not just financial institutions. They support expanding programs that restructure troubled mortgages to prevent a flood of foreclosed homes from coming on the market and driving prices below their traditional level.