Dallas-Fort Worth Foreclosures Jumped In 2009

The Dallas News

Commercial property foreclosure filings in the Dallas-Fort Worth area jumped by more than a quarter in 2009.

But foreclosures of commercial real estate still account for less than 5 percent of total filings in the four-county area.

During 2009, lenders posted 2,431 commercial properties for forced sale, including offices, warehouses, shopping centers and land, according to a report released Monday by Foreclosure Listing Service. That's up from just over 1,900 commercial foreclosure postings in 2008, the Addison-based research firm found.

"In 2009, foreclosure postings of commercial real estate climbed at a slightly steeper pace than residential postings," Foreclosure Listing Service CEO George Roddy said in the report, "although there have been many more postings of homes than of commercial properties."

More than 61,000 D-FW area home foreclosure filings were recorded this year – an all-time high.

Commercial mortgage defaults here are still significantly lower than in the last big real estate market shakeout in the late 1980s and early 1990s.

"It's probably about 20 percent of what it was in the peak year of 1989, when we had more than 7,000 postings," Roddy said. "We are not close to that at this point."

But the numbers in the current cycle are definitely climbing.

"We have begun to see the economy's impact on the commercial sector in 2009," Roddy said. "And I expect postings of commercial properties to remain at this level or even higher throughout 2010."

The biggest rise in commercial foreclosure filings in 2009 was in postings for office buildings, which were up 121 percent, and retail buildings, up 90 percent.

Foreclosure filings for commercial land increased 71 percent compared with 2008.

Dallas and Fort Worth apartments were near the top of the list of commercial building foreclosure postings with more than 400 property filings.

The largest increase in commercial foreclosure filings was in Denton County, where postings more than doubled. Tarrant County saw a 2 percent decline in commercial foreclosure postings.

Not all properties posted for foreclosure auction are actually sold by the lender.

In many cases, the borrower works out new mortgage terms or the transaction is delayed by negotiations or bankruptcy.

Consumers More Circumspect On Home Remodeling Projects

Chicago Tribune

'Twas only a few years ago, when the housing boom was in full roar, that homeowners didn't have to fret too much over whether the money they invested in remodeling would be paid back at resale time.

Indeed, it was practically a no-brainer: Home sale prices were going up so high and so fast that remodeling the kitchen or the master bath would nearly pay for itself. Some remodeling companies had so much backlogged work that clients passed the time on waiting lists.

"These days, it's a new ballgame," said Sal Alfano, a former contractor who now is the editorial director for Remodeling magazine, a trade journal. "Now, the jobs are smaller, the scope of work has been cut back, and consumers are doing things in phases."

And, he said, consumers are squinting harder at contractors' estimates, not only to push down costs but also to decide whether the price of that redone kitchen or master bath is going to pay them back anything when it comes time to sell in a market that has become notoriously fickle and with home prices sliding.

Such born-again cost-consciousness makes complete sense in the current economy, Alfano said, but he's concerned that the infatuation with the contractor who offers the lowest bid will come back to haunt consumers.

Each year, Alfano's magazine partners with the National Association of Realtors to produce the Cost vs. Value Report, a massive numbers-crunch that tries to ballpark the return on investment for dozens of home-improvement projects, nationally and regionally, in addition to numerous metro areas, including Chicago.

It's an ongoing slide, he said. Nationwide, the payback at sale on remodeling, in general, peaked in 2005 (the height of the housing boom) at 86.7 percent, according to the magazine survey of the remodeling industry and NAR members.

"That is," he said, "it was costing you 13 cents on the dollar to build just about anything (if you were selling the house in a relatively short period).

"That's pretty cheap," he said. "Then it sank like a rock, ending up at 76 percent, or 10 points lower than the year before."

In the 2009 survey, the average payback, nationally, was about 64 percent, according to magazine data.

That's almost exactly the average for 33 remodeling projects analyzed in the Chicago area in the 2009 survey, including kitchen remodeling, bathroom remodeling, decks and sunrooms. Heading the costs-recouped list here were not the glamour kitchen/bath projects, but smaller-scale and more utilitarian jobs.

The best returns here, according to the report, were on midrange entry-door replacements (115 percent return at sale) and upscale fiber-cement siding replacements (85.8 percent).

The magazine extensively defines the parameters of each project, citing specific materials and overall price ranges, all gleaned from cost-estimating software used in the remodeling industry. In addition, this year 4,000 members of the Realtors' group weighed in on how the improvements might pay back at resale in their local markets. The full report is at remodeling.hw.net.

A midrange major kitchen remodel in Chicago (average cost: $67,332) recouped about 67 percent at sale time. An upscale bathroom remodel here ($63,402) recouped about 50 percent, according to the study.

Despite the data, not all consumers are reining in and battening down, some remodelers say.

"For the people who have the ability and want to do a kitchen remodel, I'm not seeing them skimping," said Bryan Nooner, chairman of Distinctive Remodelers in Orland Park.

"Pretty typically, we're seeing kitchen remodels in the $40,000 to $70,000 range. They're spending what they want to. They still want the granite (counters), they want upgraded wood-cabinet species such as maple or cherry, and we're doing few standard wood stains -- most everybody wants a hand-rubbed finish."

One of his recent clients, Frank Toland, said resale value wasn't a consideration when he recently remodeled the kitchen of his Mokena home. He said the job cost about $70,000, in addition to upgrades elsewhere in the house that were done at the same time.

"Resale really didn't factor in at all," Toland said. "We're not planning on moving. We're planning on staying there, and that's why we decided to do it the way we wanted.

"We hope that the money we put in, eventually we'll get it out. But we said, let's do it the way we want it done rather than cut costs because of resale value."

Matt Draus, who owns Descon Construction in Oak Park, also said he's hearing from customers who are thinking long term.

"We see people who have a little bit of money and decide they're not going to move for five years because of the real estate market," Draus said. "But we're not seeing the big blowout room additions."

Instead, he said, he's seeing smaller projects and more emphasis on maintaining and updating existing features -- jobs that require handyman services.

But more so than in recent years, he said, money talks.

"Cost is definitely getting much more scrutiny now," he said. "It's all about cost, that's a No. 1 priority."

But Draus said that bottom-lining often seems to be coming at the expense of quality. Driven by the slumping economy, the home remodeling-industry ranks are swollen with newcomers and some tradespeople who are eager to have any income at all, he said.

"I'm [offering estimates] against people who aren't honest and upfront and are low-balling it in order to get the work," he said. "There are a lot of good builders out there, but there are a lot of others who are making times harder for the rest of us."

Alfano agreed, and urged homeowners to be cautious when considering bids that are significantly below competitors'.

"What we couldn't account for [in estimating costs for the magazine study] was the number of  home remodeling jobs where the contractor cut his overhead or his profit just to keep busy, hoping that things would turn around," Alfano said.

"Others are former new-construction builders who don't yet know that they can't really do a job for a large percentage less" than competing bidders, he said.

Draus said he's seeing some companies agree to jobs that unquestionably are money-losers for them, just to keep some cash flowing, sometimes with disastrous results for all.

"[A homeowner] might get a bid of $1,000 from a guy who's about to go bankrupt or a $3,000 bid from a guy who is competent and stable," he said.

"I've been called in to finish jobs for people who took the $1,000 bid," he said.

    64%

    The national average percentage of remodeling costs recouped upon selling a home. That means it costs 36 cents on the dollar to build just about anything for your home.

    In the Chicago area, the best returns were not the glamour kitchen/bath projects, but smaller-scale and more utilitarian jobs.

    115%

    Return on sale for replacing an entry door with a midrange substitute

    85.8%

    Return on upscale fiber-cement siding replacement

    67%

    The average payback on a midrange major kitchen remodeling project

    50%

    What you'd recoup on the average upscale bathroom remodeling project

The Remodeling Blues

Minneapolis-St. Paul StarTribune

As a kitchen re-do drags on, washing pots and pans in the bathtub is getting very old.

Colleen and Darrell Brandt in the kitchen of their Golden Valley home Friday night. They still await countertops and a sink to complete their kitchen remodel. They opened up the wall between the kitchen and dining room and had new cabinets installed in portion in the foreground. They use the bucket Colleen is leaning on to carry pots and pans to the bathroom for washing.

For lack of a kitchen sink, Darrell and Colleen Brandt wash their pots and pans in the bathtub. Sheets of cardboard and drywall serve as their countertop.

It's exactly the situation the Golden Valley couple were trying to avoid when they chose a contractor for their kitchen remodel. In September, they hired the Home Depot because they thought the home improvement giant would use only the best remodeling professionals.

"You hear all of the horror stories about contractors and you think that by going to Home Depot, you have the backing of a large corporation and the work will be done in a manner that is in keeping with professional standards," Darrell Brandt said.

Instead, they were frustrated by the quality of the carpentry by the company's independent contractors, and how their kitchen is still out of commission, at least five weeks after it should have been finished.

Stephen Holmes, a spokesman for Home Depot, said the company agreed to make the changes Brandt requested, but those complaints delayed the project. He added that Home Depot, which is based in Atlanta, will always work to make sure a customer is completely satisfied.

"The reason customers choose the Home Depot is they know the Home Depot is going to stand behind the quality," he said. "It's complex work. It may seem simple, but anytime you're dealing with cabinets, countertops ... unexpected things can come up."

The Brandts already had to go out of town for Thanksgiving and scaled back their Christmas gathering after being told the job wouldn't be finished until January. After Whistleblower inquired about the situation, the Brandts got a call Thursday saying that the countertop and sink might be ready for Christmas.

This fall, the Brandts wanted to get their 1940s Tudor-style house ready to sell, so they decided to do a minor renovation of their kitchen. Darrell Brandt had mostly done his own remodeling at his house and other properties he owns, but he became ill last year so he couldn't tackle the job himself.

Right away they thought of Home Depot and its many remodeling classes. It seemed like the best place to go for a guarantee of good service, they said.

Holmes said Home Depot advertises its rigorous process for selecting third-party contractors, but he acknowledged that sometimes staff members don't explain to customers what that means. The company has completed 120,000 jobs in Minnesota during the past two years, including sunrooms and outdoor decks and the majority of customers do not have complaints, he said.

In 2007, the state Department of Labor and Industry received six complaints from Home Depot customers, mostly about quality issues and delays. The company resolved the complaints and the state logged only one complaint in 2008 and none in 2009.

The Brandts spent most of September scheduling appointments for measurements and design of the $3,400 project. They were confused about the cabinet delivery date: their contract said the cabinets would be installed by Oct. 30, but a store employee told them that more measurements were needed before they could be ordered.

Holmes said the kitchen remodeling completion date on the contract was incorrect. The cabinet shipments were delayed because of a fire at the factory, and Holmes said the manufacturer was supposed to notify customers.

The cabinets finally arrived and Darrell removed the sink so they could be installed the week before Thanksgiving. The installation didn't go as he'd planned. Nail holes were exposed, the trim on the cabinets wasn't secured properly and there was a gap between a cabinet and the dishwasher, Darrell said. His biggest concern was that the cabinet doors couldn't be opened all the way at the same time.

"It was going to be a problem," he said. "Over a period of time, the finish on that cabinet was going to wear off. I thought, 'This can't be their finished product.'"

Holmes said the cabinet doors aren't designed to be opened at the same time, but the company agreed to make the changes after Brandt complained.

The cabinets were completed last week, and now the Brandts are waiting to find out when they can wash their pots in the kitchen again.

"I'd love to think it would be the day before Christmas," Darrell Brandt said. "That would be a great present."

Commercial Properties At Lowest Values In Seven Years

Property Wire

Commercial property values in the US declined in October to the lowest level in more than seven years as unemployment reduced demand for apartments, offices and retail space.

The Moody’s/REAL Commercial Property Price indices fell 1.5 % in October from September to the lowest since August 2002.

Prices were down 36% from a year earlier and are now 44% below the peak in October 2007, Moody’s Investors Service said.

The gloomy news follows predictions from commercial property brokers, including Jones Lang LaSalle and Grubb & Ellis, that office vacancies may approach 20% next year as employers hold off hiring.

‘The number one issue facing commercial real estate right now is the value declines that we’ve seen since prices peaked,’ Matthew Anderson, a partner at Foresight Analytics in Oakland, California.

Also worrying is that an estimated $1.4 trillion of commercial real estate debt is scheduled to mature over the next five years and Foresight estimates that 53% of it is underwater, meaning the value of the property is less than the mortgage.

Commercial property values may decline by a total of 50% from the peak to the bottom, Anderson added. ‘This is the worst that we’ve seen since World War II,’ he commented.

He also predicted that delinquencies for commercial real estate mortgages held by banks may increase by 5.6% in the fourth quarter of 2009 and reach 8% next year.

The delinquency rate for US commercial mortgage-backed securities rose to 4.47% as of the end of November, Moody’s Investors Service said.

That’s almost six times the rate of 0.75% a year ago.

And last week the Mortgage Bankers Association reported that delinquency rates continued to rise in the third quarter on properties held by all but one of the five major commercial real estate investor groups tracked by the MBA. Defaults were the highest among holders of bank, thrift and CMBS loans.

Meanwhile, in its 2010 outlook for structured finance released this week, Fitch Ratings predicts that, as a result of protracted illiquidity and refinance risk, CMBS loan delinquencies are projected to increase by 6% by the first quarter 2010 and as high as 12% by the end of 2012.

Recovery in the commercial real estate sector will lag the broader economy, with operating cash flows expected to decline across all property types over the next 18 months to two years, Fitch said.

Dallas-Fort Worth Housing Poised For A Rebound

Dallas News

After slogging through two years of decline, the North Texas housing market is headed for a rebound in 2010. The only question, analysts say, is how strong the bounce-back will be. And that depends on the economy, of course."Any sustained turnaround in sales and construction activity will definitely depend on the economy and job growth," said D'Ann Petersen, a business economist at the Federal Reserve Bank of Dallas. "We do see increasing signs that the local economy has bottomed out, and business contacts say they are through cutting staff."

Petersen said there are signals that the worst is over for the Dallas-Fort Worth housing market. Next year will look better for builders and buyers.

"It will be slow going in 2010, but I do think that Dallas' housing market is in a better position than many other areas of the country to respond to positive economic growth," she said.

During the last two months, sales of pre-owned homes have increased significantly from year-ago numbers, and price declines have slowed. At the same time, the number of homes for sale in North Texas has fallen to the lowest level in more than two years.

Given the demand from homebuyers, builders will have to start more houses in 2010, said David Brown, an analyst with Metrostudy Inc.

"There now is currently less than a six-month supply of homes priced under $250,000 and just over a six-month supply of homes priced between $250,000 and $500,000," Brown said.

"If homebuilders are not able to start as many homes as they are closing because of lending constraints, then some of those buyers may be forced into the resale market and could cause new home closings to fall further next year."

Builders started only about 13,000 homes this year in North Texas – the smallest production volume in almost two decades.

"The current annual rate of about 13,200 starts should prove to be pretty close to the bottom," said Ted Wilson of housing research firm Residential Strategies Inc. "Interestingly, several builders have suggested that the bottom would have been closer to 11,000 starts – similar to the 1990 bottom – had we not had the $8,000 first-time buyer tax credit."

Wilson is projecting about 15,000 home starts in the D-FW area next year.

"If job growth picks up sooner rather than later, starts could push as high as 17,000, but we are still feeling conservative about the market," he said.

Tight lending

With many small builders cut off from construction loans, Wilson said that large public companies with better access to capital could have an edge in 2010.

"I wouldn't be surprised to see some of the larger builders flex their muscles with regard to access to interim financing and pick up market share in 2010," he said.

In the pre-owned home market, the number of properties listed for sale fell below the six-month supply point in November. That's considered a balanced sales market.

Price outlook

The decline in existing home prices in North Texas has all but stopped. Median home prices have actually inched up from their bottom in February.

National analysts agree that Texas – which for the most part didn't experience the last housing bubble – is poised to see home sector gains in the year ahead.

"We expect the Texas economy to perform better than the national average over the next year," said David Berson, top economist with mortgage insurance company PMI Group. "And because the bubble was less in Texas than in most other states, that's positive for house prices in the state."

"Price gains may be somewhat less in Dallas apartments than some other parts of the state," Berson said. "But [they're] still likely to be at least equal to the national average and probably somewhat better.

Analyst Stephen Bedikian of housing consultant Real IQ is expecting an uptick in the market next spring.

"By March, we're likely to see volume increase and prices firming," he said. "That trend will continue throughout the summer, and then we will return to a market that treads water for the balance of the year.

"I would expect people to be surprised by strength of housing prices between the March and August period."

But foreclosures are unlikely to ease in 2010.

Dallas-Fort Worth apartments and housing foreclosure postings set a record at more than 61,000 filings in 2009 and could be up again in 2010, analysts warn.

"I expect foreclosures next year to be a tad above this year – they are not going down," said George Roddy, president of Foreclosure Listing Service, which tracks local filings.

Roddy said that even when the economy rebounds in North Texas, the foreclosure market will lag. "It takes time after the job market comes back to help people who have been trying to hang on to their house."

Citigroup To Suspend Foreclosures For 30 Days

USA Today

WASHINGTON — Citigroup will suspend foreclosures and evictions for 30 days in a temporary break for about 4,000 borrowers during the holiday season.

The New York-based bank said Thursday the suspension will run from Friday through Jan. 17. It applies only to borrowers whose loans are owned by Citi. Borrowers who make payments to Citi but whose loans are owned by other investors are out of luck.

"We want our borrowers to have a much less stressful time, to spend their time with their families during the holidays as opposed to worrying about their homes," Sanjiv Das, head of the company's mortgage division, said in an interview.

The suspension means Citi will halt foreclosure sales and stop evicting homeowners from properties it has already seized. The company projects it will help 2,000 homeowners with scheduled foreclosure sales and another 2,000 that were due to receive foreclosure notices including holders of Raleigh real estate.

Das also said the company is working on "some long-term fundamental alternatives" to foreclosure, but declined to be specific. "We know that moratoriums are not permanent solutions," he said.

Most major lenders suspended foreclosures last winter while the Obama administration developed its $75 billion loan modification program. Foreclosures picked up again after those suspensions lifted. In recent months, they have fallen as banks evaluate whether borrowers qualify for the government program.

Citi has enrolled about 100,000 borrowers in the Obama program, but had made only about 270 of those modifications permanent as of the end of last month, according to a Treasury Department report. But Das said the low number resulted from a "reporting error" and said it will rise dramatically by year-end.

"I have put a lot of pressure on my team to make sure that there is almost nothing left in the pipeline," he said.

Homebuyer Tax-Credit Extension Fails as Catalyst

Bloomberg

President Barack Obama’s extension last month of a tax credit for first-time homebuyers failed to stir optimism among homebuilders or stock investors about the industry’s prospects.

The National Association of Home Builders/Wells Fargo Housing Market Index and a Standard & Poor’s index of homebuilding shares dropped after Obama signed the legislation on Nov. 6. The chart tracks these indicators since 2000.

Homebuyers received another five months, until April 30, to take advantage of the government’s $8,000 credit. They also became eligible for an additional $6,500 credit if they owned their previous residence for at least five years.

“The extension has not materially helped traffic or sales despite the program’s expansion,” Carl Reichardt, a Wells Fargo analyst, wrote yesterday in a report.

The NAHB/Wells Fargo index, an indicator of builders’ confidence, fell to 16 this month from 17 in November. None of the 47 economists in a Bloomberg News survey expected the decline. Readings below 50 show that most participants are pessimistic.

S&P’s industry gauge, consisting of builders in the S&P 500, MidCap 400 and SmallCap 600 indexes, dropped 8.4 percent from Nov. 6 to yesterday. S&P’s broadest index of U.S. stocks rose 4 percent during the period.

The shifts in sentiment and share prices were at odds with the growth in November housing starts and building permits that the Commerce Department reported today. Starts rose 8.9 percent to an annual rate of 574,000 homes. Permits climbed 6.9 percent to a 584,000 pace including such items as vacation homes in Atlantic Beach NC, the fastest since November 2008.

If You're Not Buying A House Right Now, You Must Either Be Broke Or Stupid

Business Week

Interest rates are at historic lows but cyclical trends suggest they will soon rise. Home buyers may never see such a chance again, writes Marc Roth

Well, you may not be stupid or broke. Maybe you already have a house and you don't want to move. Or maybe you're a Trappist monk and have forsworn all earthly possessions. Or whatever. But if you want to buy a house, now is the time, and if you don't act soon, you will regret it. Here's why: historically low interest rates.

As of today, the average 30-year fixed-rate loan with no points or fees is around 5%. That, as the graph above—which you can find on Mortgage-X.com—shows, is the lowest the rate has been in nearly 40 years.

In fact, rates are so well below historic averages that it should make all current and prospective homeowners take notice of this once-in-a-lifetime opportunity.

And it is exactly that, based on what the graph shows us. Let's look at the point on the far left.

In 1970 the rate was approximately 7.25%. After hovering there for a couple of years, it began a trend upward, landing near 10% in late 1973. It settled at 8.5% to 9% from 1974 to the end of 1976. After the rise to 10%, that probably seemed O.K. to most home buyers.

But they weren't happy soon thereafter. From 1977 to 1981, a period of only 60 months, the 30-year fixed rate climbed to 18%. As I mentioned in one of my previous articles, my dad was one of those unluckily stuck needing a loan at that time.

Interest Rate Lessons

And when rates started to decline after that, they took a long time to recede to previous levels. They hit 9% for a brief time in 1986 and bounced around 10% to 11% until 1990. For the next 11 years through 2001, the rates slowly ebbed and flowed downward, ranging from 7% to 9%. We've since spent the last nine years, until very recently, at 6% to 7%. So you can see why 5% is so remarkable.

So, what can we learn from the historical trends and numbers?

First, rates have far further to move upward than downward; for more than 30 years, 7% was the low and 18% the high. The norm was 9% in the 1970s, 10% in the mid-1980s through the early 1990s, 7% to 8% for much of the 1990s, and 6% only over the last handful of years.

Second, the last time the long-term trends reversed from low to high, it took more than 20 years (1970 to 1992) for the rate to get back to where it was, and 30 years to actually start trending below the 1970 low.

Finally, the most important lesson is to understand the actual financial impact the rate has on the cost of purchasing and paying off a home.

Every quarter-point change in interest rates is equivalent to approximately $6,000 for every $100,000 borrowed over the course of a 30-year fixed. While different in each region, for the sake of simplicity, let's assume that the average person is putting $40,000 down and borrowing $200,000 to pay the price of a typical home nationwide. Thus, over the course of the life of the loan, each quarter-point move up in interest rates will cost that buyer $12,000.

Loan Costs

Stay with me now. We are at 5%. As you can see by the graph above, as the economy stabilizes, it is reasonable for us to see 30-year fixed rates climb to 6% within the foreseeable future and probably to a range of 7% to 8% when the economy is humming again. If every quarter of a point is worth $12,000 per $200,000 borrowed, then each point is worth almost $50,000.

Let's put that into perspective. You have a good stable job (yes, unemployment is at 10%, but another way of looking at that figure is that most of us have good stable jobs). You would like to own a $240,000 home. However, even though home prices have steadied, you may be thinking you can get another $5,000 or $10,000 discount if you wait (never mind the $8,500 or $6,500 tax credit due to run out next spring). Or you may be waiting for the news to tell you the economy is "more stable" and it's safe to get back in the pool. In exchange for what you may think is prudence, you will risk paying $50,000 more per point in interest rate changes between now and the time you decide you are ready to buy. And you are ignoring the fact that according to the Case-Shiller index, home prices in most regions have been trending back up for the last several months.

If you are someone who is looking to buy or upgrade in the $350,000-to-$800,000 home price range, and many people out there are, then you're borrowing $300,000 to $600,000. At 7%, the $300,000 loan will cost just under $150,000 more over the lifetime, and the $600,000 loan an additional $300,000, if rates move up just 2% before you pull the trigger.

What I'm trying to impress upon everyone is that if you are planning on being a homeowner now and/or in the foreseeable future, or if you are looking to move your family into a bigger home, then pay more attention to the interest rates than the price of the home. If you have a steady job, good credit, and the down payment, then you really are being offered the gift of a lifetime.

Marc Roth is the founder and president of Home Warranty of America, which touches just about every part of the real estate industry since it sells through builders, real estate agents, title companies, mortgage companies, and directly to consumers.

The Other American Dream: Default, Then Rent Instead

Wall Street Journal

PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.

But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.

Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.

"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.

People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.

Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.

Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.

Ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.

Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. "We're saving lots of money," Ms. Richey says.

The U.S home-ownership rate has charted its biggest decline in more than two decades, falling to 67.6% as of September from a peak of 69.2% in 2004. And more renters are on the way: Credit firm Experian and consulting firm Oliver Wyman forecast that "strategic defaults" by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007's level.

Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.

Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.

The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.

For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.

"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."

As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.

"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.

Few places in the U.S. were better suited to attract true believers in home ownership than Palmdale. A farming community that expanded in the 1950s to accommodate the aerospace industry around nearby Edwards Air Force Base, the city more than doubled its population from 1990 to the present as it became the final frontier for Los Angeles-area workers looking to buy.

About half of Palmdale's 147,000 residents endure a daily commute that can extend to two hours or more one way. In return, they get a homestead in a high-desert locale of haunting beauty, with Joshua trees dotting the landscape, and real-estate developments locked into a master grid of streets with anonymous names such as Avenue O-8 or Avenue M-4.

The 3100 block of Club Rancho Drive, built by Beazer Homes mostly in 2002, captures the essence of Palmdale's appeal. Winding along the southern edge of the Rancho Vista golf course just south of Avenue N-8, its spacious homes, verdant lawns and imported birch and sycamore trees exude a sense of middle-class tranquility.

Club Rancho became a solid community of owner-occupiers, many of whom stretched their finances to the limit. As of the end of 2007, total mortgage debt attached to the 13 houses on the block for which records are available had reached $4.5 million.

Fast-forward to the end of 2009, and the picture changes radically. Thanks to a 50% drop in home prices, at least two owners on the block now owe between $60,000 and $160,000 more on their mortgages than their houses are worth. Four more homes have already passed through foreclosure into the hands of new owners.

In the process, the block's total mortgage debt has fallen 37%, to $2.7 million.

Much of Club Rancho also has converted to rentals, a shift mirrored across Palmdale. Five homes on the 3100 block are now occupied by renters, up from only two in 2007. In the past six months, at least three families have moved into those rentals after walking away from other homes.

Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.

But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.

After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."

Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.

On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.

The situation presented Ms. Richey with a quandary now facing more than 10 million U.S. homeowners who owe more on their mortgages than their houses are worth.

On one hand, walking away from her home would be easy. California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default. But she also had to consider the negatives. Her credit could be tarnished for years and, perhaps most importantly, she feared her friends and neighbors might ostracize her.

"It was scary," she says, noting that people tended to keep such decisions to themselves for fear of being stigmatized. "It's still very hush-hush."

Tom Sobelman, whose family of four lives across the street from Ms. Richey, at 3127 Club Rancho Drive, sees mortgages as a moral as well as financial obligation. He's still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.

Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. "All these people are gaming the system, and I'm paying for it," he says. "My kids are going to be paying it off."

Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.

Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.

Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey's situation. So he and other rental managers are loosening rules to accept people who have been through foreclosures.

"Those are all good people," he says. "They just got bad loans or bought at the wrong time."

Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.

Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.

"You take a risk for the American dream," she says. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."

Others on Ms. Richey's block have made similar moves. Mr. Fernandez, the firefighter, moved into 3139 in July, after stopping the $4,800 monthly payments on the home he owned around the corner on Champion Way.

Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he's working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.

A spokeswoman for OneWest Bank said the bank "offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines." A spokesman for American First said the company always seeks to help clients stay in their homes.

With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.

"I don't know if I'll buy another house again, because it's such a huge headache," he says.

Annual Remodeling Report Finds 4 Best Improvements For Selling Your Home

MSN

House prices are still dropping, so it pays to know which upgrades will deliver the best return when you sell your home. An annual remodeling report finds 4 basic replacements are likely your smartest choice.

Remodeling is a better investment in some years than others. This year is among the worst if you’re hoping to recoup much money when you sell, says a newly released report. Homeowners are getting back just 64%, on average, of a project’s cost, compared with 87% in 2005, according to Remodeling Magazine’s 2009-2010 Cost vs. Value report.

Some projects pay back better than others. You get more bang for the buck putting money into a basement or attic upgrade than adding a wing to the house. Some of the highest-return projects include a deck addition and quick, conservatively priced replacements of old siding, entry door or windows. (If you want a different perspective, personal-finance guru Liz Pulliam Weston calls remodeling “a waste of money.”)

The report compiles responses from about 4,000 members of the National Association of Realtors in 80 cities to survey questions about 33 hypothetical projects. “I think what the real-estate agents are saying is you’re taking a big risk if you’re buying these high-ticket items, because the market is slow. Buyers are looking for utility,” says Sal Alfano, the magazine’s editorial director. “They’re not so wowed these days as they were three or four years ago.”

A retreat from overbuilding
Some contractors are dropping their rates to get work, so it might seem a good moment, if you have the money, to do a big, blow-out addition. And maybe it is, if you can keep the house long enough. But today, a high-end master suite remodel, for example, returns just 56% of the cost, on average, compared with 80% in 2005. 

“You’re not seeing the big 750-square-foot additions being put on the side of a house like you were a few years ago,” says Martin Conneely, owner of Conneely Contracting, in Arlington, Mass. “Our biggest (jobs) right now are maintenance replacements (of windows, doors, siding and roofing), basement renovations and moderately priced upgrades in the kitchen and bath.”

Despite widespread talk of falling labor prices among remodelers, the cost of construction overall hadn’t changed much.  Return on investment (ROI) is dropping because, in a market flooded with foreclosures, even if labor costs are dropping, the price of existing homes is at such a discount that anything newly built can’t compete.

The 22-year-old Cost vs. Value survey makes clear that return on investment depends greatly on where you live. The highest payback is in the Pacific region (Alaska, California, Hawaii, Oregon and Washington). There, although costs are double the next-most-expensive region (the Mid-Atlantic, including New Jersey, New York and home remodeling Pennsylvania), high resale values more than compensate.

Peter Michelson, CEO of Renewal Design-Build in Decatur, Ga., cautions homeowners to be aware that projects described and priced in this report can — and often do — cost considerably more than the amounts given.

ROI is better in the West South Central (Arkansas, Louisiana, Texas, Oklahoma), South Atlantic (Washington, D.C., Delaware, Florida, Georgia, Maryland, the Carolinas, Virginia, West Virginia) and East South Central (Alabama, Kentucky, Mississippi, Tennessee) regions.

Residents of the Mountain states (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico) and New England (Maine, Massachusetts, Connecticut, New Hampshire, Rhode Island, Vermont) enjoy average returns.

It’s hardest to make a buck back on your project in the Middle Atlantic, West North Central (Iowa, Kansas, Minnesota, Missouri, Nebraska, the Dakotas) and East North Central (Indiana, Michigan, Ohio and Wisconsin) regions.

The math didn’t always come out so poorly. As recently as 2005, few homeowners bothered to figure out if their plans meant overbuilding for the neighborhood, Alfano says. They just commissioned the work they wanted and assumed prices would rise to cover their costs.

They were largely correct until 2006, when payback began shrinking along with the scale of jobs that homeowners were undertaking. “The projects that were evaluated as having the most return were not kitchens and baths so much anymore. All of a sudden it was these exterior replacements: roofing, siding and windows,” Alfano says.

It was the beginning of the end of the housing boom. “Today, resale value has come to the forefront. People are much more conscious of building for the neighborhood, and they’re worried about their mortgage rates and their jobs.”

Basic replacements rule
As a group, low-cost replacements — new siding, windows, doors and roofing — deliver the best bang for the buck now, a considerably better payback than from a two-story remodel or a kitchen remodel.

Given great improvements in materials, you can replace your inefficient 10- or 15-year-old products with highly efficient ones for a decent return when you sell. In addition, the improvements help you save on heating and cooling bills. Replacing leaky windows with highly efficient newer ones is a good example. The technology behind the glass and frames has so improved that you’re tightening up your home’s weatherproofing in the process. You get more comfort and, from the real-estate agent’s point of view, new windows show off your house from the street.

Replacement projects included in the Cost vs. Value survey all cost less than $20,000 and most cost considerably less. They instantly enhance curb appeal, boosting a home’s marketability, and they require little maintenance once installed - all of which are better prospects than with a home addition. A bonus: Most of these replacements qualify for a federal tax credit for energy efficiency (not included in Remodeling Magazine’s ROI calculations).

1. Replace the front door.

    * The absolute best return on the money of any of the projects surveyed — 129% of cost — is gained by replacing a beat-up front door with a $1,200 steel-shell door filled with foam insulation.
    * A new fiberglass door (more expensive, at $3,490) returns less, about 65%. (Fiberglass is the new chic building material because it’s rugged and durable, can be painted and will mimic almost any wood. Unlike wood, it doesn’t crack, warp or shrink and needs zero maintenance.)
    * Spend about $7,500 on an entire new entrance, including a widened opening, a solid-core wood door and high-end glass, new lighting and better locks, and you’ll recoup 69%, on average.

2. Replace home siding

    * Replacing old siding with a durable fiber-cement product ($13,287) recoups about 84% at resale.
    * Use vinyl siding ($10,607) to get an 80% return.
    * Foam-backed vinyl ($13,022) costs more and earns back less — roughly 79% — but it is much more efficient at insulating a home.

3. Replace windows. Three of the four window-replacement projects considered in the survey pay back about 77%:

    * Wood-trimmed windows ($11,700).
    * Lower-end vinyl windows ($10,728).
    * Windows trimmed in higher-end vinyl ($13,862).
    * The fourth project, higher-end wood-replacement windows ($17,816), has a return of about 72%. Fiberglass windows weren’t included in the study.

Replace the roofing: Spend $19,731 on new fiberglass asphalt shingles and you’re likely to recoup about 67% of the cost.

    * A higher-end roof replacement using standing-seam metal ($37,359) pays back about 61% of the cost, agents told the survey.

Additions aren’t cost-effective
Except for a new deck, which pays back nicely, adding to a home’s footprint brings a poor return these days.

A new deck
    * Wood is high-maintenance, but homebuyers love it: A new wood deck ($10,634) returns 81%.
    * New outdoor decks of midrange composite planks ($15,373) return around 71% of the cost at resale.
    * A higher-grade composite ($37,745) brings an ROI of about 61%.

Other additions
    * Adding a 200-square-foot sunroom ($73,167) recoups 51%. [Find a Sunroom Builder in Grand Rapids Michigan]
    * A high-end ($225,995) master suite project, adding 640 square feet to the house, including a bath with walk-in shower and stone walls, brings a 56% return.
    * A less ambitious, less costly ($103,696), 640-square-foot master suite addition including whirlpool bath and ceramic tile recoups 65%.
    * A garage addition ($87,230) earns back about 56%.
    * A high-end bathroom addition ($75,812) earns about 58% at resale.
    * Adding a midrange, 6-by-8-foot full bath ($39,046) recoups about 60%.
    * Add a midrange two-story wing ($156,309) to the house, including 24-by-16-foot first-floor family room and second-floor bedroom and full bath, for a return of about 69%.
    * A midrange family room addition ($82,756) returns around 65% of the cost.
    * Adding a sunroom or home office were the projects that yielded the least payback, presumably because these special-purpose rooms appeal to fewer buyers and are in less demand.

Best use of the money (besides replacements)
Upgrading existing space, such as a bathroom remodel, is the best bet for recouping cost. It makes sense: Pouring a foundation, framing a structure and bringing in electricity and plumbing are among the most expensive aspects of a building project. When you can largely skip these steps and increase your usable space, the payback is richer:

    * An attic conversion, including a 15-by-15-foot bedroom with dormer and a 5-by-7-foot bath with shower ($49,346) returns comparative gold: 83% return, on average. Agents in several cities said this job would return more than 100%.
    * A basement ($62,067) remodel —a 20-by-30-foot entertainment room and 5-by-8-foot full bath — recoups about 75% of its cost.
    * A midrange 5-by-7-foot bathroom remodel ($16,142) with standard fixtures and trim has a 71% ROI.
    * Expanding that bathroom to 100 square feet ($52,295), including moving plumbing and wiring and adding higher-end cabinets and fixtures, brings a 62% ROI.

Kitchens and baths: Scaled back but ever popular
High-end kitchens and baths are fading in popularity, replaced by “very practical things,” Michelson says. “The $400,000 and $500,000 jobs are few and far between. The jobs between $50,000 and $200,000, we’re doing lots of those.”

Bath and kitchen remodeling hasn’t stopped, since these projects maximize the enjoyment of the most-used spaces in a home. But “people are definitely being smarter with their money,” Conneely says. “For instance, a $75,000 remodel five years ago? That same client would today spend $50,000.” People who blithely bought the best of everything now pursue the same look by choosing materials judiciously.

    * A minor kitchen upgrade ($21,411) installing new cabinet fronts, laminate counters and other cosmetic improvements is a decent investment, at 78% ROI.
    * A major kitchen remodel ($57,215) using midrange materials — semi-custom cabinets and laminate counters — pays back about 72%.
    * A high-end major kitchen remodel ($111,794) with top-of-the-line cherry cabinets, stone counters, glass backsplash and expensive, built-in appliances, pays back just 63%.

Dubai Debt To Affect U.S. Commercial Property Market

Reuters

Dubai's debt woes could further unhinge an already fragile U.S. commercial real estate market, as it illustrates the importance of that tiny emirate to global investors in an increasingly interconnected world.

Housing Market

A state-owned investment conglomerate Dubai World, with $59 billion of liabilities, set off a global stock market selloff this week after it said it wants to restructure its debt, including at its property subsidiary Nakheel.

"This downturn has had more of a global impact," said Tony Ciochetti, chairman of Massachusetts Institute of Technology's Center for Real Estate in Cambridge, Massachusetts.

"As I try to explain to my students, with a global economy, we're all attached at the hip financially in some way, shape or form," he added.

The Dubai news also cast doubt over the strength of the fledgling U.S. economic recovery, and the prospects for a bottoming of property prices.

On Friday alone, the Dow Jones U.S. Real Estate Index .DJUSRE fell 2.9 percent, nearly twice the decline of broader U.S. market indexes.

"Dubai may have to unload some very prestigious properties at distressed prices and this will drive the price of all commercial real estate lower," wrote Richard Bove, a banking analyst at Rochdale Securities in Lutz, Florida.

PRESTIGIOUS PROPERTIES

In the United States, Dubai World's portfolio includes several well-known properties, and the fallout could have a larger impact on the entire real estate market.

The company is a partner with casino operator MGM Mirage (MGM.N) in the $8.5 billion CityCenter project, which would add 6,000 rooms to a Las Vegas Strip gambling corridor already saturated with unoccupied hotel rooms.

Nakheel, perhaps best known as the developer of Dubai's palm-shaped islands, also carries the Mandarin Oriental and W hotels in New York in its portfolio, and has a 50 percent stake in the Fontainebleau Miami Beach resort.

And, through its Istithmar affiliate, Dubai World controls the upscale retailer Barneys New York Inc DBWLDB.UL.

The main threat to U.S. commercial property from Dubai World woes may be "potential for contagion," said Sam Chandan, chief economist at Real Estate Econometrics LLC in New York.

"It has the potential to spill over into the broader perception of real estate development and real estate as being a very risky area for exposure," Chandan said.

Many have already been burned.

U.S. commercial real estate values have already fallen 42.9 percent from their 2007 peak, Moody's Investors Service said.

Last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8 percent, more than six times the year earlier level, according to Trepp LLC in New York.

In a November 23 report, Moody's analyst Nick Levidy said prices could bottom at 45 percent to 55 percent below their peak, implying an additional 5 percent to 28 percent decline, but in a "stress case" could drop 65 percent from their peak.

CURRENCIES AND SUBMARINES

Like U.S. investors, foreign investors were enticed through much of this decade to buy U.S. real estate aided by cheap credit and the hope that property prices would steadily rise for a long time.

Currency fluctuations also provided a boost.

And the U.S. dollar lost about one-third of its value against a basket of currencies .DXY since late 2002, making it easier for foreign investors to scoop up U.S. real estate even when valuations grew too rich for investors at home.

Dubai World's holdings go far beyond real estate. It has a 20 percent stake in Canada's Cirque du Soleil, and also invests in the global bank Standard Chartered Plc (STAN.L) and New York boutique investment bank Perella Weinberg Partners.

Other investments go farther afield -- or under water.

Dubai World is suing a former executive in a case arising from a wayward foray into submarine financing.

But Ciochetti suggested it is premature to quantify Dubai World's impact on U.S. commercial real estate.

"It is hard to focus on any one particular participant and then generalize about the whole market," he said.

"It illustrates that very few places and participants in the commercial real estate market are totally exempt from the global economic crisis."

Home Remodeling For A Bigger Return

Indy Star

Question: What remodeling projects add the most value to a home?

Answer: Despite the recent slide in home values across the country, remodeling projects still are considered a safe investment during uncertain economic times. While home prices have fallen an average of 7 percent nationally, the value of investing in home remodeling projects has declined only 3.86 percent, according to Remodeling Magazine's 2008-2009 Cost vs. Value Report and the National Association of Realtors.

This annual study reviews all types of remodeling projects and identifies which ones offer the best return on investment. In recent years, the top three projects have remained the same.

At the top of the list is replacing old siding with one of the upscale fiber cement products on the market.

The second-best investment is installing a midrange wood deck [outdoor decks Saugatuck].

The third is a midrange siding replacement project using a vinyl siding product.

Fourth on the list is siding replacement using upscale foam-backed vinyl.

Rounding out the top five is a midrange minor kitchen remodel [kitchen remodeling saugatuck].

What's the common theme among the first four projects? If it improves curb appeal, it will bring higher returns.

Not surprisingly, when it comes to traditional remodeling projects, kitchens and baths are the smartest places to spend your money. These rooms are where homebuyers expect money to be spent. In fact, a kitchen remodel is the only interior project included in the top 10 returns on investment. One improvement lending significant curb appeal is the addition of a sunroom [sunrooms Saugatuck].

Keep the list going, and you'll find that the next category of projects with high returns includes window replacements of various types. Why? Like siding, these usually are projects of necessity. Consumers have an awareness of energy efficiency and understand that new windows are essential to controlling energy costs.

The message to consumers is this: Putting money into your home still is a good investment, but be wise with your selections. To make the most of your investment, take care not to turn off potential buyers, and focus on projects that boost curb appeal.

Horror Story Of Junk Mortgages Continues

CNN Money

Back two years ago when the mortgage meltdown was heating up, we wrote an article called "Junk Mortgages Under the Microscope" dissecting a particularly wretched mortgage-backed securities issue peddled by Goldman Sachs.



We wanted to show how these complex securities really worked and how Moody's and S&P, the rating agencies, aided and abetted the process by giving two-thirds of an issue backed by ultra-risky second mortgages the same safety rating they gave to U.S. Treasury securities.

We thought this was a cautionary tale -- but it's turned into a horror story. All the tranches of this issue, GSAMP-2006 S3, that were originally rated below AAA have defaulted. Two of the three original AAA -rated tranches (French for "slices") are facing losses of about 90%, and even the "super senior," safer-than-mere-AAA slice is facing losses of 25%. How could this happen? And what lessons can we take away from it?

Let's revisit the way this security was put together, and how and why it fell apart. And for the first time, we can even estimate the value -- low -- of the mortgages backing it, thanks to a new service called ABSNet Loan HomeVal.

Our tale begins in April 2006, when Goldman Sachs (GS, Fortune 500) sold $494 million of securities to institutional investors seeking yields somewhat above those that were available on U.S. Treasuries or high-rated corporate bonds.

It was an especially hinky offering, because it was backed by second mortgages rather than by traditional first mortgages. A first mortgage rarely becomes completely worthless, because a house is usually worth something.

But often all it takes is a decline of 20% in a home's value to wipe out a second mortgage, which is typically piled on top of an 80% first mortgage. In our case, borrowers' stated equity in their homes averaged less than 1% -- 0.71%, to be precise. Even that was doubtless overstated because a majority of the mortgages were low-documentation and no-documentation.

Despite these problems, the formulas used by Moody's and S&P allowed Goldman to market the top three slices of the security -- cleverly called A-1, A-2 and A- 3 -- as AAA rated. That meant they were supposedly as safe as U.S. Treasury securities.

But of course they weren't. More than a third of the loans were on homes in California, then a superhot market, now a frigid one. Defaults and rating downgrades began almost immediately. In July 2008, the last piece of the issue originally rated below AAA defaulted -- it stopped making interest payments. Now every month's report by the issue's trustee, Deutsche Bank, shows that the old AAAs -- now rated D by S&P and Ca by Moody's -- continue to rot out.

As of Oct. 26, date of the most recent available trustee's report, only $79.6 million of mortgages were left, supporting $159.9 million of bonds. In other words, each dollar of bonds had a claim on less than 50¢ of mortgages.

But even worse, those mortgages aren't worth anything like their $79.6 million of face value, according to ABSNet Loan HomeVal. ABSNet, unveiled in October, combines a database from Lewtan Technologies of Waltham, Mass., that has a list of every mortgage underlying every mortgage-backed issue, with data from Collateral Analytics of Honolulu, which tracks individual home values. It gives you a snapshot of the value of the collateral backing a mortgage security.

As of Sept. 26 -- a slightly different date from what we're using above -- ABSNet valued the remaining mortgages in our issue at a tad above 20% their face value. Now, watch this math. If the mortgages are worth 20% of their face value and each dollar of mortgages supports more than $2 of bonds, it means that the remaining bonds are worth maybe 10% of face value.

If all the originally AAA -rated bonds were the same, they'd all be facing losses of 90% or so in value. However, they weren't the same. The A-1 "super senior" tranche was entitled to get all the principal payments from all the borrowers until it was paid off in full. Then A-2 and A-3 would share the repayments, then repayments would move down to the lower-rated issues.

But under the security's rules, once the M-1 tranche -- the highest-rated piece of the issue other than the A tranches -- defaulted in July 2008, all the A's began sharing in the repayments. The result is that only about 28% of the original A-1 "super seniors" are outstanding, compared with more than 98% of A-2 and A-3. If you apply a 90% haircut, the losses work out to about 25% for the "super seniors," and about 90% for A-2 and A-3.

This was an especially bad issue, which we picked (on advice of some bond mavens who aren't competitors of Goldman Sachs) precisely because it was so awful. According to Bloomberg LP, recent trades in the A's were at less than 7% of face value. So the market is saying the losses are even greater than our estimates.

Goldman and Moody's declined to discuss this security. S&P told us that it had toughened its standards in 2005 and had discontinued rating second-mortgage securities in 2008. "Had we anticipated fully the severity of the declines in these markets at the time we issued our original ratings, many of those ratings would have been different," a spokesman said.

Now to the investment lessons: The first is, Don't put your faith in rating agencies, even though some branches of the federal government, including the Federal Reserve, use ratings to determine whether certain securities qualify as collateral under federal loan programs to financial institutions.

Our problem is that if things change for the worse after the original rating comes out, the agencies' response is, "Oops, sorry about that," and they revise the ratings down after you've already taken a hit. When lawsuits arrive, the agencies say all they did was issue an opinion that's protected under the First Amendment, therefore they're not liable.

The second lesson is, No matter how fancy the name is on the offering statement -- Goldman Sachs, the calumny being heaped on it lately notwithstanding, is still Wall Street's alpha outfit -- you're on your own if the issue heads south.

The final lesson is, Beware of the dangers of bottom fishing. It would have been tempting to buy this security when the original AAA paper traded down to the low two-digits -- but any buyer that did that is sitting on big losses.

Just as things often rise further than you think they will and stay there longer, they can also fall further than you think and keep on falling. Remember that when someone tells you that something is so cheap that it has nowhere to go but up.

General Growth Properties Emerging From Chapter 11

Associated Press

General Growth Properties Inc. said Wednesday lenders have agreed to restructure about $9.7 billion in debt under a plan that will allow the nation's second-largest shopping mall operator to emerge from bankruptcy protection by the end of the year.

General Growth will pay off loans covering 92 regional shopping centers, offices, community centers and related subsidiaries. The plan will allow the real estate investment trust to retain ownership of the properties, including the Ala Moana Center in Honolulu and the Harborplace & The Gallery in Baltimore.

The Chicago-based company expanded aggressively during the real estate boom, amassing $27 billion in debt. As the real estate market imploded and financing dried up, General Growth was unable to refinance its short-term loans and in April became the largest U.S. real estate company to file for bankruptcy.

Greg Cross, an attorney representing the largest block of secured General Growth creditors, said lenders extended the length of their loans in exchange for full repayment, plus interest and bankruptcy costs. The lenders also will get increased oversight of the loans and General Growth's financial reserves.

The plan will go before the Bankruptcy Court of the Southern District of New York on Dec. 15.

General Growth's debts are tied to securities, which were purchased by investors. On Wednesday, Fitch Ratings said it doesn't expect the securities' ratings to be affected by the plan.

General Growth is exiting bankruptcy at one of the most challenging times in commercial real estate history. The national vacancy rate for retail space, for example, is over 10 percent, up from about 8 percent last year, according to Reis Inc., a real estate data tracker.

At the same time, landlords have had to cut deals to keep struggling tenants, driving rents down almost 2 percent to $19.22 per square foot, and Reis economist Ryan Severino doesn't expect conditions to improve for the next two years.

And while General Growth was mired in bankruptcy, its rivals took advantage of thawing equity and debt markets to raise cash. REITs raised about $20 billion this year, after the capital markets virtually shut down in 2008.

"REITs have demonstrated the ability to access capital," said Richard Anderson, an analyst at BMO Capital Markets, "and put to rest any conversation of their survivability."

Ten Questions On The Housing Market

The Wall Street Journal

The U.S. housing market has been in a slump for the past four years. When will it ever end?

In recent years, real estate has proven as jittery and unreliable as any other market. The average U.S. home price nearly doubled between January 2000 and April 2006, according to the First American LoanPerformance index. Since then, the average has fallen about 30%. The drop has been 53% in the Las Vegas metropolitan area and 39% in Miami, where about a quarter of all households with mortgages are behind on their payments or in foreclosure. The value of your home might be determined more by whether the neighbors keep their jobs than whether the house has ample light and closet space.

Here is a guide to navigating a fractured and volatile market:

1. Is the housing market getting better?

It has shown some signs of healing this year, but the much-touted recovery is tentative and fragile.

Home sales have increased from the severely depressed levels of 2008. The inventory of unsold homes listed for sale also is down. Bidding wars are breaking out for foreclosed homes in the sorts of neighborhoods (near jobs and decent schools) that attract both first-time buyers and investors seeking rental properties.

But more than 6.7 million U.S. households with mortgages, or about 13%, are behind on their payments or are in the foreclosure process, according to the Mortgage Bankers Association. Eventually, many of them will lose those homes, sending more supply onto the market. Unemployment has continued to rise, and the housing market is unlikely to show a sustained recovery until job growth resumes.

While the supply of middle-class homes on the market has declined somewhat, it remains ample in most places. And there is a huge glut of high-end houses for sale in many areas. That means prices of high-end homes might still have a long way to fall.

2. When will housing bottom out?

There probably won't be any clear turning point. Monthly indicators, such as home sales and prices, tend to bounce erratically from month to month, making it hard to discern the underlying trend. And the housing bust will end at different times in different places. House prices already might have bottomed out in the coveted Virginia suburbs with short commutes into Washington, D.C., for instance. But it probably will be years before all of the unsold condos find buyers in parts of Florida.

Generalizations about states or metropolitan areas don't say much about what is happening in your neighborhood. In Summit, N.J., known for good schools and an easy, 45-minute train commute to Manhattan, the median home price in September was up 1.2% from a year earlier, according to Otteau Valuation Group, an appraisal company. In Atlantic City, N.J., which suffers from too much speculative building of condominiums and weak demand for vacation homes, the median price is down about 12% from a year ago.

3. What signals should I watch to determine whether my local market is improving?

One way to get a sense of supply is to ask a good local real estate agent for stats on how many homes are listed for sale in your town and how many months it would take at the current sales rate to absorb that supply. Anything over about six months generally is considered high, meaning that sellers might have to cut prices. Another way to get a sense of a neighborhood's health is to count the number of for-sale signs and vacant houses. If there are more than a couple vacant homes in a block, that might be a bad sign, particularly if no one is taking care of them.

The supply of homes listed for sale has fallen very sharply in some areas. But the supply is likely to balloon again in many areas with a renewed surge in foreclosures. Many local newspapers provide information on foreclosure filings.

Demand depends heavily on the job market. The U.S. Bureau of Labor Statistics provides unemployment rates by metropolitan area. In September, they ranged from 2.9% in Bismarck, N.D., to 30% in El Centro, Calif. State and local agencies provide job-market data, too. Celia Chen, a housing economist at Moody's Economy.com, says help-wanted signs can be a useful local indicator; if you start seeing more of them around your neighborhood, that is a sign that business in your area could be starting to recover.

4. How can I figure out the value of my home?

You never know for sure what a home will fetch until you put it on the market, and then it is partly a matter of luck. Will the eager buyer who shares your taste in home style and neighborhood show up on day one or day 200?

Some Web sites -- including Zillow.com, HomeGain.com and Cyberhomes.com -- provide estimates of individual home values. These estimates are largely based on recent sales of nearby homes, and in some cases they are wildly off the mark. But they often provide a ballpark idea of a home's value.

You might come closer to the real value by talking to a local agent and looking at recent prices for homes that you know are very similar to yours. If you want to be more scientific and don't mind paying a few hundred dollars, hire a professional appraiser.

5. Does it matter whether I'm "under water"?

At least you have plenty of company. About 20% of owners of single-family homes with mortgages owe more than the current estimated value of their homes, according to Zillow.com.

If you can afford your monthly payment and don't need to move soon, that might not be a big problem. But it is hard, and sometimes impossible, to refinance a mortgage if you are under water, and you will take a bath if you have to sell the home now. Some people who can afford to make their monthly mortgage payments are deciding it doesn't make sense to do so because they don't expect their home values ever to recover to past peaks, and they could rent similar houses for much lower monthly costs.

6. If I lose my home to foreclosure, how long will it take to repair my credit record?

It probably will be three to five years before you can qualify for a home mortgage insured by the government, depending on your circumstances, and that assumes you have re-established a record for paying your bills on time. The foreclosure will remain a blot on your credit record for seven years, likely raising your interest costs even if you do get another loan. If you pay bills on time, keep your credit-card balances low and don't apply for too many cards, you can make a "slow, gradual improvement" in your credit score, says Tom Quinn, a vice president at Fair Isaac Corp., which provides tools for analyzing credit records.

7. If I'm renting, is now a good time to buy a house?

It may well be. Prices in most areas are well below their peaks, even if they haven't hit bottom. Don't kid yourself that you can time the bottom of the market perfectly. But don't feel any pressure to buy in a hurry, because the supply of housing is likely to remain ample for years in many areas.

Generally, it doesn't make sense to buy unless you expect to remain in the house for at least four or five years, because the transaction costs -- including commissions for real estate agents and mortgage fees -- are heavy.

But now is clearly a good time to rent. Many landlords need tenants badly. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. So landlords are cutting rents and offering such sweeteners as free flat-screen televisions or several months of free rent to retain or attract tenants. Some owners of condos will "cut their throats to get some kind of rental income to cover part of their expenses," says Jack McCabe, a real estate consultant in Deerfield Beach, Fla.

8. Can I get a tax credit if I buy a home now?

Under an expanded and extended program approved by Congress earlier this month, tax credits are available to many people who buy or sign a contract to buy a principal residence by April 30 and complete the purchase by June 30. The tax credit is up to $8,000 for first-time home buyers and $6,500 for people who already have owned a home for at least five consecutive years during the previous eight years. The credit is available for individual taxpayers with annual incomes of up to $145,000 or joint filers with incomes up to $245,000.

9. Can I get a mortgage on attractive terms?

Only if you have a good credit record, a moderate amount of debt in relation to your income and the ability to fully document your income. That last requirement is fairly easy for people who work for a salary and have had the same employer for more than two years, but it can be tough for self-employed people with incomes that vary substantially from year to year.

A borrower with a strong credit score of 740 or higher (on the scale of 300 to 850) and the ability to make a down payment of at least 20% could get an interest rate of about 5% with no origination fees on a 30-year fixed-rate mortgage, says Lou Barnes, a mortgage banker in Boulder, Colo. But if your credit score is 680, the rate jumps to about 5.5%.

People who can't make a down payment of at least 20% generally are being funneled into loans insured by the Federal Housing Administration. That means paying extra fees for the FHA insurance.

Borrowing costs are steeper at the high end of the housing market. For so-called jumbo loans -- those above $729,750 in areas with the highest housing costs or $417,000 in places with the lowest costs -- interest rates on 30-year fixed-rate mortgages last week averaged 5.95%, according to HSH Associates, a financial publisher.

10. Should I invest in foreclosed homes?

Probably not. A lot of investors chase these properties, and only the most experienced know how to deal with all of the pitfalls. Homes auctioned at trustee or sheriff sales are sold on an as-is basis, and there is no provision for an inspection before you take ownership. If after buying you find out that termites have been treating the floor joists as an all-you-can-eat buffet, that is your problem. You must pay for the full price within a day or two, so you need a lot of cash or access to special short-term loans for investors that come with interest rates of around 18%. This is a pursuit best left to people with a lot of time, nerve, cash and knowledge of the local market.