A Mortgage History Lesson & Foreclosure Tax Repercussions

The current mortgage environment has drawn many comparisons with the 1930's, when the government stepped in. It is generally agreed that without those fundamental changes, the Great Depression could have been much worse than it was. In the early part of the last century, most home loans were a 5-yr ARM with a balloon payment. Keeping that in mind, here's a brief summary:

In 1932, the National Association of Real Estate Boards proposed (and Congress created) the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. The Appraisal Institute was also founded in 1932 by the appraisal industry. Bankruptcy and eviction laws were modified and in 1933, Congress created the Home Owners Loan Corporation to help borrowers move from 5-yr balloon loans to 15-year amortizing mortgages.

In 1934, Congress created the Federal Housing Administration (FHA) to insure mortgages and the Federal Deposit Insurance Corporation (FDIC), intended to prevent runs on banks from depleting resources for home mortgages. Lastly, in 1938, Congress created the Federal National Mortgage Association (FNMA or Fanny Mae). Some argue that it is very early in this current business cycle; however it is easy to see the amount of government intervention juxtaposed with today's market, especially at the Federal level.

A plan is nearing fruition on a plan to freeze some subprime rates, but that won't help those already foreclosed upon. As most originators know, in many states (including California), most mortgages that are used to purchase a residence are nonrecourse, but mortgages from refinancing a previous mortgage are usually recourse, based on the note. So, can the lender come after the borrower for the difference? If the loan (Deed of Trust) is a purchase money loan secured by a house that is the borrower's principal residence, the answer is generally "no."

California's anti-deficiency laws [California Code of Civil Procedure Section 580(b)-(d)] protect homeowners by preventing lenders from doing any more than taking back the property. These anti-deficiency laws were enacted during the Depression to give homeowners a fresh start, without a deficiency judgment hanging over their heads. However, the code section is fairly specific. The loan had to be for the purchase of the property and the borrower has to occupy it as his or her principal residence: (No non-owner or vacation homes.) The lender can choose to file a judicial foreclosure against the borrower. For loans involving a refinance or line of credit (technically not purchase money loans) a lender could go after the borrower for the difference.

Regarding tax consequences, here are some sites that may be of help for you:
Questions and Answers on Home Foreclosure and Debt Cancellation -- IRS http://www.irs.gov/newsroom/article/0,,id=174034,00.html

Interest/Dividends/Other Types of Income: 1099 Information Returns (All Other) -- IRS http://www.irs.gov/faqs/faq4-4.html

Foreclosures and Repossessions -- IRS http://www.irs.gov/publications/p544/ch01.html#d0e914
Tax Consequences of a "Short Sale" of Real Estate vs. Foreclosure - CPA's website http://www.realestateinvestingtax.com/shortsale.shtml

Blog worth checking on-- http://dirtlaw.typepad.com/blog/2007/02/preforeclosure.html

In recent weeks jumbo loans have worsened relative to conforming prices, almost back to where they were when they were "bad" a few months ago, and currently have a difference of roughly 1%. So, as usual, headline-grabbing Treasury yields are improving, yet mortgages are plodding along. Conforming rates have improved slightly, jumbo prices hardly at all, while Treasury rates are down. If asked why, the primary reasons are:

1. Continued fear of delinquencies and foreclosures with mortgages (something not present with Treasury securities)


2. Investors nervous about declining property values in many markets (not a factor with Treasury securities)


3. The fear of early pay-offs on current mortgages if rates continue to move down (also not a factor with Treasuries).

The investor perceptions of mortgage companies and FNMA & FHLMC (their stocks are down 50% in recent months) are not helping either.

News today that "The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations," is helping us somewhat. In fact, financial stocks are up significantly today. But the 10-yr bond continues to dance around 4% and mortgage prices are roughly unchanged.

Oil has dropped into the $89/barrel range for the first time in over a month. The economic news this morning was mixed. Personal Income was +.2 Personal Consumption was +.2%, with no revisions, but the price deflator moved up year-over-year. Unfortunately rates had crept up overnight, given the potential rally in the stock market.

Besides announcing $1.4 billion in HELOC-related write-downs, Wells Fargo engaged in further product changes. Effective today, for all of their nonconforming Verification of Assets loans, the maximum debt-to-income ratio requirement will decrease from 45% to 38%, and non-self-employed borrowers now have reduced eligibility for Limited Doc/VOA. At least one of the borrowers on the loan application must have their income derive from self-employment to be eligible for Limited Doc/VOA documentation option.

Speaking of Wells Fargo, they are absorbing $1.4 billion in losses on home equity loans that borrowers have stopped repaying. Well Fargo's troubled home equity loans, totaling $11.9 billion, represent about 14 percent of the bank's total home equity portfolio of $83.4 billion. The bank has said most of the delinquent loans originated from mortgage brokers or other lenders on the wholesale market. Wells Fargo is now steering clear of virtually all home equity loans made outside its own offices.

FNMA announced changes to their Alt-A program, effective March 1, 2008. (Remember that most, if not all, investors will probably follow suit.) "In light of the continuing deterioration of market conditions," FNMA will no longer purchase No Income/No Assets (NINA) documentation loans, or No Ratio (No Income/Verified Assets [NIVA]) documentation-type loans. Beginning then, FNMA will only purchase Stated Income/Verified Assets (SIVA) and Stated Income/Stated Asset (SISA) loans, with the following eligibility adjustments: for cash-out refinance loans, the maximum LTV/CLTV is reduced to 75% for all except 1-unit primary residence, the minimum FICO score is increased to 660 regardless of LTV/CLTV, and for 3- to 4-unit properties, the minimum FICO score is increased to 700.

Chase, effective today, is changing their risk-based price adjustments for Agency fixed rate products. Needless to say, they are not for the better. This is in reaction to FNMA and FHLMC's loan level pricing adjustments based on LTV and FICO scores. In addition, JP Morgan Chase will be cutting 91 jobs at a Southern California Mortgage Operations Center.

Freddie Mac is offering $6 billion of preferred stock, saying that the capital will be used for their base requirements. Freddie also cut their dividend by 50%.

Quote of the Day: "This time, like all times, is a good one if we but know what to do with it." ~ Ralph Waldo Emerson

Stumble It!

Definitions provided by: U.S. Property Definitions

Even my parents own a shredder

Even my parents own a shredder. (It sits, still wrapped in the box, under their rotary dial telephone that they lease every month from AT&T.)

Experts say that estimating how frequently confidential mortgage data is leaked is difficult, because many breaches go unnoticed. For three days in July, however, Bob Segall, a reporter at WTHR-TV in Indianapolis , Indiana , looked into 40 dumpsters behind loan branches and title companies that handle mortgage documents. In 18 of them he discovered sensitive information about various borrowers. "You could see their complete financial lives on paper, dating back 20, 30, 40 years," he said. Among the finds inside the mortgage files: a letter from one borrower's counselor saying he was doing well in alcohol rehab . . . .

Who were the top non-conforming lenders for the first half of 2007? There are no surprises: Countrywide, Wells Fargo, Citibank, Chase, Bank of America, WAMU, Residential Capital, Wachovia, Indymac, and American Home.

Is there any good news out there? Evidently not right now.

• Total Existing Home Sales fell 8.0% and are 19% below a year ago. The national median existing-home price for all housing types was $211,700 in September, down 4.2% from September 2006. Total housing inventory inched up 0.4 percent at the end of September to 4.40 million existing homes available for sale, which represents a 10.5-month supply at the current sales pace.
  


• The price of the average home Centex sold fell 8% from a year ago, and in some locations prices were slashed 15 to 20 percent, executives said.
  


• Merrill Lynch took an $8.4 billion hit in the third quarter from revaluing bonds backed by mortgages and other write-downs, and recorded a $2.24 billion loss for the quarter compared with a profit of $1.94 billion a year earlier.
  


• National City said third-quarter earnings fell 80% and recorded a net loss of $152 million in its mortgage banking business in the third quarter.

• Bank of America issued a short statement announcing the closing of their wholesale operation: “Today Bank of America announced that it will exit the wholesale mortgage business in order to devote increased energy to its expanding retail channels."

Stumble It!

The Great Depression Comparison & A Short Course in MI

There are rumors about UBS having huge losses. Bear Stearns, the second largest underwriter of mortgage-backed bonds in the U.S., will write down the value of its subprime-related assets by $1.2 billion in the fourth quarter, cut 900 jobs, and seen its shares drop 38% this year. Barclays, the U.K.’s third largest bank, wrote down $2.7 billion due to credit-related securities tied to the U.S. subprime-mortgage market collapse. Morgan Stanley, Goldman Sachs, Merrill Lynch, the list rolls on and on.

What seems to be safe? The short end of the curve is where the safe haven buying is strongest. The long end of the curve, while doing better, is not doing well due to inflation worries. And therefore mortgage prices are not really benefitting from the strength in bonds.

According to Reuters, Wells Fargo & Co, which has been fortunate enough (so far) to have sidestepped many of the credit and liquidity problems plaguing most U.S. mortgage lenders, believes the nation's housing slump is the worst since the Great Depression and is far from being over. Chief Executive John Stumpf said on Thursday that the second-largest U.S. mortgage lender and fifth-largest U.S. bank is "not immune" from the storm, but is well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008.

"We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a Merrill Lynch & Co banking conference in New York. "I don't think we're in the ninth inning of unwinding this," he continued, "If we are, it's an extra-inning game."
Shares of Wells Fargo fell $1.13, or 3.4 percent, to $32.12 in afternoon trading on the New York Stock Exchange.

Where’s the good news? Besides oil prices sliding back to $93 per barrel, the MBA said that mortgage loan application volume was up 5.5% on the week. The refinance numbers were +6.4% and purchases increased 4.8%. The news out this morning is certainly good for bonds. Treasury rates have dropped dramatically, however mortgage prices have not followed.

Today the 10-yr is at 4.24%, yet conforming rates are still in the low 6’s. Something similar happened 5 years ago, when the Fed began lowering rates in spite of no one having a good sense for where rates were heading. When uncertainty is present, investors require a greater relative yield to compensate for prepayment risk: "Is the loan I buy now for 102 going to pay off in 4 months?" Until there is better consensus about rates, or things stabilize, expect the same issue to exist.

• Our flat yield curve has certainly gone away: the spread between a 2-yr and a 10-yr Treasury security is over .75%, whereas a year ago it was less than .12%.
  The Consumer Price Index was as expected (+.3%, core rate +.2%, year-over-year up 3.5%, core up 2.2%), and Jobless Claims moved up 20k to 339k.
  
  
• Bill Beckman, the president of CitiMortgage, sent out a letter stating that "…at CitiMortgage we continue to focus on growing profitable share through a balanced sourcing model via Correspondent, Wholesale and Retail channels….We continue to be a leader and supporter of the mortgage banking community by supporting and promoting the long-term health and viability of the mortgage lending community…. Our acquisition of ABN AMRO Mortgage Group/InterFirst earlier this year, year-to-date Citi maintains its #3 market share in both originations and servicing, our continued support of non-conforming and non-prime products...."



• From the LA Times: Countrywide said its monthly mortgage volume fell 48% in October from a year earlier as it all but stopped making sub-prime loans and sharply cut back on home equity lines of credit. Meanwhile, delinquencies on the mortgages for which Calabasas-based Countrywide handles the billing and other services continued to mount, and their stock is down 68% this year. CW funded $22 billion in home loans last month, down from $41.9 billion a year earlier but up 4% from September's $21.2 billion. Countrywide funded just $3.2 billion in mortgages through loan brokers last month, a startling 57% decline from the level of a year earlier.



• In addition, CW’s Home Equity group eliminated the reduced doc option above 80% CLTV, entirely eliminated CLTV’s above 90%, and disbanded all ARM subprime lending.
  



• Wells Fargo wholesale announced to their broker clients that non-Full Doc 2nds are "going away" next week, which impacts standalone and piggyback transactions.
  



• Fannie Mae said its third-quarter loss widened to $1.52 billion. For the first nine months of the year, Fannie Mae's net income plummeted to $1.5 billion from $3.0 billion in the same period in 2006.



• Wachovia Corp. said the pretax value of collateralized debt obligations (CDOs) invested in asset-backed securities declined by $1.1 billion last month. That's on top of a $1.3 billion write-down during the third quarter.



• Fitch Ratings downgraded the ratings on $37.2 billion in collateralized debt obligations that were part of 84 transactions. Fitch also affirmed ratings on $6.9 billion worth of CDOs.



• E*Trade Financial, not to be confused with ELoan, saw its stock price crumble 55% Monday morning after an analyst at Citigroup said there's a 15% chance the depository could go bankrupt.

At this point, 2nd mortgages are "few and far between," enforced by recent studies that show piggyback loans with FICO scores of 660 or below were 43% - 50% more likely to go into default. This alone would cause investors to switch their focus from buying 2nds to buying larger first mortgages with mortgage insurance and sure enough, loans with MI tend to receive more Accept/Approve recommendations and are a credit enhancement.

Mortgage insurance companies tout the "simpler financing": one loan to close, one interest rate, one set of underwriting guidelines, and they state that this typically results in competitive monthly payment & lower life-of-loan costs.

MI can generally be cancelled (based on loan servicer's requirements) which will lower the monthly payment, but in the mean time there are two annual premium types: annual (level or declining) and split-premiums. Annuals are the old way of MI: MI is collected annually (included in PITI), it is cancellable, it is refundable (prorated), it is tax-deductible, and the first year premium could be paid as an NRCC.

Splits are a hybrid of One-Time MI and Monthlies: an upfront premium is paid by the builder/seller/borrower (there are limitations on concessions), there is a significantly reduced monthly policy that the borrower is then responsible for (through PITI), it is cancellable, it is refundable, it is tax deductible, and it is also available on Alt-A products.

There's also One-Time MI, where the MI is collected upfront in a single premium... it offers some advantages, but is expensive. Most people opt for LPMI. From a pricing standpoint, MI companies say that the splits are good because of pricing to the borrower once the up-front portion is paid. They are limited by investors, though. Annuals are widely accepted but are more costly to the borrower over the long-run, even if the first year is paid.

Speaking of mortgage insurance, news came out late last week that Old Republic bought a stake in PMI & MGIC. The parent company of Republic Mortgage Insurance Co., Old Republic International, disclosed the acquisition of 15% in two of its rivals in the mortgage insurance business

Thought For the Day: "Finish each day and be done with it . . . You have done what you could; some blunders and absurdities no doubt crept in; forget them as soon as you can. Tomorrow is a new day; you shall begin it well and serenely." ~ Ralph Waldo Emerson

Actions by the FED & other rumblings

Fed Chairman Ben Bernanke suggested a new idea to fix the troubled market for mortgages too large for Fannie Mae and Freddie Mac to buy: allow the companies to securitize jumbos, but have the federal government guarantee them. Fannie and Freddie currently can buy mortgages only up to $417,000 and so far Congress hasn't acted to lift that. As an alternative, Bernanke suggested that Congress could consider allowing the companies to buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them, and then turn them into securities to be sold to investors. But is the Federal government willing to take on additional credit risk in addition to FHA, VA, etc?

The House Committee on Financial Services approved the mortgage reform legislation and anti-predatory lending practices by a vote of 45 to 19. H.R. 3915, the "The Mortgage Reform and Anti-Predatory Lending Act of 2007," will create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan, and will attach a limited liability to secondary market securitizers. The legislation will also expand and enhance consumer protections for "high-cost loans," will include protections for renters of foreclosed homes, and will establish an Office of Housing Counseling through the Department of Housing and Urban Development. From here it moves on to the full House . . . .

• E-LOAN, which opened in 1997, laid off 500 employees (out of 950) worldwide. The lay-offs impacted their auto-lending group, programmers overseas, and a few other business lines.
• HSBC withdrew from the mortgage-backed security trading business in the United States. That is not a good thing.
• Trading in Barclays shares, Britain's third-biggest lender, was temporarily suspended from trading after the stock fell 6% in London.
• Edgewater Lending of Clackamas, Oregon announced the closure of their wholesale department but continued their two retail centers. The layoff involves 8 to 10 people.
• California wholesaler ResMae announced that they have ceased accepting locks.
• Indymac reported a net loss of $202.7 million ($2.77 per share) for the third quarter, compared with net earnings of $86.2 million ($1.19 per share) a year earlier.

Bernanke said that there is a host of economic problems which will cause business growth to slow noticeably in coming months. Finally, we actually have some top level government officials recognizing that we have some problems out there. Just as Bill Gross (Bond Guru for PIMCO FUNDS) has come out and stated that if the FED doesn't continue to lower rates over the next several months, the tidal wave will continue to build and we will be in a world of hurt. Not that we're not there already.

Oil Prices, Gas Prices, and Gold all continue to rise which will make consumers pull in their purse strings even more. Foreclosures, Credit Card delinquencies, and Defaults continue to rise. The Dollar continues to weaken. The strong labor /income market, along with the strong global market with demand for US Exports, have kept our economy alive. Builders continue to lower prices to compete and stay alive. Ultimately this hurts the homeowner around the corner. When will this end? When will it get better? No one knows, however, we do need a solution. Lower Rates will help, albeit temporarily.

We have seen some of the biggest institutions come out and waive the white flag. Wamu, Citibank, Morgan Stanley, Merrill Lynch, Goldman Saks, B of A, etc . . . More losses are to follow. Unfortunately, we have not seen the worse of this yet. Traders are starting to price-in another move in December, although we'll need more negative news on the economy before that happens.

Good news? Treasury yields continue to decline, and the 10-yr is down to 4.26% ahead of the three day weekend. (Mortgages, however, are unchanged, primarily because of continued nervousness about that sector, prepayment risk, and money manager's books being set heading into year-end.) We had the September US trade deficit, as expected, and the Import Price Index which rose 9.0% year-over-year! Later we'll see the preliminary University of Michigan Consumer Confidence number. What is the current thinking on another Fed cut in a month? Interest rate futures show a 90% chance that the Fed will lower the Fed Fund rate to 4.25 at the Dec. 11 meeting.

Quote of the Day: "It's never too late to be what you might have been."
~ George Eliot

Let us not forget that Monday is Veteran's Day. Take some time out of your day on Monday to remember those who served our country during time of war and those who gave their lives so that you and your loved ones didn't have to . . . .

The mortgage business

The mortgage business just finished a conference in Boston . Besides the numerous comments about it being a “job fair”, this comment from an attendee was particularly interesting:

“The unfortunate part of the conference was that those who were out of work were actually the most cheerful, as if some weight had been lifted. Those who were working were so concerned about what faces us every day - declining volumes, repurchase issues and declining values – that it wasn’t enjoyable.”

· The latest FDIC data shows BofA controls an 8.9% market share of deposits, followed by JP Morgan Chase at 7.0% and Wachovia at 5.9%. (BofA could still acquire a bank with up to $75B in deposits and still be under the 10% cap.) Speaking of BofA, their earnings today were far below expectations, much attributed to non-performing loans.

· Mortgage applications last week were up slightly, given the Columbus Day holiday.

· Washington Mutual Inc.'s third-quarter profit shrank 72%. WAMU reserved $967 million in the third quarter to prepare for borrowers defaulting on their debt. The bank also had a write-down of $147 million after transferring to its investment portfolio $17 billion in home and other real estate loans that it had originally intending to sell.

· Wachovia plans an aggressive expansion in California – aiming for a fivefold increase in the number of branches in the state over the next several years. Based in Charlotte , N.C. , most think of them as the company that bought World Savings.

The bank is in the process of changing the signs on the former World Savings branches to Wachovia, at which point they will have 149 branches in the state. Wachovia was a regional bank until 2001, when it merged with First Union, and now operates in 21 states. The bank's latest acquisition is the $6.8 billion takeover of brokerage firm AG Edwards.

Rates are continuing to drop, and prices improve, as a) BofA announced their earnings, b) weekly Jobless Claims were +28k to 337k, c) housing market indicators continue to show sustained weakness, and d) the chance of a Fed Funds cut on the 31st have increased to 75%. Is the labor market starting to slide? Later this morning we have September’s Leading Economic Indicators index is expected to show a slight gain of 0.3%, while the Philly Fed will likely decline 3.9 points to a reading of 7.0.

Where is the economy heading? And just what is "FHASecure"? What a great question. Last week Retail Sales was surprisingly strong, up 0.6%, but the University of Michigan Consumer Confidence Index Fell to 82 - the lowest since August 2006 as the outlook for housing worsened. The Producer Price Index was stronger than expected, indicating inflation is still a concern, yet house prices continue to slide in many areas.

Unemployment is low, and many companies are looking for workers (I can’t walk by a Starbucks without thinking about turning in an application!), yet foreclosure rates are climbing because borrowers can’t afford their payments.

Tomorrow we get another clue with the Consumer Price Index, but given that unleaded gas is once again above $3/gallon has led me to tell the kids that Christmas will be slim this year… It hasn’t helped, and this could point to lower rates eventually, that there has been positive overall job growth but all of that growth attributable to three employment categories: education and health services, food service and drinking places, and government (Federal, State, and Local).

Continuing on, mortgage prices have improved a little this morning (and the 10-yr is at 4.66%) but were slightly worse yesterday after a report showed manufacturing in New York reached the highest level in three years (aren’t we a service economy?).

The factory report adds to expectations that the Fed will stay on hold. We also saw an $80 billion plan over the weekend to revive the credit markets: Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to start a fund to help revive the asset-backed commercial paper market.

The high-stakes plan to rescue banks from losses on mortgage securities amounts to a big bet that this group can persuade investors to pour more money into the credit market. Companies depend on commercial paper to finance day-to-day expenses like payroll and rent, although we’re already seeing the jumbo market improve slightly.

Pessimists thought that the “super-SIV story is a bit much for the market to handle...we have some risk that needs to find a home; none of the existing firms want that risk...so we will create a new ‘firm’ to become the buyer of last resort, capitalized from the firms that created the products, but don't want them at current prices.”

Are they trying to create a buyer out of thin air?

Ginnie Mae announced last night that starting December 1, 2007, all FHASecure loans will fall into the GNMA II program but they will be pooled separately as “specifieds” and will not be TBA deliverable. But what is an “FHASecure” loan?

President Bush, on August 31st, announced that HUD's Federal Housing Administration (FHA) will help families avoid foreclosure by enhancing its refinancing program. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.

In addition, FHA will implement risk-based premiums that match the borrower's credit profile with the insurance premium they pay - i.e., riskier borrowers pay more. The press release can be found at http://www.fha.gov/press/2007-08-31release.cfm The FHASecure program was conceived as a way for borrowers that are having trouble making their post-ARM reset payments to refinance into a fixed-rate FHA loan.

You can also visit http://www.fha.gov/about/fhasfact.cfm. Eligible homeowners must have a non-FHA insured ARM that has reset, sufficient income to make the mortgage payment, and a history of on-time mortgage payments before the loan reset.

Thought for the Day: “The ultimate responsibility of a leader is to facilitate other people’s development, as well as his own.”
~ Fred Pryor

Welcome to Stockton : foreclosure capital USA

by Zachary Slobig Thu Sep 13, 9:20 AM ET

STOCKTON , United States (AFP) - A town in central California has become ground zero in the wave of foreclosures plaguing the US housing market in the wake of the sub-prime lending crisis.

With a population of nearly 300,000, Stockton has acquired the unfortunate distinction of having the highest foreclosure rate of any US city, with one in 27 households left counting the cost of the credit crunch, according to Realtytrac, an online marketplace for foreclosure sales.

Stockton 's Weston Ranch neighborhood, a 15-year-old subdivision of modest tract homes, has the worst foreclosure rate in the area, according to ACORN, a national advocacy group for low and moderate-income families.

Adjustable rate mortgages offered to sub-prime borrowers, hopeful homeowners with shaky credit, lured families into houses with inflated prices, said Taylor .

"Many financed one hundred percent of the price, and some even financed the closing costs," she said. "They got in at a teaser rate thinking this neighborhood would be commutable and affordable, and then the rates went up."

Sign-after-sign beckon to potential buyers on the Weston Ranch streets. "American Dream Realty -- Reduced Price!" reads one placard spiked into a brown lawn.

"People are just walking away," said Taylor . "We've seen houses with food still on the table from when the sheriffs have come knocking."

Lupe Dominguez washed his car in his driveway two doors down from a shabby bungalow with a front window covered in a yellow and black poster announcing a public auction with a fifty thousand dollar starting bid.

"That house has been empty for nine months or so and the sign has been there for two," he said.
A friend who lived down the street lost his house to foreclosure and then rented a house that he had to vacate because it too was foreclosed, he said.

Gloria Johnson, another broker in the Weston Ranch area, has increased her volume of "short sales," as a method to help homeowners avoid foreclosure and wrecked credit.
In this arrangement, the borrower provides evidence of financial hardship and the lender agrees to assume a loss and sell the house below the amount owed on the mortgage.

"It is almost like begging, but I am doing everything I can to help these people maintain their dignity," she said.

Taylor too has modified her business practices, shifting her focus from home sales to rental property management, advising clients to wait out the market. She manages fifty rental homes now, properties that she hopes to sell for clients when buyer interest returns.
"There are just are no buyers out there right now," said Taylor .
Houses are sitting on the market three times as long as in 2006 and the average sale price has dropped by 10 percent, she said.

"We've got 350 homes for sale in this neighborhood right now and at this rate, that is five years of inventory," said Taylor .

"Nobody has a crystal ball, but I don't expect to see an improvement until 2010."
Potential homeowners must be better educated about the market, said Lance Hill, a housing counselor with Visionary Homebuilders, a Stockton non-profit whose goal is to extend homeownership to low-income families.

"To be mortgage ready, they need to know what adjustable rates, refinancing, and pre-payment penalties mean, and we must make sure that they have a certain education level," he said.
Stockton has had 8,000 foreclosures so far in 2007.

"Home ownership is a great thing," said Taylor , "But only if you can afford it."

Definitions provided by: U.S. Property Definitions

The Mortgage Minute

The Mortgage Minute