More homeowners selling houses for less than they owe

After years of borrowing in a sizzling housing market, more homeowners are finding themselves upside down on mortgages.

They borrowed more to buy or fix up homes than they can now afford, and a growing number are turning to short sales — selling homes for less than they owe — to unload high payments and avoid foreclosure or bankruptcy.

No organization tracks short sales, but real-estate agents, housing counselors and mortgage companies say they have been seeing more of them since the economy tanked and employers began laying off workers.

Most are the end result of delinquent mortgages — those not paid for more than 90 days — which have risen dramatically in the Seattle-Tacoma area the past three years. The number of delinquent mortgages rose 50 percent between June 2000 and July 2003, according to Loan Performance, a San Francisco firm that tracks mortgage data monthly.

For GVE, the increase in mortgage trouble is good news. GVE, in Covington, is one of the few companies in the area that brokers short sales, and business is up 70 percent in the past nine months, founder Joanne Anderson said.

She has been working 16-hour days, six or seven days a week, to keep up with demand, she said, and plans to hire 10 employees in the next year.

In the late 1990s, people were encouraged by rising stock portfolios and a robust economy. They took out large mortgages and tacked on home-equity debt with the help of looser loan-qualifying rules.

But low down payments, subprime loans (high-rate home loans aimed at buyers with terrible credit), and predatory mortgages (loans for people who often shouldn't have one), have gotten more people into homes they can't pay for.

"We're seeing tons of short sales and foreclosures because people are in over their heads," said Debra Snoey, branch manager at Windermere's Federal Way office, who works with Anderson on short sales. "It's refreshing when a buyer has equity now."

Although some lenders say buyers should max themselves out for a mortgage, being more practical is safer.

"(People) are buying more expensive homes because they want one bigger, newer and better," Anderson said. "But they don't realize that if they bought a home for $20,000 less and saved up $5,000 for a down payment, they'd be sitting so much better."

An Issaquah woman who recently sold her house for $30,000 less than she owed on it never thought she'd be in that position.

The woman, who didn't want her name used because she's embarrassed, said she and her husband earned more than $200,000 a year, lived in a 3,200-square-foot custom-built home on an acre, and bought a new car every year.

Then her husband took a pay cut to save his job, and they couldn't keep up with the bills. The couple divorced, and he filed for bankruptcy, leaving her with three kids and two mortgages.

To make it, she put the family's home on the market, reducing the price four times in six months. In May, it finally sold, but at a loss.

"It's awful and embarrassing to do a short sale and admit you're a deadbeat," she said. "(But) people make mistakes. This can happen to anyone."

Sellers lose a lot in a short sale, but buyers can make out because the homes usually are worth more than they cost.

Hal Bancroft and his partner bought a 3,330-square-foot house in Everett last year from a couple who could no longer make their payments. The former owners had taken out a second mortgage to buy a motor home, but the man lost his job at Boeing and his wife broke her back. They sold the home for $205,000 — $30,000 less than they owed.

The deal had strings, though. Short sales can take several months to close because lenders take longer to approve them.

"It took four months to close what should have been a 30-day transaction," Bancroft said. "The byword with short sales is patience."

For real-estate agents, short sales aren't so good. Adnan Othman, with John L. Scott Real Estate in Lynnwood, said he usually receives a reduced commission of 1 to 1.5 percent and sometimes doesn't get one at all — agents typically get 3 percent on a regular sale — but he keeps handling them. Othman is working on four now.

"There's a lot of sadness when you see this," Othman said. "You want to throw a life preserver to them and see if you can help."

This is another problem:

Refinanced mortgages could haunt you into retirement

WASHINGTON - Malcolm Buckey would be 97 years old when the 30-year mortgage on his dream home in Ponte Vedra Beach, Fla., is paid.

Walter Molony of Annandale, Va., would be 84 when the last payment comes due on his 30-year loan.

For many middle-aged homeowners, taking advantage of low mortgage rates will have an unintended consequence: As retirees on reduced incomes, they could have mortgages to contend with.

Experts say these people should consider their financial strategies carefully when opting for a 30-year loan rather than one for 10 or 15 years.

"You could have a significant financial problem if things don't go as planned," said Mark Zandi, chief economist at Economy.com, a research firm in West Chester, Pa. "For instance, your income isn't as strong as you thought it would be, and you won't be able to pay off your mortgage as quickly as you had thought. Or home prices end up being a lot weaker than you expected, and you won't be able to sell and pay off the mortgage."

People of average financial means should try to avoid having mortgage payments when they're retired, financial experts say. Nonetheless, it can make financial sense for some people to take out a longer-term loan.

In general, people in their 40s and 50s are enjoying their peak earnings years. This can make people better able to handle a shorter-term mortgage, but a longer-term one might offer more financial flexibility.

Buckey sold a house in Richmond, Va., to get the cash to pay for his ranch-style house in Florida. He decided to finance about 20 percent of the new house with a 30-year loan because the lower monthly payments offered flexibility. Plus, he would get a tax break.

"It was a budgeting issue," he said. "We wanted to make improvements."

Extra money for home-improvement projects or retirement investments are among the reasons older people cite when going for 30-year mortgages.

Molony, 54, refinanced his mortgage twice this year and went with a 30-year loan each time.

He and wife, Cathy, took out a larger loan in March and used the extra cash to make extensive repairs and upgrades on their house in Annandale, Va., as well as to pay off the mortgage on a cabin in the West Virginia mountains. He refinanced again in June to lower the monthly payments further.

There's a tax break to consider, said Greg McBride, a financial analyst with Bankrate.com, an online financial service. "By taking out a 30-year mortgage, you are paying down a lot less principal in the longer term, getting a larger tax deduction through the interest you are paying," he said.

Experts say middle-aged homeowners who take out 30-year loans are likely to pay them off ahead of time. They might be banking on a sharp rise in the value of their homes, which could be sold long before the 30-year loan is finished, leaving them with a tidy profit. Or they might be expecting a huge bonus or some other cash windfall that could be used to pay off the loan early.

Buckey plans to pay an additional amount to the principal each month. "It could be 20 years when I'm done," he said.

Doug Duncan, chief economist at the Mortgage Bankers Association of America, said the average life of a 30-year mortgage "is probably seven or eight years," meaning it's paid off in that period through refinancing or early repayment.

This trend has been heightened in recent years as millions of homeowners have moved to refinance mortgages to take advantage of the lowest rates in four decades.

In mid-June, the rates on benchmark 30-year mortgages slid to 5.21 percent, a record. Shortly afterward, rates started rising a bit, but they have gone down again in recent weeks.

AARP spokeswoman Sally Hurme, who deals with consumer protection, advises people to ask themselves questions like these:

How would I make the payments if I weren't working?

What expectations do I have about appreciation of the property?

Is this the place where I will live for the life of the loan?

How much debt am I going to be able to manage if my income is reduced?

When people refinance and take out loans larger than they need to finance a house, she said, they ought to think carefully about what they're going to do with the extra cash: for example, debt consolidation, paying for children's tuition, taking a trip around the world.

Some experts believe that the baby-boom generation is less worried about carrying mortgage debt into retirement.

"The sort of joy and sense of personal accomplishment to have paid off my mortgage and be able to leave my house free to my kids is one of those ingrained personal-finance philosophies we know of the older generation," Hurme said. "I think that boomers are not as debt-averse as their parents."

Most are the end result of delinquent mortgages — those not paid for more than 90 days — which have risen dramatically in the Seattle-Tacoma area the past three years.

The three years being 2001, 2002, and 2003. Specifically, the housing market began collapsing on January 20, 2001 at 12 noon and has been accelerating since then. As a result we have almost 40,000,000 homeless womyn and children, the economy is a catastrophe, diversity has been set back some 8,000 years, and the environment has been devastated by the Bush administration. (drool, drool) Also, our foreign policy everywhere is a disaster, we no longer cooperate with the United Nations like we should, and we are about to elect a Nazi to the governorship of California. (froth, froth, carpet chewing) Finally, we fail to recognize that animals have rights and should be able to vote against the California recall. What a disaster this administration is! (That's what the voices told me to say!)

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