After Financing the Housing Boom, Wall Street Shuts Off the Spigot
After Financing the Housing Boom,
Wall Street Shuts Off the Spigot
On a March 6 conference call, New Century Financial Corp. Chief Executive Brad Morrice seemed hopeful.
Increased defaults were hammering loans the company had made to less-creditworthy home buyers, and its lenders were preparing to declare it in default. But Mr. Morrice told bankers from Citigroup Inc., Goldman Sachs Group Inc. and its nine other Wall Street lenders that he had a plan to secure new financing so he could keep his mortgage business going. He just needed a little time.
Hours later, the bankers began formally terminating lending agreements that had provided $8 billion to New Century -- pushing the nation's second-largest mortgage lender to risky "subprime" borrowers (behind HSBC Holdings PLC's HSBC Finance Corp.) to the brink of bankruptcy.
Subprime Meltdown
Sortable Chart: Where subprime loans are heavy in the U.S., and where delinquencies are rising.
Subprime Players Get Washington Summons
By extending generous credit to subprime lenders, Wall Street firms financed the borrowing binge that helped fuel the housing boom. Those firms now are turning off the money spigot. They see more borrowers having trouble paying off those mortgages in a slowing economy, which has made investors less willing to pour money into the sector.
More than two dozen subprime mortgage lenders have closed shop, and there is concern that the defaults could spread to other types of risky loans and to less-risky mortgages, exacerbating the housing market's slowdown and possibly weighing on the economy. Accredited Home Lenders Holding Co., a subprime lender, recently was forced to sell $2.7 billion of loans at a big discount to meet lenders' demands for more collateral.
Worries about defaults in slightly less-risky mortgages also have hit shares of companies that specialize in them, including Impac Mortgage Holdings Inc., where loans with overdue payments more than doubled last year, and IndyMac Bancorp Inc.
Subprime lenders sell many of their loans to Wall Street banks, which package them into securities to be sold to bond investors. The appetite for these bonds grew when interest rates were falling and investors wanted high-yield alternatives. The riskier the customer, the higher the interest rate, so subprime bonds were in demand.
Though banks make money lending to subprime companies, packaging the bonds produces hefty fees -- an estimated $2.3 billion last year, up from about $500 million five years ago, according to Thomson Financial data. Fees for other services added to the windfall.
No Money Down
New Century, which declined to comment for this article, was one of Wall Street's biggest subprime customers. Founded in 1995, the Irvine, Calif., company had mortgages totaling almost $60 billion last year, up from $6 billion five years ago on the strength of no-money-down loans and other edgy products. Mr. Morrice, one of the company's founders, became CEO last July.
Before things fell apart recently, Wall Street's relationship with subprime lenders was close. New Century executives spoke at conferences hosted by Wall Street firms, including a Morgan Stanley gathering in New York City last June.
An early sign of a chill in that relationship came when subprime lender Ownit Mortgage Solutions Inc. defaulted on its credit line in mid-November. J.P. Morgan Chase & Co. gave the company a month to come up with additional capital, and Merrill Lynch & Co. demanded that Ownit buy back poorly performing loans. Ownit declared bankruptcy within weeks.
By early December, subprime-bond investors were getting nervous. By one measure, the cost of insuring against default on some of the bonds jumped 50% in a week as demand for such protection spiked. The price of New Century's mortgages was dropping on Wall Street.
At a January industry conference in Las Vegas, New Century executives tried to calm investors. They "stressed that they're making better loans now," a person who met them says. "They were reassuring everyone."
In February, New Century mortgages that had been worth $8 billion fell by more than $300 million within days, someone familiar with the matter says. The result: More lenders demanded additional collateral, also called margin, from New Century, including Goldman and Credit Suisse, people familiar with the matter say. Banks also invoked terms allowing them to demand that the company buy back loans if borrowers failed to make payments.
The company's cash was dwindling quickly. Adding to the company's woes were revelations about accounting problems, plans to restate 2006 earnings and post a fourth-quarter loss, and a Securities and Exchange Commission inquiry.
New Century was running out of options. It was unable to get new financing and in violation of its existing lending agreements, in part because it was low on cash. So the company convened the March 6 conference call with its 11 lenders. Mr. Morrice, the CEO, was joined on the call by New Century board member David Einhorn, who runs Greenlight Capital, a New York hedge fund that owned 6% of the company's stock, which by then had fallen 70% in two weeks.
Mr. Morrice informed the bankers that New Century's available cash had dropped to $40 million, down from the $100 million he had reported to some of the bankers a day earlier and from $350 million at year end, a participant on the call said.
The CEO told the bankers he was working with Mr. Einhorn and Bear Stearns Cos., another Wall Street firm, on a plan to stabilize the company's operations. The banks were holding New Century mortgages as collateral for $8.5 billion worth of loans. Under the plan, the banks would return those collateral mortgages to New Century so it could cobble them together into new bonds that would be sold to raise money.
The proceeds would allow the company to repay the 11 lenders and continue generating new mortgages.
Mr. Einhorn told the bankers that his firm would consider buying the riskiest of the new bonds, which otherwise might have few takers given the sinking subprime market. The Bear Stearns bankers expressed hope that they could make the plan work.
Shocked Bankers
The bankers listened without indicating whether they'd help. In private meetings after hanging up, some expressed shock at New Century's precarious state, given its depleted cash supply. "That told us the situation was more dire than we thought," says a banker on the call.
That night, Citigroup moved forward with a decision to declare New Century in default. Others followed. The next day, Mr. Einhorn resigned from New Century's board. Though Morgan Stanley agreed to a $265 million loan, it demanded as collateral a loan portfolio worth even more, and reversed course a few days later and cut off additional financing.
[buysell]
On March 12, New Century announced that it couldn't pay its creditors and that all lenders had halted financing. The New York Stock Exchange suspended trading in New Century shares as a filing for protection from creditors in federal bankruptcy court started to seem inevitable. (The stock now trades on the Pink Sheets at $1.11 a share, down from the 52-week high of $51.97.)
The woes of New Century and others in the subprime industry aren't necessarily bad news for Wall Street. Some firms are shopping for battered mortgage lenders' bargain-priced assets.
"What we're seeing [is] a good opportunity for us around the subprime space," Lehman Brothers Chief Financial Officer Christopher O'Meara said March 14. Goldman and Bear Stearns executives also have expressed interest in finding subprime opportunities amid the wreckage.
Morgan Stanley, which had loaned $2.3 billion to such companies, says its subprime business was a "significant contributor" to robust first-quarter profits. The firm made some good trades betting that subprime woes would deepen, hedging their exposure to the market, and had collateral to back up money it loaned to now-struggling subprime companies, people familiar with the matter say. Even New Century's expected bankruptcy filing presents an opportunity: Lazard Ltd. has been hired as a restructuring adviser to the company.
"Shed no tears for the titans of Wall Street," Kathleen Shanley, an analyst at bond-research firm Gimme Credit, wrote in a report. Its title: "Never Bet Against the House."
Wall Street's Exposure
Wall Street isn't yet free of risk from the mess. If it drags down the economy or weighs too much on the housing market, the banks will feel pain like everybody else. The firms also could see losses if the value of mortgages they accepted as collateral falls too far or if their risk-hedging strategies weren't up to snuff.
And burned investors and borrowers could sue the Wall Street banks, arguing that they shouldn't have allowed things to get out of hand. A lawsuit seeking class-action status, filed on March 19 in federal court in California, includes Morgan Stanley and Bear Stearns as defendants, alleging that they included false statements in documents describing New Century's plans to sell new preferred shares of itself to the public.
Morgan Stanley declined to comment on the suit. Bear Stearns didn't respond to requests for comment.
Home Prices Go Negative For First Time in 11 years
Home Prices Go Negative
For First Time in 11 years
U.S. home prices continued to fall in January, with prices in 10 major cities now down 0.7% year-over-year, according to Standard & Poor's and MacroMarkets LLC, which released the January Case-Shiller price indexes on Tuesday.
The 10-city index is down 0.7% in the past year, the first year-over-year negative reading since 1996. The 20-city index is down 0.2% year-over-year. A year ago, prices were rising 15%.
"The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market," said Robert J. Shiller, chief economist at MacroMarkets, in a statement. Read the full report.
Related Link
New-Home Sales Tumble To 7-Year Low in February
"We look for price declines in the bubble regions but flat prices nationally," wrote Michelle Meyer, an economist for Lehman Bros. Goldman Sachs economists said they expect prices to fall 5% in 2007 compared with 2006.
The report comes amid heightened concerns about the housing market. Inventories of unsold homes continued to build up in February, recent data have said. See full story. And at a hearing on Capitol Hill on Tuesday, lawmakers pointed fingers at federal bank regulators for letting lending standards get too loose, putting many people with less-than-stellar credit at risk of losing their homes. See full story.
Falling home prices will exacerbate credit problems, because many borrowers will not be able to refinance their loan or sell their house because they owe more than it's worth.
The 10-city Case-Shiller index turned negative in mid-1990 and remained negative for much of the next three years. Prices did not return to the peak seen in October 1989 until January 1998.
Home prices fell from December to January in 17 of the 20 cities; only Miami showed any price gains. Prices were flat in Charlotte, N.C., and Seattle. Prices were falling fastest in January in San Diego, down 1.7%, or a 22.4% annual rate. Prices dropped 1.1% in Los Angeles, or a 14% annual rate.
[nutting2]
The 10-city index was down 0.8% in January, or an annual rate of 10%. The expanded 20-city index was down 0.7% in January, or an 8.7% annual rate.
Eleven of the 20 cities had negative price appreciation in the past year, led by Detroit (down 6.9%) and Boston (down 5.6%). The biggest increases were in Seattle (up 11.1%) and Portland, Ore. (up 8.7%).
Prices have now retreated year-over-year in some of the regions that had the biggest price gains in 2004 and 2005. Phoenix is down 0.7% year-over-year. San Francisco is down 1.4%. Washington is down 3.9%.
The Case-Shiller index is considered to be a superior gauge of home prices compared with the median sales-price data released by the Commerce Department or National Association of Realtors, because it tracks multiple sales on the same property and is therefore not influenced by a different mix of homes sold in a period.
In a separate report, the Conference Board said its consumer confidence index fell to 107.2 from 111.2, the first decline in five months. See full story.
Sales of new homes fall sharply
WASHINGTON - Sales of new homes fell sharply for a second consecutive month in February, a weaker-than-expected performance that dimmed hopes for a rebound in the troubled housing market.
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The
Commerce Department reported Monday that sales of new single-family homes fell by 3.9 percent last month to a seasonally adjusted annual rate of 848,000, the slowest sales pace in nearly seven years. All regions of the country except the West experienced weakness last month.
The February decline followed an even larger 15.8 percent drop in sales in January, which had been the largest one-month plunge in 13 years. The back-to-back declines provided evidence that the housing market is continuing to struggle with lagging demand and a glut of unsold homes.
The weakness in sales pushed the median price of a new home down to $250,000 in February, a drop of 0.3 percent from a year ago. It marked the second straight month that the median price fell compared with the same period a year ago. The median is the point where half the homes sold for more and half for less.
By region of the country, sales were up 24.6 percent in the West, a rebound after a 25.8 percent plunge in January.
However, every other region showed weakness last month, led by a 26.8 percent drop in sales in the Northeast and a 20 percent decline in the Midwest, two areas which experienced a series of winter storm. Sales also fell in the South, dropping by 7 percent.
The performance of new home sales was in contrast to a report last week that sales of existing homes rose in February by the largest amount in nearly three years.
Analysts had expected new home sales to increase in February as well, based on a view that January's steep plunge had overstated the weakness in housing.
The back-to-back declines in the new home market served to support the forecasts of private analysts who believe the slowdown in housing has more months to run its course.
The housing bust is coming after a housing boom in which sales of both new and existing homes set records for five straight years.
Some analysts see the current slowdown as a correction from a period of speculative frenzy in which investors were buying second homes in hopes of reselling them quickly to make profits on the double-digit gains in prices in the hottest sales areas in the country such as California and Florida.
The sales decline that has occurred over the past year has left a glut of unsold homes on the market, forcing builders to slash prices and offer a number of incentives to attract buyers.
For February, the number of unsold homes rose by 1.5 percent to 546,000. That meant it would take 8.1 months to sell all of those homes at the February sales pace, up from 7.3 months in January.
The problems in housing are being increased by spreading financial difficulties with mortgage lenders who specialized in the subprime market, where borrowers with weaker credit histories could qualify for mortgages.
The plunge in housing has trimmed overall economic growth and is occurring as part of an effort by the
Federal Reserve to raise interest rates as a way of slowing economic activity and keeping inflation under control.
Know anyone in the Situation?
Subprime bust forces families from homes
THORNTON, Colo. - The lights are still on inside Foreclosure No. A200642668 — so while there's time, have a look around.
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Here's the living room, still covered in the worn blue shag Angela Sneary always intended to replace with the sheen of hardwood. And downstairs, through a curtain of plastic beads, is the basement where husband Tim was going to knock out a wall and put in a foosball table.
Step this way and the Snearys point out the places where they never could find the cash to hang a ceiling fan, install a hot tub, replace the siding ... a long list of abandoned ambitions that seem almost too big to squeeze into the modest four-bedroom tri-level.
Owning a home is all about finding humor in unfinished projects. But in the house set back from a bend at 11030 Eudora Circle, the Snearys never had the luxury.
They ran out of money first. Then, they ran out of time. Soon, they'll almost certainly be out of a home.
Buying a home is the American dream and a record number of Americans — nearly 70 percent — are living it.
Many families, though, likely never would have become owners if not for the tremendous growth over the past decade of a new kind of mortgage business called subprime lending. It long seemed like a winning proposition for all parties. Now the costs are becoming apparent — and they are very unsettling.
Subprime lenders peddle new kinds of mortgages, often requiring no money down and made at "teaser" interest rates that soon rise. They target marginal borrowers with weak credit or questionable incomes who previously might not have gotten a loan at all.
By last year, subprime loans made up 20 percent of the market for new mortgages.
But as the housing market cools, thousands of subprime borrowers are struggling to keep their homes. A number of subprime lenders, saddled by failed loans and a shortage of cash, have folded or staggered. In some particularly hard-hit neighborhoods in Denver's suburbs — one of a few metropolitan areas where the problem is especially grave — home after home sits dark.
Clearly, this isn't how the American dream is supposed to play out, but who's to blame?
The experience of families like the Snearys show how the squeeze created by questionable lending can quickly be compounded by family economic crises, a lack of planning and knowledge, and the rapid shifts in a real estate market that once seemed unstoppable.
"You were set up to fail," one real estate agent told them.
It's a sobering thought for anybody who shares the American dream. After all, it hits so close to home.
___
Tim first met Angela when he was just 5. She was hours old.
Their fathers were best friends, "two old hippies who partied together." On an afternoon 33 years ago, they celebrated Angela's arrival. Tim stared at the tiny infant a nurse held up to the maternity ward window and waved.
Sixteen years later, Angela's dad died. Tim, just out of the Navy, went to pay his respects. He offered his arms to Angela — and never let go.
In the wedding photos, Tim's rock-star hair reaches the shoulders of his white tuxedo. Angela's bridal gown does little to hide her eighth month of pregnancy.
The new family grew fast — a year after Amanda was born, Timmy Jr. followed and three years later came Steven. Tim found work doing landscaping in Denver's mushrooming subdivisions. Angela got a job working for an insurance company. Eventually, they combined to make around $55,000 a year.
They moved from rental to rental, aspiring to buy. By 2004, their rental town house was getting tight. A neighbor complained they were noisy.
The couple set out to look at homes in Thornton, a fast-expanding, mostly working-class suburb 20 minutes outside Denver.
They loved the second house the agent showed them, tucked in a 1970s subdivision with streets curled around each other like a ball of yarn. It was painted glowing pink with a big shade tree out front. The kitchen drawer-pulls were shaped like tiny forks and spoons. It had spacious bedrooms for all three kids, plenty of space for three dogs and six cats.
Tim "walked in here and said this is perfect," Angela recalls.
It cost $204,000. "We thought we were getting a deal," Tim says.
The agent said he'd find them a mortgage, no money down. The Snearys say they never thought to shop around.
More than two years and 100-plus homes later, agent Kent Widmar says he has no memory of the couple or the deal. But he knows his customers — and subprime loans are the only loans most can get.
"I kind of work the bottom of the market, the tough deals, the people that can't get credit anywhere," Widmar says. "You're dealing with people where nobody else (other lenders) is even going to talk to them ... It's not like you have a whole lot of choices."
The Snearys say they expected to borrow at a fixed rate of 6.5 percent. That would put monthly payments at about $1,290, a little more than rent.
But at the closing in August, all the numbers were higher. The Snearys were offered two loans, both from a Texas subprime lender, Sebring Capital Partners. The first, for 90 percent of the purchase price, was at 8.31 percent, set to adjust after two years. The second, for the remainder, was at 13.69 percent.
The house would cost $1,623.80 a month to start — and it was almost certain to rise.
Looking back, Tim wishes they'd asked more questions or considered walking out. But everything was in boxes, and they'd given notice. So they eyed each other nervously, and agreed to work more hours. Then, they signed the papers.
___
The home loan business is very different from what it used to be.
"When we were children, the lender was a savings and loan — just like in 'It's a Wonderful Life'," says Oliver Frascona, a Boulder, Colo. attorney whose firm represents many lenders in foreclosure proceedings, including the Snearys'. "The lender was loaning their own money ... so they were very careful with how they lent it."
Savings and loans had their own deeply serious flaws, and their failings opened the business to competitors.
Today, many buyers find loans through a mortgage broker. Many of those loans — certainly subprime loans — come not from local banks but from loan originators. These companies hold the loans briefly before reselling them, earning a profit and passing along the risk.
The mortgages are usually bought by a bank or Wall Street firm. Sometimes a loan servicing company, which pockets a fee for administering each mortgage, acts as a go-between. Then the loans are bundled and resold as securities to investors.
The new system works well in many ways, but the incentives driving the players are very different. The mortgage broker and loan originator, rather than being restrained by risk, pursue the profit that is the reward for generating new business. An enthusiastic Wall Street provides cash for yet more loans.
But the willingness to downplay the risk of subprime loans turns a business of caution into a hedged bet. Often, buyers qualify for these loans only because they can afford payments at the introductory rate, without considering how they'll make good once the rate goes up.
While home prices kept rising, it hardly seemed a gamble. Lenders and investors embraced the high returns generated by such loans. For consumers with shaky credit, it was easier to buy a home, easy to refinance and easy to sell for a gain.
Then the market turned — and for many homeowners, the escape hatch slammed shut.
There will always be people who fall behind on loans.
But "house prices are no longer the lifesaver they were for people in good times," says Ellen Schloemer of the Center for Responsible Lending, which recently projected a sharp rise in subprime foreclosures in the next few years.
Now, owners in trouble are living in homes that may be worth substantially less than they owe. They can't sell or refinance. They are ensnared in loans whose costs keep rising.
It is a vortex that's difficult to escape. Schloemer calls it "the perfect storm."
___
On their first night as homeowners, the Snearys celebrated at one of the kids' favorite restaurants, Old Chicago, with a deep-dish pepperoni pizza. The next morning, Tim borrowed a trailer from work and moved them in. They set to work making the place their own, repainting the exterior themselves in a stunning night-sky shade called Suddenly Sapphire.
They stopped when they ran out of paint. Two years later, patches of pink still show through the eastern wall.
For a few months, anyway, they kept pace with the costs. But as 2004 ended, Tim's employer — who had already laid him off and called him back — sent him home for good.
With little saved, the Snearys immediately fell behind, missing two payments.
By now, their loan had been sold. The new loan servicer, Homecomings Financial, told them they'd need to catch up and set up a payment plan. The Snearys' monthly bill jumped to $1,920.
After three months, Tim found a new job for two-thirds of his previous pay. A tax refund helped. But the larger payments "had us strapped so tight it wasn't even funny," he says.
So Angela took on more hours.
In July 2005, she pointed her Saturn into Denver's morning rush. Trying to merge into traffic on I-25, the car was slammed from behind. It spun across traffic and smashed into the concrete divider.
Doctors said Angela would be OK. But disabling headaches kept her home for three weeks, and made work for another three all but impossible. The couple fell further behind.
The lender set up a new payment plan. Monthly costs jumped to $2,100. Angela began draining her small 401(k).
If the Snearys could make it through 2006, maybe they could refinance and dig out.
Now, though, there was another problem.
They still owed nearly all of their loan. But their home was worth much less in a real estate market slowed by economic uncertainty and bloated by new construction. The couple, convinced they'd overpaid, couldn't refinance or sell.
Instead, they neared the two-year mark, when their interest rate would jump.
The lender "said you're going to have to pay ... or we'll have to go to foreclosure," Tim says. "Well, I guess I'm going to have to go foreclosure because I've given everything I have to give and you can't squeeze blood from a turnip."
The foreclosure notice came last October. The Snearys have not made a payment since.
In theory, if they paid up, they could keep the house. But there is no money or incentive.
A few weeks ago, Homecomings sent a letter. Stay and their interest rate will leap again to 12.8 percent. Payments that were impossible to meet temporarily will become permanent.
___
Late last year, a form letter arrived in the Snearys' box from their original lender, Sebring Capital, inviting them to refinance.
"I thought it was crazy," Tim says. They threw the letter in the trash.
It's just as well. Weeks later, Sebring folded, a stark example of how quickly subprime lending has soured.
Sebring, a mid-sized lender, hardly wasted away. Near the end, it was initiating nearly $200 million in new loans a month, senior vice president Michael Waldron says.
But the company didn't have the cash to keep up, particularly as the market turned, and Sebring went searching for a buyer.
When subprime lenders sell mortgages, they sign contracts promising that loans will meet certain standards and performance measures. Otherwise, the lenders are obligated to take the loans back.
Sebring found a buyer — just as Wall Street began taking notice of the spike in foreclosures and the resulting squeeze on lenders. The deal fell through and the next morning executives at what had been one of Dallas' fastest growing companies gathered their 325 employees to announce they were shutting down.
That would be no big deal if it were only the tale of a single company. But in recent months, more than two dozen subprime lenders have stumbled or failed.
The question now is just how many more bad loans like the Snearys' are still out there — and who will be left holding the bag.
___
Officially, it's an auction.
But there is no machine-gun sales chatter at Adams County's weekly foreclosure sale, no gavel-banging. Bargains are doubtful, so no bidders show up. It is mostly a formality, finished minutes after it begins.
That's the scene this Wednesday morning, when the Sneary home goes up for sale. With many homes worth less than borrowers owe, the only bids are the ones submitted in advance by the banks holding the soured loans.
The lack of bids gives Tim and Angela 75 more days to move out. They hope that will be enough to find a buyer who'll satisfy their lender, and keep foreclosure from staining their record.
But even if that doesn't happen, the couple has reached an unexpected truce with failure. After two years of fighting to hold on to a house, there's soothing relief in losing. Finally, there's a chance to rest, to crawl out from under the pressure.
They can stop shouting now, the Snearys say. They can give the time they'd spent working to the kids. They'll find new jobs, a place to rent, and try to save.
The Snearys have a long-term plan, too. In a few years, they hope to buy again.
But the next time will be different, Tim and Angela say. They'll stay within their means. They'll borrow more intelligently. And they already know just where to find a deal.
They'll make an offer to another family desperate to escape foreclosure.
Are you paying Too Much Rent?
Is Your Rent Too High or Too Low?
Web Site Analyzes Local Rates
Tool/Web site: Rentometer.com, a Web tool that can be used by renters and landlords to measure how a property's rent stacks up against similar homes or apartments nearby. The site is a product of Investment Instruments Corporation of Newton, Mass., and is associated with iiproperty.com, a property management tool.
Function: Type in the address of a particular rental property, the number of bedrooms and the total residential units in the building, click "Analyze my Property" and the site reveals how the rent compares to other rates nearby. New to the site: searches now pull up local for-rent listings, which may include property photos and full descriptions of available rentals.
[Rentometer]
Rentometer, a tool for measuring how your rent stacks up.
How it works: Using data from listings provided by rental marketing firms and property owners/managers and listings publicly available on the Web, the site's "Rentometer" gauge provides a quick visual comparison of a property's rent to the area's rental range. Alongside, a Google map (with street, satellite and hybrid views) displays the location of the target rental unit (indicated by an orange pushpin) and comparable properties nearby (represented by green and blue pushpins).
Pluses: The site is easy to use and provides users with a quick estimate of how their rents match up against neighborhood rates. The Rentometer -- which looks like a car speedometer -- is a simple visual of how a unit's rate compares against other local rental values. A rent that falls to the left of the median on the meter is low; one to the right is pricey. Above the meter, the site spits out a paragraph summarizing whether your rent is fair, a bargain or too high. The accompanying map can be used to compare rents to comparable properties nearby -- rentals marked with plus signs have higher rents, those with negative signs have lower rates. (The map doesn't reveal the size of the rent disparities.) Renters can size up their units' amenities and costs against homes available for rent nearby. A click on a property represented by a green pushpin pulls up a Web flyer that may include a photo and information such as the size of the unit, the number of bedrooms/bathrooms, when the apartment/home is available, the term of the lease and the initial security deposit required.
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More The Smart Surfer columns
Drawbacks: The Rentometer only considers a rental property's address, number of bedrooms and total units in a building when comparing rates -- so if you rent a two-bedroom penthouse in a new full-service building, your unit may be compared to dissimilar rentals -- say neighborhood basement apartments in older buildings with relatively few amenities. Rentometer's developers intentionally limited the variables -- to make it as "easy to use as possible," says Owen Johnson, president of Investment Instruments Corporation. The site has full listings for a limited sample of properties and its coverage for areas outside large metropolitan areas may be spotty. The Web site doesn't supply the exact location for all properties available for rent -- which may make actually finding those rentals (or visiting them in person) -- difficult. Exact addresses are provided only for units for which the site has complete listings available. (Clicking on blue pushpins -- properties for which the site doesn't have full information -- reveals just a unit's rate, number of bedrooms and distance from the address for which the search was completed.) Renters who are interested in finding out whether neighborhood rents are creeping up or holding steady are out of luck -- the site only offers data on current rental rates only, not past rates. Also, exact addresses are needed to use the Rentometer, so someone who isn't renting an apartment locally, but wants to check out the rents in the neighborhood, may be frustrated.
Insider tips: Last week, Rentometer added a feature that allows landlords and property managers to post their listings on the site and use iiproperty.com's free suite of online tools (more tools are available for a fee) to manage properties. Landlords/property managers who list through iiproperty.com can have their listings posted on Google Base, Craigslist, Oodle.com (a search engine for local classifieds) and edgeio.com (a Web site that aggregates and distributes listings) at no cost. Larger landlords and companies can push listings directly to the site through data feeds. Rentometer's search options may be expanded in coming months to allow visitors to search rents by neighborhood or pull up rental listings for a particular area, Mr. Johnson says.
Could You Become a Landlord?
More Americans Become
Landlords as Rents Rise
By Jeff D. Opdyke
From The Wall Street Journal Online
With home prices retreating from fever-pitch highs, a new breed of real-estate investor is eclipsing the speculator: the landlord.
More Americans are hanging out "for rent" signs. Some were forced into the business after buying investment houses or condos at top dollar during boom times that they now can't sell. But many are discovering their inner landlord on purpose, often buying properties well below prices from a year or two ago.
It can be lucrative. For the first time in several years, rents are rising in many places, in part because the subprime-lending crisis is making it harder for people with marginal credit records to secure mortgages, increasing rental demand.
Shantay Wakefield and Gerald Taggart, a couple in Fairview Heights, Ill., have bought two rental properties in the past two years. The two 30-year-olds figured they would be income-generating investments, though they didn't foresee the pitfalls.
Left: Shantay Wakefield (with husband Gerald Taggart): 'You find out quickly that this is not easy.' Right: John Hayes in Dallas got the Christmas Eve 'my toilet's broken' phone call.
"You find out quickly that this is not easy," says Ms. Wakefield, a high-school teacher. They expected repairs to one of their rentals to take four weeks; they took seven months, and costs piled up.
Nevertheless, she says, "The sense of accomplishment, that's what we've enjoyed."
At the National Association of Residential Property Managers in Virginia Beach, Va., membership in the past year has increased by more than 20%. In Nashville, Tenn., Wilson Group Real Estate's property-management-services arm has nearly doubled to 250 clients in the past year, thanks to the landlord boom.
Getting into real estate remains relatively easy. Despite the difficulties in the loan market for higher-risk, subprime borrowers, there are lots of financing options available for investment real estate, assuming your credit is good.
But that doesn't mean it is a good idea for you. Think of it like operating a small business, even if it is just a single condo. Tricky tax laws, obscure local ordinances and other imponderables can turn what looked like a no-brainer rental into a money pit.
Keep in mind that "you're buying an income stream, not a pretty house," says Paul Howard of the Florida Landlord Network, which provides services to landlords in the Sunshine State. A house will attract only so much rent. If you overpay, you can raise the rent only so much before your property starts sitting vacant.
Mr. Howard says he recently took a call from an engineer in Maryland who had just bought a waterfront Florida home and was looking for help finding a renter. "I ran the numbers," and "even if this guy got top dollar for rent, he was still underwater by $800 a month," Mr. Howard says. "He overpaid, and now he's got problems."
The first step is to assemble a small team of pros, especially a real-estate agent knowledgeable about local rental rates and other issues that will impact your bottom line. Consider retaining a local property manager who can help you navigate ordinances, set a fair rent, find tenants, arrange lawn services and handle worst-case scenarios, like evictions.
The downside: Managers tend to charge a month's rent upfront and about 10% of the rent thereafter.
Tenant Complaints
Ms. Wakefield and Mr. Taggart manage such duties themselves. One of their two properties has been smooth sailing. The other's tenant is "calling every day with a new complaint," Ms. Wakefield says. "Right now she wants us to put in a water line because she bought a new refrigerator with a water dispenser."
[George Heim]
George Heim is now working on a background check for his third tenant.
Property managers are listed in phone books or online. You will want one that has been in the business full time for years. To track rental finances, many landlords use Quicken Rental Property Manager or similar software.
Running a credit check "is a must," says George Heim, a retired policeman in Wall Township, N.J., who, along with his wife, inherited a home that is now a profitable rental unit. Landlords can sign up for services from providers such as Fidelity Information Corp. (gofic.com) to get these reports for small fees.
Key Questions
Insist on references from previous landlords. Key questions to ask: Did the tenant pay on time? How much damage was done to the property?
A typical mistake is to underbudget for repairs. Keeping the home in good condition helps attract quality tenants. "It's just so silly to scrimp on maintenance," says the Florida Landlord Network's Mr. Howard. "When you're a landlord, you're in the retail business, not real estate. You don't want to lose your good customers."
Insurance is another concern. An injury to your tenants or their guests on your property could mean a lawsuit. A good insurance agent and lawyer can help determine how best to structure your business to limit your personal liability.
Where's My Accountant?
Rental real estate also comes with a dizzying array of tax breaks, deductions and write-offs, perhaps more so than just about any other investment. You have deductions for interest, insurance, repairs, even for the mileage accumulated driving to the bank to deposit the rent checks. It is worth the expense to hire an accountant with rental-income expertise.
Overall, aim for an annual return of at least 10% to 12%. Remember, you can earn 5% in risk-free U.S. Treasury bonds, so you should make more to compensate for the headaches of being a landlord, such as the Christmas Eve phone call informing you of a broken toilet.
That happened to John Hayes, president of HomeVestors of America Inc., a national chain based in Dallas that buys and sells homes in need of repair. "This kind of stuff is a hassle," says Mr. Hayes, who is also a landlord. Fortunately, he had a plumber on 24-hour call -- another good idea.
Will Foreclosures %'s Rise?
Mortgage meltdown sinks more than those on edge
Reuters
March 15, 2007
My (income and tax) information was wrongly represented on the (application) but I asked and asked and they said, 'This is okay because of your good credit,'
By Gina Keating
LOS ANGELES (Reuters) - Unlike many borrowers who took out subprime loans, Andy Sobel had good credit, a decent job and modest savings, but he needed to stretch to buy a home in the white-hot San Diego housing market in 2004.
Three years later, Sobel has lost his home and his savings, and he faces a big tax bill as a consequence of a failed subprime mortgage held by Countrywide Financial Corp. he says he should never have been written.
"You never think that this could happen to you. You feel like an idiot," said Sobel, 48, who has a doctorate in education. "You fall down and they stab you."
The subprime mortgage meltdown is hitting more than people living on the financial edge.
Thanks to the frenzy of a market seeking to invest in the high-interest loans, incentives for brokers to encourage the sale of those loans and a housing market booming beyond the reach of many, many people with good credit were sucked in, consumer advocates say.
"Once Wall Street entered the marketplace of housing ... the typical mainstream lending community was not prepared for those types of loans, the volume and the greed it would create," said Lori Gay, president and chief executive of Los Angeles Neighborhood Housing Services.
Gay said she has begun meeting with lenders, at their request, to try to stave off what could be "the biggest foreclosure bloodbath that we've ever had."
"We are seeing every age group, every single income level now, people with similar problems, and I haven't seen that in my career," she added.
BLOODBATH
Sobel, who works for a nonprofit community group, said that when he found it difficult to qualify for a loan big enough for a slice of property in San Diego, his independent broker pushed him to take out a popular adjustable mortgage with a two-year low fixed rate, known as a "2-28," as well as a second mortgage to buy a $240,000 condominium.
He knew payments on the loan, originated by Express Capital Lending and bought by Countrywide, the largest subprime lender, could rise, but was told he could refinance. Countrywide did not initially comment on the case.
The introductory rate was affordable, but Sobel began to worry as interest rate hikes, falling home prices and a glut of condo conversions hit the San Diego market.
"I started to look to refinance. I called my first and second (mortgage lenders) and said, 'I'm going to be in trouble, what can you do for me?'" he said.
Countrywide's refinance offer was more than he could afford, he said. His broker advised him to take out a negative amortization loan that would add $300 each month to his principal and "ride it out for a few years" until the market recovered.
"I said, 'Are you crazy?' I started really worrying," he said. Sobel is not alone.
Gabe del Rio, homeownership director at Community Housing Works in San Diego, worked with Sobel and said borrowers with good credit like his often got in over their heads when brokers pushed them toward "stated income" mortgages that had looser guidelines for proving income.
IN OVER THEIR HEADS
"Anyone who had a higher FICO (credit) score ... was moved into a stated loan product in which they then qualified for (a higher) purchase price, putting them in above their head," del Rio said.
Delia Dee, a municipal analyst, said she refinanced her home with Countrywide to withdraw $200,000 to help her father buy a home of his own in a process she found suspicious.
"My (income and tax) information was wrongly represented on the (application) but I asked and asked and they said, 'This is okay because of your good credit,'" Dee said.
Then, unexpectedly to her, the payment nearly doubled in the second month of the mortgage. She has since negotiated terms to prepay and will refinance -- again.
"I would rather get out of it and not have to deal with Countrywide," she said.
Just over a fifth of all mortgages in California are subprime, according to First American LoanPerformance, a data and analytics unit of First American Corp.
Some 10 percent of Florida mortgages are subprime and 6 percent of those in New York, it said.
The nonprofit Center for Responsible Lending predicted the subprime failure rate would reach 22.8 percent in Santa Ana, Anaheim and Irvine, 22 percent in Los Angeles and Long Beach, and 25.2 percent in Bakersfield.
As for Sobel, the banks began foreclosure proceedings in December. Both lenders have agreed to allow Sobel to sell the condo at a loss of $60,000 -- on which he has to pay taxes.
