Getting more for your mortgage

Rates are lowest in over 50 years: Tips to help you get the most for your money

Rates for a 30-year mortgage are now below five percent — the lowest in over 50 years. Whether you’re shopping for a new mortgage or refinancing, you have many products to choose from. “Today” financial editor Jean Chatzky offers some advice to help you get the most for your money.

Think back to 1999. Every time you went to a cocktail party or out with friends for dinner, the topic would turn to stocks, as the participants tried to out-do each other with their soaring shares of Amazon or Ebay. Today, the parties are the same but the conversation’s different. Now you can’t escape the mortgage rate competition. You may have gotten a killer deal at 5 1/2 percent for 30-years, but your next door neighbor’s got you beat at five.

The mortgage market is this year’s little engine that could. Last week, the Mortgage Bankers Association reported — for the first time in more than 50 years — that rates on a 30-year fixed rate loan had fallen, on average, below five percent. Those low rates will drive, the MBA predicts, a record 3.3 trillion in mortgage originations in 2003; 68 percent of that activity, the MBA says, will come in the form of refinancing.

There’s one big difference between the mortgage activity we’ve seen over the past few years (which, themselves, have been far from sluggish) and this year’s: Last year was all about cash-out refinancing, consumers were pulling equity out of their homes (many of which had run up in value) to pay down their credit card debt, pay for college, home improvements or cars.

This year the trend is more conservative. Borrowers are swapping into shorter term mortgages. Instead of taking out 30 year mortgages, with interest rates so low, they’re looking at fixed-rate mortgages with 10, 15 or 20 year terms. Some people are looking at hybrid mortgages, that are fixed for the first five or seven years and then begin adjusting. And some are even getting rid of their conventional mortgages altogether in favor of home equity lines of credit that are a point to a point-and-a-half cheaper in rate with negligible closing costs.

WHY ARE THEY DOING THIS?

Two reasons: One is that rates have fallen so far that if you haven’t refinanced in a while, it may be possible to swap into a much shorter term without impacting your cash flow. But second, despite the fact that we’ve had a nice little run in the market, investors are still opting for safety. A recent Roper survey says that more today than at any time during the previous 26 years, Americans considering the best place to put their money want the safest place, not the place that will provide the most income or the most growth.

HOW DO YOU KNOW WHICH OF THESE SOLUTIONS — IF ANY — IS RIGHT FOR YOU?

To answer that question you need to come back to mortgage square one: How long are you going to be in that house? Are you planning on trading up in a few years when you have kids and earn more money? Are you planning on trading down in a few years when your grown kids flee the coop? Does your company move you every few years? Or is this your home for the foreseeable future?

THE RIGHT LOAN FOR YOU?

Less than three years: Home Equity Line of Credit

If you plan to be in your house for less than three years, you may want to consider refinancing into a home equity line of credit (HELOC). Now, not everyone can do this. In general, to get a competitive rate on a HELOC you can only borrow about 90 percent of the equity in your home — with a first mortgage you can borrow nearly 100. But rates are lower. In just about every market in the country, it’s possible to find a HELOC at 4.25 percent (the current prime rate). Even if rates go up a full point each year you’ll still be around 5-6 percent by the time you get out of this loan. The bigger benefit is the absence of closing costs which can run in the thousands of dollars. Because you’re not in the home for long, you may not have enough time to recoup them.

Three to seven years: Adjustable Rate Mortgage

If you plan to be in your house for three to seven years, look at a hybrid ARM that’s fixed for, say, the first five years then begins adjusting. On a $200,000 loan, your monthly payment on a 5-1 (4.2 percent) would be $979. That’s $140 less than it would be on a 30-year fixed rate loan (five percent) at current rates where the monthly payment is $1,119. Your savings over the first five years of that loan: $11,500. That’s some pretty serious money.

More than seven years: Fixed Rate Mortgage:

If you plan to be in your house for more than seven years, a fixed-rate mortgage is the way to go. Although activity in shorter term loans is creeping up, the 30-year fixed rate mortgage is still, far and away, the most popular product. If you like the idea of a 15, but don’t want to lock yourself into the higher payments, try making one extra mortgage payment a year. It can knock the term of a 30-year loan down to 23 years.

WHAT’S THE BEST WAY TO SHOP FOR ANY OF THESE PRODUCTS?

Personally, I got my most recent deal from a mortgage broker (and it was better than the ones I was offered by banks). But I’ve heard other people tell the opposite tale — and that’s just the way this market works. Sometimes you’ll get the best deal from brokers, other times from bankers, other times online. One thing you should always do is to go back to your old lender and ask about a streamlined refi, which is basically an abbreviated refinance with less paperwork and lower closing costs. But if they won’t give it to you (and we’re seeing lenders tighten up a bit here) you can always go somewhere else.

WILL THESE LOW RATES LAST?

As you know, I think trying to forecast interest rates is similarly tricky to trying to forecast the market. However, the economists I’ve polled at both HSH.com and the MBA believe that rates will hold through the summer, perhaps ratcheting up a quarter of a point but not much more than that. In all though, I think if you run the numbers to refinance and see that you can save enough money to make the hassle of the transaction palatable, you should do it. If rates drop further, you can always refinance again.

When Does a Home Sale. Trigger a Big Tax Bill?

By Patrick Barta
Special to RealEstateJournal.com

Question: We're living in a house that we're renting, but the owner plans to put it on the market. Although we ultimately plan to move, we're not ready to move just yet. So we're considering trying to buy the house -- it would be our first home -- and then either sell it or rent it out when we're ready to leave. My concern is this: Will we have to pay a big capital-gains tax if we buy and then sell the house?

-- Suzy, Seattle

Suzy: Don't worry. There's a good chance you won't have to pay capital-gains tax at all, and even if you do, it's still likely that you'll walk out a winner.

Here's why. Thanks to a 1997 tax law, married couples who live in a house for two out of the prior five years are excluded from capital-gains taxes for the first $500,000 of profit. For single persons, the limit is $250,000. Say the house is worth $250,000 the day you buy it. If you're married, the home's value would have to increase by 200% over the next two years before you pay capital gains. For the record, Seattle home prices rose 10.4% in the last two years, and the rate of appreciation has actually slowed over the last four quarters.

Even if you don't stay in the house the full two years, you might still be able to avoid paying capital gains. For example, if you have to leave because of a job, health problems or other unforeseen circumstances, there's a good chance you could qualify for a partial exemption from the capital-gains tax.

Of course, if you rent the house, that adds a new variable to the mix. If you live in the house a full two years before renting it out, it won't matter: You'll still get the maximum exemption. If you don't, you could wind up paying some capital gains when you leave. Even so, under the latest tax-cut plan approved by Congress, the capital-gains-taxation rate drops to no more than 15% from the previous 20%. And that's only 15% of your profit, meaning you get to keep the rest. "That, to me, is not getting hurt," says Gerald Marsden, a partner at Eisner & Lubin, a tax-consulting firm in New York.

The primary way you could lose is if you sell the home very quickly after buying it, though in that scenario the capital-gains tax is the least of your worries. You'll also be deep in the hole because of the numerous transaction costs that are involved in buying and selling a home, including a realtor's fee and the origination fee you pay to the lender for your mortgage. Short-term ownership of real estate is rarely a good idea, regardless of the potential capital-gains hit.

Impact of fiscal shakeup at mortgage-finance firm

Removal of officials at Freddie Mac unnerves financial markets, homeowners.

By Ron Scherer | Staff writer of The Christian Science Monitor

NEW YORK – When Congress sought to end accounting irregularities, few thought that the spotlight might fall on a company that was chartered by Congress itself and provides a service that touches millions of Americans.

But, now the klieg lights are on Freddie Mac, which purchases mortgages from home lenders so they can make new loans. On Monday, the company released its top three officials after questions arose over its earnings statements for the past two years. Congressmen are calling for hearings. And the financial markets are hoping the mess gets straightened out soon because many financial institutions own billions of dollars in stock and debt issued by Freddie Mac.

"This is not a pretty or welcome sight," says Marilyn Cohen, president of Envision Capital Management, a Los Angeles bond manager. "We thought we were at the tail end of the accounting shenanigans and corporate malfeasance."

If any of the charges turn out to be true, it will be even more surprising because Freddie Mac is considered a conservative and well-run company that does not cut corners. "I am incredulous," says Larry Platt, a mortgage banking partner at Kirkpatrick & Lockhart, a Washington law firm.

The hubbub comes at a time when the housing industry is one of the few bright spots of US economy. Low interest rates have prompted millions of Americans to either buy houses or refinance their current homes. And, Freddie Mac and Fannie Mae - which together guarantee or supply about one-third of all mortgages - have been big players in that growth. Freddie Mac, with $722 billion in assets, is now the nation's fourth largest financial institution. "They are a pillar of the housing market," says Scott Jacobson, director of research at Jefferies & Co., an investment bank.

SO FAR, the turmoil has not had any immediate impact on consumers' ability to finance mortgages.

Even before the latest headlines, the company and Fannie Mae - which helps low and moderate income home buyers - were under scrutiny by Congress. "Over the last few years there has been a debate over whether their obligations are backed by the full faith and credit of the United States," says Mr. Jacobson.

Some in Congress have also been after the company to register their mortgage securities with the Securities and Exchange Commission. Rep. Christopher Shays (R) of Connecticut and Rep. Edward Markey (D) of Massachusetts sponsored a bill in May that would require such quasi-public companies to register with the SEC and comply with the nation's securities laws. On Monday, the two representatives said this incident proved their bill was needed.

The Office of Federal Housing Enterprise Oversight (FHEO), which oversees Freddie Mac and its kin, has appointed special investigators to review Freddie Mac's accounting. According to published reports, the special audit team are citing "employee misconduct" and "management misjudgments." One issue was the refusal of the former president David Glenn to turn over a diary that includes notes from recent meetings.

"I guess the real questions are how long have they known about these problems and what took so long to do the house cleaning," says Ms. Cohen.

Jacobson says that accounting is extremely complex and includes lots of assumptions. For example, many mortgages are for 30-year terms. But, because interest rates change, individuals often prepay their mortgages and refinance with a lower rate.

To try to protect themselves from such uncertainty, many financial institutions turn to something called "derivatives." These are securities whose prices are based on another underlying investment, such as futures and options.

"I imagine that many of the assets and liabilities on the balance sheet are intangibles, such as derivatives that are very hard to value," says Mr. Platt. "Reasonable people can differ and what some might call misdeeds, others might call incorrect assumptions and that is what the review process is all about."

Closing-cost surprises sting homeowners

By Thomas A. Fogarty, USA TODAY

Not all mortgage loan settlements go as poorly as Vinny Worley's. But many do.

Check in hand, Worley went to a law office to close on a new home in Wilmington, Del. Only when the lawyer's assistant slid the settlement summary across the table did he learn he was $1,800 short.

It was the classic settlement table surprise — the too-frequent chaotic climax of the biggest, most complicated type of business deal the typical American ever undertakes. Surging home sales and serial waves of refinancings have made such surprises routine.

Last year, Americans closed on 16.9 million mortgage loans and paid an estimated $80 billion in settlement costs. Record low interest rates this year have unleashed a wave of mortgage business that is expected to swamp last year's numbers. Across the USA, tales of botched settlements have become standard chatter at cocktail parties and backyard barbecues.

Responding to widespread dissatisfaction, the Bush administration last year proposed rule changes that would simplify mortgage deals and transform the way the industry operates.

The key change would encourage lenders to offer loan applicants upfront a single guaranteed price for closing the transaction. For lenders willing to do business on that basis, the government would eliminate the thicket of regulations that now make it impractical.

Supporters say improved efficiency from the pending changes would squeeze up to $1,000 from average closing costs. The changes also would let borrowers comparison shop for the first time on the basis of just two numbers: interest rate and the fixed closing cost.

But if the proposal is to become reality, the administration will have to bull its way through opposition from tens of thousands of small mortgage-related businesses that have a financial stake in the way business gets done.

In Worley's case, the lender and the settlement attorney had overlooked a local transaction tax. Worley eventually was permitted to close the deal with a personal check on a separate account intended as a reserve for the new home.

It wasn't just the extra expense but the sheer sloppiness of the transaction that offended Worley, 33, an electrical engineer and a self-described fanatic for orderliness. "There ought to be a way to be precise about the numbers ahead of time," he says.

Settlement surprises can result from plain incompetence or honest misunderstandings. Or they can be fraud by any of the many players needed to close a deal.

John Courson, chairman of the Mortgage Bankers Association of America and a supporter of reform, told Congress this year that the complexity of the mortgage deal today is "an invitation of bait-and-switch."

Regulatory thicket

When Congress in 1974 enacted the law that governs real estate closings, a key objective was outlawing then-common kickbacks: lavish gifts and cash from lenders, title insurers, settlement agents, home inspectors and other industry players to real estate agents in return for delivering clients. The law also required extensive written disclosures so borrowers would know who was being paid what for services related to closing the mortgage.

Over time, the industry has successfully pushed government to ease the original anti-kickback provisions. Now, key players such as real estate agents and mortgage bankers can steer customers to related service providers if the link is spelled out in writing.

Critics say changes in the law over the years have produced a confusing jumble that does more to confuse borrowers than to protect them. Borrowers are not so much enlightened by the blizzard of mandatory disclosures as buried in them, critics say.

"Disclosures have so much information that they're meaningless to most customers," says Ira Rheingold, director of the National Association of Consumer Advocates.

How the law now fails to protect:

• Lenders must provide loan applicants with a "good faith" estimate of closing costs early in the process. However, they are largely free to ignore their own numbers.

• Borrowers have a legal right to see their settlement sheet — the document that itemizes all the costs — a day before closing, but few know to demand it.

• Borrowers can cancel the loan for refinancing up to three days after settlement. It is rarely done because it means starting the painful borrowing process over and possibly increasing the interest rate. In a purchase, the borrower has no comparable cancellation right.

Not just a problem for novices

The uninitiated aren't the only ones vulnerable.

As chief of realty franchiser Century 21, Van Davis is an expert in home finance. Yet when he went to settle on a purchase of a new home in Morristown, N.J., last year, costs were $3,000 more than estimated, the result mainly of a title insurance charge far in excess of what had been estimated.

Nina Simon, an attorney who represents mortgage borrowers in her job at senior-citizen advocate AARP, initially refused to settle a recent refinancing on her home in suburban Washington, D.C. The issue: An appraisal estimated at $400 was listed at settlement for $500.

Several lenders are trying to capitalize on borrower dissatisfaction. Some roll into one fee their discount points — upfront money that buys down the interest rate — and the array of profit-boosting administrative fees common in mortgage lending.

Dutch-owned ABN Amro has gone a big step beyond that. It rolls into one guaranteed fee not only the charges for its own services but those of third-party providers: appraisers, title insurers, surveyors, closing agents and the like. The only expenses to borrowers falling outside ABN Amro's guaranteed price are daily interest, mortgage taxes and pre-payments for property taxes and home insurance premiums.

Company executive Garth Graham says ABN Amro decided two years ago to guarantee one price to boost its Internet lending arm, Mortgage.com. Market research showed a recurring theme: Borrowers were frustrated and angry with ever-changing terms.

"The thing they always came back to was 'Just give me a single fee,' " Graham says.

The single-fee model

Mel Martinez, secretary of the Department of Housing and Urban Development, has been the most vocal advocate for making the single guaranteed fee the industry model.

Last summer, Martinez proposed changing federal rules to permit lenders to offer what HUD calls "guaranteed mortgage packages." In return for offering such deals, lenders would be freed from burdensome disclosure requirements at settlement time.

Under the proposal, lenders who opt not to provide an upfront guarantee of closing costs would have to close the deal within 10% of the prices that they quote in the good-faith estimate issued to the borrower at application.

The proposed rule also aims to settle one of the most contentious issues in the current process: compensation for mortgage brokers.

Squeezing out savings

Few borrowers understand that a broker commonly is paid by the lender for delivering customers who are willing to pay a higher-than-market interest rate. The Martinez proposal calls for spelling out for borrowers the terms of broker compensation.

HUD officials estimate that proposed changes could squeeze about 20% from the cost of mortgage settlements — $16 billion on the basis of 2002 business volumes. Much of the savings would come from regulatory changes that would permit lenders to seek volume discounts from service providers, such as appraisers and title companies. Under current interpretations, such discounts are thought to violate the anti-kickback provisions of the 1974 law.

HUD issued the preliminary rules for comment last summer. The agency's draft of final rules must pass review by the Office of Management and Budget. The final version could be issued this summer, officials say.

Several large mortgage lenders support Martinez's proposal for a guaranteed closing price. Anne Canfield of industry group Consumer Mortgage Coalition says the single-fee idea would quickly sweep the industry.

"Everybody's champing at the bit. This is the biggest thing going in the industry," Canfield says.

Many fingers sharing the pie

Whether final rules bear much resemblance to the original proposal remains in doubt.

Brokers, title companies, settlement attorneys, appraisers and others who draw fees from the current way of doing business say all the proposed savings from Martinez's proposal will come from their fees.

During a recent HUD comment period, opponents unleashed 40,000 complaints. And they have enlisted members of Congress.

Stanley Friedlander, president of the American Land Title Association, sounded a typical complaint at a hearing in February: "By squeezing the small (title insurance) agent, it would virtually put them out of business."

Opponents also point to ABN Amro as proof that the rule change is unnecessary. But ABN Amro's Graham, who favors industry reform, rejects that.

His company is saddled with the same costly, inefficient disclosure requirements that inhibit broader industry adoption of the single-fee approach, he says.

A promise of strong rules

Martinez says the savings from the proposed rules will come from everyone in the industry, not just the small fry. By their nature, says Martinez, real estate transactions will always be local, assuring a place for small local businesses that provide closing services.

Martinez's initiative is the latest in a series of attempts at pro-consumer reforms in the mortgage business. Inevitably, they've stalled amid intractable differences among the various players.

Rheingold, the consumer advocate, predicts HUD's pro-consumer proposals as issued last summer will be watered down when finalized. He says Martinez stumbled into stronger opposition than he bargained for.

"HUD didn't recognize all the people who get fees out of this process," he says.

Nevertheless, Martinez promises strong rules. "Failed efforts of the past were rooted in people's attempts to reach consensus," he says. "Consensus isn't possible in this case."

Charles Hora, a commercial property manager in Delray Beach, Fla., is among those hoping for an industry transformation. Hora, 58, says he can't recall an instance in his half-dozen residential mortgage transactions when a deal didn't shift substantially between application and settlement.

Says Hora: "If any other businessman acted this way, they'd call him a crook."

Regarding Freddie

Wall Street has taken a sanguine view of the big mortgage finance company's troubles.

By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - So far, the imbroglio at Freddie Mac has prompted a bit of hand wringing in the stock market, but little else. Let's hope it stays that way.

The mortgage-finance company's sacking of its three top executives Monday, and its stated concerns over the "cooperation and candor" of its chief operating officer, pulled the rug out from under its stock.

Freddie Mac (FRE: Research, Estimates) tumbled 16 percent in heavy trading and fellow government-sponsored mortgage-finance company Fannie Mae (FNM: Research, Estimates) sank 4.8 percent. The Dow, meanwhile, fell 82 points -- a down day, but by no means horrible.

But trouble at the mortgage finance companies could carry serious implications for the overall economy. If credit market players begin to seriously question either Freddie or Fannie's business, their borrowing costs could shoot up. That would send mortgage rates -- currently at all-time lows -- higher.

That would ripple badly through a financial sector which has become increasingly dependent on investments in the tradable bundles of mortgages called mortgage-backed securities to make profits.

"Imagine you're a bank," said Lehman Brothers chief economist Ethan Harris. "The corporate sector isn't interested in borrowing, so you can't lend to it. So where do you go? Well, mortgages. They pay a reasonable rate. They're seen as a safe investment. Load up on mortgage-backed securities."

Indeed, banks have been loading up on mortgage-backeds at a prodigious rate -- at the end of May they held 43 percent more than they did a year ago, according to the Federal Reserve.

Other investors, too, have been "surfing" the yield curve by taking advantage of low short-term borrowing costs to buy mortgages. The Fed, after all, in its all-out bid to revive the economy, has more or less promised to keep short-term rates low, so buying up mortgages doesn't seem so dangerous.

And those low mortgage rates are doing wonders for the economy. The Mortgage Bankers Association estimates that there will by over $3 trillion in mortgages originated this year, up from about $2.5 trillion last year. Mortgage refinance activity is going strong, putting money into consumers' pockets and keeping spending going. Problems in mortgage-land could put an end to all that.

Which, of course, is not something that anyone wants to see happen. Various officials, like Fed Chairman Alan Greenspan, sometimes complain that when it comes to Freddie and Fannie, investors have become too complacent, believing that the two mortgage companies are "too big to fail," and that in the event of serious trouble, the government will bail them out.

Given the present circumstances, can you imagine that the government wouldn't?

Homeowners on a refinancing kick should take heed of possible pitfalls, experts advise

By Jennifer Davies
UNION-TRIBUNE STAFF WRITER

The home refinancing mania that has gripped the country has been good for homeowners and the feeble economy.

Homeowners have been able to cut their monthly payments and reap huge cash windfalls by refinancing as interest rates plummeted and housing prices skyrocketed. That "extracted equity," as Fed Chairman Alan Greenspan likes to call the refinancing boom, has spurred additional consumer spending at a time when companies are cutting jobs and other expenses.

In 2002, homeowners converted more than $96 billion of their home equity into cash, propping up the economy through home improvements, car purchases and repayment of consumer debt, said Amy Crew Cutts, deputy chief economist of Freddie Mac, the home loan mortgage company. The refinancing boom has continued into this year, with some $24 billion in equity converted to cash thus far.

"But that has hardly made a dent in the $6 trillion worth of equity value held in single-family homes," Cutts said. "By reducing their mortgage costs through refinancing, homeowners are saving a little more than $110 a month on average, and in aggregate that adds up to some $300 million per month in extra spending money for those homeowners to put back into the economy."

The refinancing bonanza that has kept consumer confidence from cratering could turn into a bust if the housing market cools or the economy further swoons. That could usher in an ugly chapter of high bankruptcy and foreclosure rates.

The nightmare scenario goes something like this: Interest rates rise and housing prices fall. The economy fails to recover and unemployment climbs. Those who have refinanced their homes, taking out cash to pay off credit card debts or purchase new cars, could end up owing more on their houses than they are worth.

Overleveraged homeowners who lose their jobs due to cutbacks would be unable to sell their houses for as much as they owe on them. Unable to make the monthly payments, the overextended consumers could face bankruptcy and even foreclosure.

"My opinion is that everyone is refinancing to death," said Ken Pecus, a real estate agent with California Prudential in San Diego. "People are mortgaging their futures by not paying attention."

Pecus' opinions are shared by many in the mortgage industry and bankruptcy attorneys who see the potential pitfalls of the refinancing boom.

While San Diego's housing market continues to soar, some parts of the country are seeing a stagnation in housing prices and a corresponding increase in foreclosures that could be a sign of things to come.

Indiana is a prime example. According to the National Association of Realtors, Indiana's home foreclosure rate last year was 2.38 percent, more than double the national average. Not coincidentally, the state also has one of the most tepid housing appreciation rates in the country. The Indiana Mortgage Bankers Association reported that Indianapolis' home appreciation rate was 3.71 percent, about half the national average. Indiana has been hit especially hard by unemployment, losing 4.1 percent of its jobs from 2000 to 2002 while the rest of the country lost .9 percent of its jobs.

Already bankruptcies are skyrocketing in some parts of the country, including the East Coast, said Keith Herron, a bankruptcy attorney in San Diego. The number of U.S. bankruptcy filings reached a record in the first quarter of 2003, according the Administrative Office of the U.S. Courts. In the first three months of this year, there were 412,968 bankruptcy filings. The previous record for filings was in Sept. 30, 2002, when there were 401,306 filings.

It's only a matter of time before the bankruptcy phenomenon makes its way to California, Herron said.

"When the bubble breaks – and I'm still waiting for it to happen – there are going to be some very serious repercussions," Herron said.

Not everyone sees the mass refinancing boom in a dark light. At a recent congressional hearing, Greenspan lauded the unprecedented ability Americans have had to turn their home equity into cold hard cash.

"Surveys by the Federal Reserve indicate that equity extraction from homes ... tend to be very significantly employed to repay other debt," Greenspan said, adding that refinancings "have also shown up as a major factor in reducing the burden of consumer debt."

Still, some bankruptcy attorneys and mortgage brokers see clients who look at refinancing cash or home equity lines of credit as free money and are cruising for trouble.

John Yeager of Yeager & Associates/American Mortgage Express said with the huge run-

up in housing prices, people are able to pay off their debts and get tax deductions on the refinancing.

"The problem is that temptation and human nature kicks in, and they run up more debt," Yeager said. "Six months to a year later, they are in the same position."

While Yeager said his clients are fairly responsible, he estimates that 10 percent to 20 percent of homeowners are getting themselves into trouble by misusing the equity in their home.

Ted Grose, president of the California Association of Mortgage Brokers, said the relative ease with which a homeowner can refinance could result in what he calls pyramiding debt.

With all the money flowing from refinancing, there still has not been a significant decrease in consumer debt, he said. A recent report by UBS Warburg found that consumer debt grew by 10 percent in 2001 and 2002.

"You would expect some of that freed-up money would go to pay down debt," Grose said. "The unfortunate consequence is that consumer debt continues to climb."

Mike Philips, San Diego area manager for Wells Fargo's Home Mortgage department, said about two-thirds of the bank's mortgage business is refinancing. Homeowners are refinancing for a variety of reasons: to lower rates, shorten the term of their mortgages or, as Philips put it, "leverage their lifestyles."

The scary part of using home equity to pay off credit cards or make big-ticket purchases is that it converts unsecured debt, which can be erased in a bankruptcy filing, into secured debt in the house, which cannot be written off. If homeowners fall behind in their payments or run into money troubles, that means they can lose their house, said Kerry Denton, a San Diego bankruptcy attorney.

While bankruptcies are down in California, Denton said he expects that could change.

"If something does give and the economy goes bad, you will see the bankruptcy filings go up and more of those people will lose their homes," he said.

The nightmare scenario depends on a significant depreciation in home values. While many believe that the skyrocketing cost of houses in California, and San Diego, will eventually slow down, few see the local market collapsing.

San Diego's economy is not only stronger than most parts of the country, but the region still lacks an adequate supply of housing, said Alan Gin, a professor at University of San Diego's Real Estate Institute. During the 1990s not enough homes were built for the growing population, and it will be a long time before supply and demand come into line. Because of the lack of supply, San Diego's housing market won't be hurt as badly as other regions when mortgage rates do go up.

In fact, Gin is refinancing his own home to bring down his monthly costs.

"The high payment is stressful," he said. "I'm going to reduce it by about $900."

For those who look to reduce payments or shorten the term of their mortgage, refinancing can be positive, said Wells Fargo's Philips.

But the downside of refinancing also can be more subtle, said Pecus, the real estate agent. People who chase after the lowest rates reset the clock on their mortgages, further extending the time it will take to pay off their loans. A mortgage isn't a big deal for someone in their 30s, but when a homeowner reaches retirement age, a big mortgage can be daunting.

"This generation will never pay off their homes," Pecus said.

Philips said there are customers who have refinanced their homes two, three and even four times as rates have fallen to lows not seen since the 1950s. The run-up in housing prices and the low interest rates have caused many in San Diego to view their homes as an investment, Philips said.

That type of thinking could cause problems if the housing market stalls or falls.

"A lot of people are considering their home only as an investment," Philips said. "But you have to look at your home and say, 'I have to live there and be able to afford to live there.' If you do that, you won't get into trouble."

To rebuild, housing agency has to uproot

By Stuart Eskenazi

Seattle Times staff reporter

Katie Ngo was in denial about having to move from the comforts of her home.

Rainier Vista, the low-income housing project where the young single mother lived, was being demolished as part of a $750 million makeover of public housing in Seattle. Her landlord, the Seattle Housing Authority (SHA), offered Ngo two options for relocating, but she rejected both because they required her to move from Rainier Valley. Her job, her child's day care, her mother, her friends were all there.

"Who would want to change all of that, right?" she said.

But change has been necessary for about 1,600 low-income households in Seattle that have had to move since 1996 to accommodate the redevelopment of Holly Park (now NewHolly), Rainier Vista and High Point.

Each is being transformed from a sprawl of public housing into a new neighborhood where poor people live side by side with market-rate renters and homeowners.

Ngo's decision on where to move became easier after she switched jobs. Although her stubbornness had made life difficult on her relocation counselors at Rainier Vista, the Housing Authority recruited her to counsel residents at High Point in West Seattle.

She brought to the job an intimate appreciation for the disruption that an imposed move can have on a family. When her duties ended last month, she left convinced that SHA is making the best of a tough situation.

A recent city audit of SHA's completed relocation effort at Holly Park, where 832 households had to move, concluded the same thing. Auditors gave SHA good marks for keeping residents informed and helping them find satisfactory new homes.

But those who urged the City Council to order the audit dismiss it as cursory and misleading.

John Fox, head of the Seattle Displacement Coalition, said the audit failed to address whether displaced residents received all relocation benefits they were entitled to under federal law.

He also said the coalition has evidence SHA broke promises, including a guarantee that residents could return to NewHolly after construction and that their new rent would not exceed 30 percent of their income for four years after their move.

The audit is based on SHA case files of 59 uprooted households. The auditor queried only four families, however — a laughably small sample from which to draw conclusions, Fox said.

Councilman Nick Licata, who requested the audit, did not respond to several phone messages for this story.

Each relocation experience is a unique story, with residents choosing from several options.

Many leaped at the opportunity to take a Section 8 voucher, which allows low-income people to rent in the open market with the government picking up a share of the expenses.

Others chose to stay in the same housing project, moving to areas not under construction, which has been possible because the work is occurring in phases.

A few accepted lump sums of about $1,500. Some seniors accepted a similar payment and moved into private facilities or in with family.

Ngo, like several residents, moved to West Seattle, to one of the many SHA-run properties scattered throughout the city.

Ngo said a lot of her job at High Point was trying to allay anxieties, understanding that people in public housing already have plenty of stresses in their lives. "Some residents had lived there 10 years or more," she said. "The older folks, especially, didn't like having to move."

They bemoaned the loss of longtime neighbors and worried about moving farther from doctors and bus lines. Some expressed fears of becoming homeless.

For SHA, relocation has been like solving a puzzle, matching available public housing with residents while trying to grant their first preferences. According to the audit:

• At Holly Park, 70 percent of 832 relocated households received their first preferences for new housing. The number rises to 85 percent when circumstances not the fault of SHA are taken into account, such as a family being unable to buy a house as hoped.

• At Rainier Vista, where demolition west of Martin Luther King Jr. Way South is almost done, the first phase of relocation ended last spring, said Virginia Felton, SHA's communications director. Of the 471 households at Rainier Vista at the time it began, 376 have moved. Of those, 100 took Section 8 vouchers, 99 moved to the eastern section not under construction, 57 moved to other SHA housing across the city, and four bought homes. The circumstances of the remaining residents who left varied.

• At High Point, where the first phase of relocation finished in April but construction does not begin until this summer, 516 of the 702 eligible households have moved, Felton said. Of those, 421 moved off-site, and 95 moved to the section of High Point not slated for demolition right away.

"Not to downplay the disruption the redevelopments have caused, but in any public-housing environment about half of the residents move during a five-year period anyway," Felton said.

As the SHA refines its relocation process, the King County Housing Authority is taking note. At its Park Lake Homes in White Center, 569 units for low-income tenants will be demolished starting in 2005, to be replaced by a mixed-income neighborhood of 900 to 1,100 new homes.

Relocation trends have changed since the process began in 1996, said Willard Brown, SHA's redevelopment property manager. At Holly Park, few residents expressed interest in moving back into the development after it became NewHolly, while at Rainier Vista and High Point, many residents wanted in when the redevelopments are completed.

"What we didn't fully understand at Holly Park was the general stigma and negativity attached to living there," he said.

Residents doubted NewHolly would offer them a better life, Brown said. But now that SHA can point to the completed phases of NewHolly as a model, Rainier Vista and High Point residents are more interested in SHA's redeveloped neighborhoods.