The action was a stunning blow to Fiorina, 50, one of the most powerful women in business, and a repudiation of her leading of H-P's controversial 2002 acquisition of Compaq Computer

Fiorina pushed through the $19 billion merger as part of a bold plan to remake the Silicon Valley icon into a computing and services giant that could challenge IBM. Yet the merger never produced the results promised, and as Fiorina worked to integrate the two huge companies, Dell Inc. leapfrogged past H-P to become the leading seller of PCs.

And H-P shares lost more than half their value during Fiorina's tenure, underperforming Dell's by a wide margin and also lagging IBM's stock performance.

[snip]

Investors rallied behind H-P's stock after learning of Fiorina's departure. The shares climbed $1.39, or almost 7 percent, to close at $21.53. The Dow component was the most heavily traded issue on the New York Stock Exchange, with volume of more than 102 million shares.

[snip]

Controversy surrounded Fiorina from the beginning of her H-P tenure, which included laying off thousands of workers in a painful restructuring.
But the most divisive move was her acquisition of Compaq, which she spearheaded despite fierce opposition from board member Walter Hewlett, the son of H-P co-founder William Hewlett.

Hewlett argued that acquiring Compaq, at the time the largest maker of PCs, would dilute H-P's profitable printing business, kill shareholder value and lead to massive layoffs.

The bitter fight prompted a proxy battle that raised questions about H-P's business direction and became a major distraction for the company's management. When the acquisition was completed in 2002, it led to the firing of more than 17,000 employees and the acrimonious departure of Hewlett from the board.

"H-P has been a great company," Hewlett said in an e-mailed statement after Fiorina's departure was announced. "We all look forward to H-P fulfilling its promise." The Hewlett Foundation still owns about 10 million H-P shares.
Missing expectations

In August 2004, Fiorina had to deal with H-P missing its third-quarter estimates. She blamed the results on poor performance in the company's enterprise servers and storage business, and fired three executives from the division.

While Dunn said on the conference call that there was no connection between those results and Fiorina's firing, investors believed Fiorina was to blame for the company's poor results.

"Now the business unit leaders will have the autonomy to run them properly," said Hillman.

At HP, Fiorina developed the reputation of a manager who knocked heads together—or who chopped them off. And there were massive layoffs during her tenure. In 2003, the company announced it would dismiss almost 18,000 people. (That year, the firm posted a $903 million loss on $56.6 billion in revenue.) When the outsourcing of jobs turned into a national political issue, Fiorina became the poster-girl for an industry campaign aimed at blocking any legislation that would restrict a company's ability to can American employees in favor of workers overseas. She and executives from seven other tech companies issued a report that argued that any such measures would hurt the U.S. economy. The best way to increase American competitiveness, they declared, was to improve schools and, yes, reduce taxes. At a Washington press conference, Fiorina said, "There is no job that is America's God-given right anymore. We have to compete for jobs." The remark did not go over well with critics of outsourcing, who have ever since used it as an indicator of corporate insensitivity.

Fiorina's stint at HP was marked by other moments of controversy. In March 2004, after HP shareholders voted 1.21 billion to 925 million to expense stock options, she opposed the move, essentially opting to stick with accounting practices (that were used by other corporations) that did not reveal a company's true value. That same year, Forbes reported that Hewlett-Packard was "among many other U.S. companies that kept offices in Dubai and were linked to Iranian traders there." The article suggested that HP and other countries were skirting export controls to trade with Iran. And in early 2005, Fiorina announced that pop star Gwen Stefani would join the HP design team and work on the company's line of digital cameras.

Fiorina wasn't around long enough to see her Plan Stefani to completion. In February 2005, she was pushed out of HP. The company's board, with which she had been battling for years, had had enough of her. The Compaq merger had not yielded the benefits—improved shareholder returns and greater profits—she had promised. At the time of her dismissal, Hewlett-Packard stock was trading at about the same price as when she first unveiled the Compaq deal. Eighty percent of the company's operating profits were coming from its old-line printing business. She had not succeeded in reviving HP as a computer-selling powerhouse. The day she was dumped, the company's stock price rose 7 percent. That was Wall Street exclaiming, Hooray. As Robert Cihra, an analyst with Fulcrum Global Partners told Money magazine, "The stock is up a bit on the fact that nobody liked Carly's leadership all that much. The Street had lost all faith in her and the market's hope is that anyone will be better."

Labels: Carly Fiorina, economics, John McCain

Even as it enriches Arab rulers, the recent oil-price boom is helping to fuel an extraordinary rise in the cost of food and other basic goods that is squeezing this region’s middle class and setting off strikes, demonstrations and occasional riots from Morocco to the Persian Gulf.

Here in Jordan, the cost of maintaining fuel subsidies amid the surge in prices forced the government to remove almost all the subsidies this month, sending the price of some fuels up 76 percent overnight. In a devastating domino effect, the cost of basic foods like eggs, potatoes and cucumbers doubled or more.

In Saudi Arabia, where inflation had been virtually zero for a decade, it recently reached an official level of 6.5 percent, though unofficial estimates put it much higher. Public protests and boycotts have followed, and 19 prominent clerics posted an unusual statement on the Internet in December warning of a crisis that would cause “theft, cheating, armed robbery and resentment between rich and poor.”

The inflation has many causes, from rising global demand for commodities to the monetary constraints of currencies pegged to the weakening American dollar. But one cause is the skyrocketing price of oil itself, which has quadrupled since 2002. It is helping push many ordinary people toward poverty even as it stimulates a new surge of economic growth in the gulf.

“Now we have to choose: we either eat or stay warm. We can’t do both,” said Abdul Rahman Abdul Raheem, who works at a clothing shop in a mall in Amman and once dreamed of sending his children to private school. “We’re not really middle class anymore; we’re at the poverty level.”

Labels: economics, Middle East

“Poverty in early childhood poisons the brain.” That was the opening of an article in Saturday’s Financial Times, summarizing research presented last week at the American Association for the Advancement of Science.

As the article explained, neuroscientists have found that “many children growing up in very poor families with low social status experience unhealthy levels of stress hormones, which impair their neural development.” The effect is to impair language development and memory — and hence the ability to escape poverty — for the rest of the child’s life.

[snip]

In 2006, 17.4 percent of children in America lived below the poverty line, substantially more than in 1969. And even this measure probably understates the true depth of many children’s misery.

Living in or near poverty has always been a form of exile, of being cut off from the larger society. But the distance between the poor and the rest of us is much greater than it was 40 years ago, because most American incomes have risen in real terms while the official poverty line has not. To be poor in America today, even more than in the past, is to be an outcast in your own country. And that, the neuroscientists tell us, is what poisons a child’s brain.

America’s failure to make progress in reducing poverty, especially among children, should provoke a lot of soul-searching. Unfortunately, what it often seems to provoke instead is great creativity in making excuses.

Some of these excuses take the form of assertions that America’s poor really aren’t all that poor — a claim that always has me wondering whether those making it watched any TV during Hurricane Katrina, or for that matter have ever looked around them while visiting a major American city.

Mainly, however, excuses for poverty involve the assertion that the United States is a land of opportunity, a place where people can start out poor, work hard and become rich.

But the fact of the matter is that Horatio Alger stories are rare, and stories of people trapped by their parents’ poverty are all too common. According to one recent estimate, American children born to parents in the bottom fourth of the income distribution have almost a 50 percent chance of staying there — and almost a two-thirds chance of remaining stuck if they’re black.

That’s not surprising. Growing up in poverty puts you at a disadvantage at every step.

Labels: economics, weight

“Everybody was basically using their house as an A.T.M. machine,” said Dave Simonsen, a senior vice president for NAI Alliance, an industrial real estate firm in Reno. “Now they are upside down on their house without that piggy bank to go back to.”

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data.

This summer, the size of withdrawals fell even more sharply to about one-third below the level of late last year, according to Mark Zandi, chief economist at Moody’s Economy.com.

“This slide in equity withdrawal is very recent,” Mr. Zandi said, “so you wouldn’t expect the drop in spending to occur until now, or Christmas.”

Only a year ago, money taken out of houses was still more than 9 percent of the nation’s disposable income, Mr. Zandi calculated, using a sampling of Equifax credit reports to supplement Fed data. By this fall, it had dropped to about 5 percent, a difference of about $350 billion a year.

Much of the attention in the recent collapse of the housing boom has focused on those in danger of losing their home or facing higher monthly payments in their adjustable mortgages. But the broader effect on the economy is likely to come from the much larger group of homeowners who can no longer count on rising home values to bolster their wealth.

Labels: economics, housing bubble, I love the smell of schadenfreude in the morning, unabashed consumerism

The UAW strike was just one distressing headline in a week of bad economic news for Michigan. As usual, the state has the nation's highest unemployment rate -- 7.2 percent. (In 2005, it was the only state not hit by a hurricane to lose jobs. It regularly wins United Van Lines' title of most-fled state, and the state of Wyoming put up a billboard outside Flint to lure workers west. That's a reversal of Henry Ford's old practice of sending his agents to wander the South handing out free one-way train tickets to Detroit.) On Friday, thousands of state employees will be told whether to report to work next week. Thanks to obstinate Republicans in the state Legislature and an ineffectual Democratic governor, Michigan may not meet its Oct. 1 budget deadline. The governor wants to raise taxes. Republican legislators want to freeze school funding and cut social services. If they can't agree soon, the state government will shut down. Drivers have been warned to renew their license plates now. The state police won't patrol the roads, and even the casinos will close.

How did the state that Franklin D. Roosevelt called "the Arsenal of Democracy" fall on such hard times? By clinging too hard to that title, is how. Michigan is hopelessly attached to the 20th century. It's not just the UAW with its longing for graduation-to-grandparent job promises. The Big Three have never gotten over the idea of muscular American cars ruling the highways. The SUV -- pumped-up descendant of the Fleetwood and the Electra -- was the automotive status symbol of the 1990s, so profitable that Detroit turned up its nose when Japanese automakers introduced hybrid cars.

"Hybrids are an interesting curiosity," then-GM chairman Robert Lutz said in 2004. "But do they make sense at $1.50 a gallon? No, they do not."

This year, with gas at $3 a gallon, GM is introducing a flex-fuel vehicle called the Volt, which can run on electricity, biodiesel, E85 or gasoline. But by waiting so long, GM yielded the title of environmentally friendly automaker to Toyota. The Prius will always be the hybrid car.

Detroit made the same mistake in the 1970s. It was too late getting into the small-car market, and the efforts it turned out were junk. My factory-town DNA tells me that buying American is a patriotic duty (as did the graffito "Assholes Buy Jap Cars" that I once saw painted on an overpass near Flint), so I suffered through the Chevy Chevette, the Ford Escort and the Plymouth Volare. I think I abandoned them all on rural roads, with blown head gaskets. My Ford Focus runs like a dream, but it can't seem to compete with the Corolla. This year, Toyota will become the biggest-selling automaker in the world.

When I think of Detroit's stubborn self-image as "the Motor City," I think of the Boll Weevil Monument in Enterprise, Ala. Enterprise was a town that grew cotton, and no other crop. After boll weevils struck, the farmers thought their livelihood was over. Then they started planting other crops, such as peanuts, and prospered more than ever.

Michigan did not become great because of the auto industry. The auto industry became great because of a Michigander, Henry Ford. The state still produces creative people. Google founder Larry Page, a Ford of the 21st century, grew up in East Lansing, and studied at the University of Michigan, whose main function seems to be giving young Michiganders the credentials to get the hell out of Michigan. Page went to California, but as a sop to his home state, Google is opening a 1,000-employee office in Ann Arbor.

(I've moved back to Michigan three times since college. My last attempt lasted a year -- until I was laid off. I now live on the North Side of Chicago, which is so crowded with my fellow economic refugees that we call it "Michago.")

I can only hope Google Ann Arbor is the beginning of a post-industrial era for Michigan. The picketers in the UAW's two-day strike were mostly gray-haired, protecting jobs and benefits they've held for years. Like the music of Bob Seger -- who celebrated Michigan's glory days with "Makin' Thunderbirds," "Night Moves" and, fittingly, "Back in '72," -- auto work belongs to the baby boom generation. GM has been culling them as quickly as possible, buying out 35,000 last year.

They're not being replaced with younger workers. My generation never heard the promise. We never counted on a career in the shop. If we have a mission, it's finding Michigan a new industry, and a new image, that take it beyond the automobile.

Labels: economics, New Jersey

A new study released this week revealed that Americans' health care varies dramatically from state to state. It should come as no surprise that in general Southern states ranked at the bottom in almost every category. After all, whether the issue is health, education, working conditions, or virtually any indicator of social pathology, things are worst in precisely those states that voted for George W. Bush.

The Commonwealth Fund report, "Aiming Higher: Results from a State Scorecard on Health System Performance," examined states' performance across 32 indicators of health care access, quality, outcomes and hospital use. Topping the list were Hawaii, Iowa, New Hampshire, Vermont and Maine. Bringing up the rear were the Bush bastions of Kentucky, Louisiana, Nevada, Arkansas, Texas, with Mississippi and Oklahoma. The 10 worst performing states were all solidly Republican in 2004.

The extremes in health care performance are startling. For example, 30% of adults and 20% of children in Texas lacked health insurance, compared to 11% in Minnesota and 5% in Vermont, respectively. Premature death rates from preventable conditions were almost double (141.7 per 100,000 people) in Tennessee, Arkansas, Louisiana and Mississippi compared to the top performing states (74.1 per 100,000). Adults over 50 receiving preventative care topped 50% in Minnesota compared to only 33% in Idaho. Childhood immunizations reached 94% in Massachusetts, compared to just 75% in the bottom five states. As the report details, federal and state policies, such as insurance requirements and Medicaid incentives, clearly impact health care outcomes.

[snip]

But health care isn't the only area where denizens of the Republican heartland suffer relative to their blue state brethren. As Perrspectives detailed in January, minimum wage levels also vary significantly from state to state. Unsurprisingly, many of the "bluest" states lead the way in exceeding both the previous ($5.15 an hour) and recently passed ($7.25) federal requirements, with Washington, Oregon, California, Vermont, Massachusetts, Rhode Island and Connecticut mandating wages as high as $7.93. Only one of the 21 states (New Hampshire) mired at $5.15 an hour voted for George W. Bush in 2004. (Click here to view a map of the minimum wage by state.)

And the minimum wage is just the beginning. A December 2005 report Political Economy Research Institute at the University of Massachusetts showed that Americans' working conditions in general closely follow the 2004 electoral map. The report's Work Environment Index (WEI) rated the quality of Americans' working lives by a weighting of three factors: job opportunities, job quality, and job fairness. The top five states were Delaware, New Hampshire, Minnesota, Vermont and Iowa, the bottom five were South Carolina, Utah, Arkansas Texas and Louisiana. Unsurprisingly, all five of the cellar-dwellers are so-called "Right-to-Work" states featuring outright hostility towards union organizing. (Click the following links for maps of WEI by state and right-to-work states.)

Labels: economics

I'm going to talk a little bit about two big priorities: one, how to keep this economy strong so people can make a living; and secondly, how this country needs to stay resolved and firm in protecting the security of our country. (Applause.) And I appreciate you giving me a chance to come over and visit.
Let me talk about how to keep this economy growing. You know, one of the main jobs of government is to create the conditions for economic growth. A main job of government is not to try to create wealth. The fundamental question we've got to ask here in Washington is, what do we need to do to encourage investment and risk-takers, and to encourage entrepreneurship? And I believe the heart of good economic policy is keeping people's taxes low. (Applause.)

The reason I say that is there's a fundamental debate in Washington, when you really get down to it, and the debate is who best to spend your money. And I believe a cattleman can spend their money better than the government can. Now, obviously, we need some amount of money here, and that's called setting priorities. But beyond that, the best way to keep this economy growing is to let you keep more of your own tax money. The tax cuts we passed are working.

Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.

The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.

The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

Prof. Emmanuel Saez, the University of California, Berkeley, economist who analyzed the Internal Revenue Service data with Prof. Thomas Piketty of the Paris School of Economics, said such growing disparities were significant in terms of social and political stability.

“If the economy is growing but only a few are enjoying the benefits, it goes to our sense of fairness,” Professor Saez said. “It can have important political consequences.”

Last year, according to data from other sources, incomes for average Americans increased for the first time in several years. But because those at the top rely heavily on the stock market and business profits for their income, both of which were strong last year, it is likely that the disparities in 2005 are the same or larger now, Professor Saez said.

He noted that the analysis was based on preliminary data and that the highest-income Americans were more likely than others to file their returns late, so his data might understate the growth in inequality.

The disparities may be even greater for another reason. The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.

The Bush administration argued that its tax policies, despite cuts that benefited those at the top more than others, had not added to the widening gap but “made the tax code more progressive, not less.” Brookly McLaughlin, the chief Treasury Department spokeswoman, said that this year “the share of income taxes paid by lower-income taxpayers will be lower than it would have been without the tax relief, while the share of income taxes for higher-income taxpayers will be higher.”

Treasury Secretary Henry M. Paulson Jr., she noted, has acknowledged that income disparities have increased, but, along with a “solid consensus” of experts, attributed that shift largely to “the rapid pace of technological change has been a major driver in the decades-long widening of the income gap in the United States."

Others argued that public policies had played a role in the shift. Robert Greenstein, executive director of the Center on Budget and Policy Priorities, an advocacy group for the poor, said that the data understates the widening disparity between the top 1 percent and the rest of the country.

He said that in addition to rising incomes and reduced taxes, the equation should take into account cuts in fringe benefits to workers and in government services that middle-class and poor Americans rely on more than the affluent. These include health care, child care and education spending.

“The nation faces some very tough choices in coming years,” he said. “That such a large share of the income gains are going to the very top, at a minimum, raises serious questions about continuing to provide tax cuts averaging over $150,000 a year to people making more than a million dollars a year, while saying we do not have enough money” to provide health insurance to 47 million Americans and cutting education benefits.

A major issue likely to be debated in Congress in the year ahead is whether reversing the Bush tax cuts would slow investment and, if so, how much that would cost the economy.

Labels: economics

SHAKER HEIGHTS, Ohio — In a sign of the spreading economic fallout of mortgage foreclosures, several suburbs of Cleveland, one of the nation’s hardest-hit cities, are spending millions of dollars to maintain vacant houses as they try to contain blight and real-estate panic.

In suburbs like this one, officials are installing alarms, fixing broken windows and mowing lawns at the vacant houses in hopes of preventing a snowball effect, in which surrounding property values suffer and worried neighbors move away. The officials are also working with financially troubled homeowners to renegotiate debts or, when eviction is unavoidable, to find apartments.

“It’s a tragedy and it’s just beginning,” Mayor Judith H. Rawson of Shaker Heights, a mostly affluent suburb, said of the evictions and vacancies, a problem fueled by a rapid increase in high-interest, subprime loans.

“All those shaky loans are out there, and the foreclosures are coming,” Ms. Rawson said. “Managing the damage to our communities will take years.”

Cuyahoga County, including Cleveland and 58 suburbs, has one of the country’s highest foreclosure rates, and officials say the worst is yet to come. In 1995, the county had 2,500 foreclosures; last year there were 15,000. Officials blame the weak economy and housing market and a rash of subprime loans for the high numbers, and the unusual prevalence of vacant houses.

Foreclosures in Cleveland’s inner ring of suburbs, while still low compared with those in Cleveland itself, have climbed sharply, especially in lower-income neighborhoods that border the city. Hundreds of houses are vacant because they are caught in legal limbo, have been abandoned by distant banks or the owners cannot find buyers.

The suburbs here are among the best organized in their counterattack, experts say, but many suburbs elsewhere in the country have had jumps in foreclosures and are also working to stem the damage.

Outside Atlanta, Gwinnett and DeKalb Counties have mounted antiforeclosure campaigns while several towns south of Chicago are forcing titleholders to fix up empty houses, or repay the government for doing it.

Here in Ohio, there are more than 200 vacant houses in Euclid, a suburb of Cleveland north of here. In the last two years more than 600 houses in Euclid have gone through foreclosure or started the process, many of them the homes of elderly people who refinanced with low two-year teaser rates, then saw their payments grow by 50 percent or more.

Euclid has installed alarm systems in some vacant houses to keep out people hoping to steal lights and other fixtures, drug users and squatters. The city has hired three new building inspectors, bringing the total to nine, to deal with troubled properties and is getting a $1 million loan from the county to cover the costs of rehabilitation, demolition and lawn care at the foreclosed houses. (When the properties are sold, such direct maintenance costs will be recovered through tax assessments.)

The Euclid mayor, Bill Cervenik, said the city, with a population of 53,000, was losing $750,000 a year in property taxes from the empty houses.

A brief look back at the evolution of the consumer finance market reveals that the financial services industry has long been competitive, innovative, and resilient. Especially in the past decade, technological advances have resulted in increased efficiency and scale within the financial services industry. Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants.

[snip]

Home mortgage loans, as we know them today, are a fairly recent product born of the failures of the mortgage finance system during the Great Depression. Clearly, radical change was needed. One of the most significant responses to this need was creation of the Federal Housing Administration, which instituted a new type of mortgage loan--the long-term, fixed-rate, self-amortizing mortgage--which became the model that transformed conventional home mortgage lending. A whole industry--thrift institutions--grew up around this one product.

[snip]

As has every segment of our economy, the financial services sector has been dramatically transformed by technology. Technological advancements have significantly altered the delivery and processing of nearly every consumer financial transaction, from the most basic to the most complex. For example, information processing technology has enabled creditors to achieve significant efficiencies in collecting and assimilating the data necessary to evaluate risk and make corresponding decisions about credit pricing.

With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. The widespread adoption of these models has reduced the costs of evaluating the creditworthiness of borrowers, and in competitive markets cost reductions tend to be passed through to borrowers. Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending; indeed, today subprime mortgages account for roughly 10 percent of the number of all mortgages outstanding, up from just 1 or 2 percent in the early 1990s.

[snip]

Improved access to credit for consumers, and especially these more-recent developments, has had significant benefits. Unquestionably, innovation and deregulation have vastly expanded credit availability to virtually all income classes. Access to credit has enabled families to purchase homes, deal with emergencies, and obtain goods and services. Home ownership is at a record high, and the number of home mortgage loans to low- and moderate-income and minority families has risen rapidly over the past five years. Credit cards and installment loans are also available to the vast majority of households.

Labels: economics, mortgage crisis

Need some cash?

If you're like a lot of people, you've found that what's in your wallet is nothing like what's in your house.

As wages stagnated and real estate prices doubled in the first half of this decade, homeowners discovered their home was their best credit card.

Refinanced home loans, home equity lines and second mortgages have become the way to pay for Hummers, high-tech kitchens and vacation cruises. The interest rates are usually lower than the rates on credit cards, the interest paid is tax deductible, and there's been a lot more cash available in house equity.

The numbers are staggering. New Jersey homeowners borrowed $183 billion on mortgage refinancings and home equity loans from 2003 through 2005, the peak refinancing years, an Asbury Park Press analysis shows. Some homeowners may have refinanced more than once in that time. Nonetheless, that's enough to pay for all the fast food meals in America this year or to run state government for the next six years -- tax free.

But now bankers and economists worry some homeowners have overspent like families at Disney World. Default rates on mortgage loans are rising, and real estate prices are falling as higher interest rates have made loans less affordable.

[snip]

James F. Brown, a Spring Lake Heights mortgage banker, said demand for loans that effectively provide cash from house equity has been so high that he has, in recent years, tried to persuade people to borrow less money and not put themselves in so much debt.

Brown, 52, a 24-year mortgage industry veteran, said he's failed to dissuade a single borrower.

Brown said he recalls the days when people tried to actually pay off their mortgage and have a party to burn the paperwork. That's not a modern-day attitude, he said.

"People are sitting back and saying: 'Tell me how much equity is in my house, I want to consolidate my debt, and I'm not worried if I ever pay my house off,' " Brown said

You are in trouble if John Bittel calls you.

If Bittel contacts you, it means your mortgage company is ready to throw you out of your house.

Bittel, of Stafford, is a property investor. He buys houses from people who can't pay their mortgage loans, or he buys them at foreclosure. Then he renovates the houses and either rents or sells them.

Bittel admits he and other investors may look like vultures to those who don't understand the business. But they play an important role in the real estate market, he said.

"Even a vulture has a purpose," Bittel said after one sheriff's sale last month. "He cleans up the mess."

[snip]

The man whose job it is to represent lenders at the Monmouth County sheriff's sale auctions, at which foreclosed properties are sold, said he sees a lot more trouble coming.

That's especially true for owners of large, suburban homes who bought during the boom times, have since run into financial trouble, and now are dealing with a declining market, said real estate broker Dennis Kessler, the lenders' agent in Monmouth County.

"We're seeing more foreclosure action at the top of the market than at the bottom," Kessler said. "You see a lot of people who can't sell their homes, and they're really extended out."

[snip]

Many homeowners in trouble during a real estate downturn attempt to rent out their houses in order to cover the mortgage. That won't work for many this time, Kessler said.

"You can't rent a McMansion that's worth $800,000 and has $20,000 a year in property taxes," he said.

[snip]

Dennis DeBernardis, 57, of Freehold, a property investor and retired New York City police officer, sat motionless after a sheriff's sale in Monmouth County last month.

He had researched the loans on the properties and driven by the houses, but never raised his hand once to offer a bid.

"There's no equity in these," he said. "What's coming through is these interest-only, balloon mortgages, no-money-down loans."

The scene has been much the same for investors in Ocean County.

"Look at these judgment amounts — they're huge," said Bittel, the Stafford investor, as he slapped the sale list. "That house has a $254,000 judgment. It's only worth $200,000. Look at this one in Brick: $500,000 to buy it today. Forget it."

After a while, Bittel and other investors predict, the banks will have to start unloading properties for whatever price buyers will pay.

When that happens, real estate prices in general will drop, since those sales will be used as comparisons for homeowners who put their homes on the market, Bittel said.

Labels: debt, economics, homeownership, real estate