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Originally published December 6, 2007 at 12:00 AM | Page modified December 6, 2007 at 11:25 AM

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Bit by bit, homes given away

Homeowners started losing hold of their homes years before spiking foreclosures and the housing slump slammed the economy. Piece by piece, some...

The Associated Press

NEW YORK — Homeowners started losing hold of their homes years before spiking foreclosures and the housing slump slammed the economy.

Piece by piece, some gave away their homes by tapping equity to take cash out to pay for cars, weddings and vacations. Others never owned one brick.

During the country's most recent housing boom, the term "homeowner" became a misnomer as lenders offered 125 percent home financing to some buyers.

Now, slipping home prices threaten to further erode the value of many Americans' single largest asset, curbing consumer spending and jeopardizing retirement assets.

Thanks, in large part, to mortgage-related tax deductions and a drumbeat of advice that everyone should own their home, the U.S. homeownership rate rose steadily in recent decades. It peaked at 69.2 percent in 2004 before backing down to 68.2 percent at the end of the third quarter, according to the Census Bureau, which has collected the data since 1965.

But that small decline masks a much larger plunge in the amount of equity homeowners hold. This figure, equal to the percentage of a home's market value minus mortgage-related debt, fell to an average of 51.7 percent at the end of the second quarter, down from 62 percent at the end of 1990, the Federal Reserve reported, even as the average home value surged 139 percent during that period.

Some economists believe the home-equity number will drop below 50 percent by the end of next year, marking the first time homeowners will owe more than they own since the Fed started recording the data in 1945.

The central bank is set to release the third-quarter equity figure Thursday.

"Although homes increased hugely in value, homeowners were borrowing against them as fast, if not faster, than the appreciation," said Dean Baker, co-director for the Center for Economic and Policy Research. "And when people were buying new homes, they were getting them with as a little as 5 percent, 2 percent down, even nothing at all."

Small down payments

Thirteen percent of first mortgages originated in 2005 and 2006 had down payments of less than 10 percent, according to the Mortgage Bankers Association (MBA).

An additional 1 percent of the mortgages surpassed the value of the property.

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"How much people put down on the home has always been an important variable for the performance of a loan," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant.

"Mortgage lenders lost sight of its importance because most of the loan-level data they used came from the latter 1990s to the early 2000s when very few places in the country weren't seeing house appreciation," he said.

A recent report from Seattle-based online real-estate information company Zillow showed home values declining 5.7 percent year over year in 83 metropolitan areas. A 20 percent down payment would have provided a cushion from these price declines.

The drop in average value is particularly bad news for homeowners who treated their homes as piggy banks instead of as savings accounts.

Refinancings

They drained $468.7 billion out of their homes in 2004 through home-equity loans or cash-out refinancings, according to a report this year from former Fed Chairman Alan Greenspan and Fed senior economist James Kennedy.

Fifty-eight percent of that cash went to home improvements and personal spending, while an additional 27 percent paid off credit-card debt.

Catherine Alexander, 61, who lives near Plano, Texas, first dipped a toe into home equity before taking a plunge.

After her husband died four years ago, Alexander moved from Seattle to Texas to be closer to her children, buying a $172,000 four-bedroom house with life-insurance money.

For more than a year, she shredded countless home-equity checks sent to her unsolicited by Beneficial, a member of HSBC Group. She finally cashed one for $6,000 to meet expenses after being unemployed for over a year. That, in turn, led to phone calls from Beneficial recommending a larger equity loan.

$93,000 loan

At the end of 2005, Alexander took out a $50,000 equity loan to pay for day-to-day expenses and charges related to her son's wedding. To satisfy that loan and to pay off her Ford Escort, she took out another home-equity loan the next year, this time for $93,000.

Alexander, who now works for Neiman Marcus, put her home on the market in May after her home and loan expenses became too costly. Even though she felt lured into the loans, she also blames herself.

"A lot of it has been my ignorance and being naive about my finances and in trusting people," she said. "I shouldn't have had a loan that size for my income and I should've been more reasonable in the house I needed."

Fortunately, Alexander will receive more than half of the proceeds from a sale if she gets her $189,900 asking price.

Scant remains

For homeowners who took equity out, what remains is scant. Thirty percent of the home-equity loans issued in 2005 and 2006 left homeowners with less than 10 percent of equity in their homes, the MBA said. An additional 3 percent now owe more than the value of the house.

Now, homeowners trapped in unmanageable mortgages with little equity can't refinance or sell their houses at a price to cover what they owe. Many of them face foreclosure.

Dropping home prices also threaten retail spending as the equity well runs dry. Homeowners won't be able to tap equity as easily for big-ticket purchases and may put more toward saving than spending as housing values fall.

Residential real estate represented 39 percent of a household's total assets in 2004, according to the Fed, whereas retirement accounts made up 11.4 percent and stocks just 6.3 percent.

No type of national bailout will replace that lost equity. Those who depended on it will have to rely on meager savings and other investments.

Younger homeowners have more time to replenish the equity. But for baby boomers who took out cash from their homes every time home prices went up, their retirement income may not cut it.

"For lower- to middle-income homeowners who are relying on their homes as a source of savings, this will be very tough with declining home values," said Mark Zandi, chief economist for Economy.com.

"Particularly in context of reining in Social Security, Medicare and Medicaid. It's one more financial problem on top of mounting ones as they approach retirement."

Copyright © 2007 The Seattle Times Company

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