Nov
26
Mortgage Rates Plummet
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The $800 billion infusion of federal funds into credit markets has an immediate impact on mortgage rates.
NEW YORK (CNNMoney.com) — Mortgage rates fell sharply yesterday after the administration announced that it will pump another $800 billion into credit markets to free up frozen consumer and mortgage lending.
That number dwarfed previous government actions aimed at bolstering the mortgage lending market.
“The feds agreed to spend a half a trillion dollars to buy up mortgage backed securities and another $100 billion to fund lending for Fannie and Freddie; we’re not talking chump change anymore,” said Keith Gumbinger of HSH Associates, a publisher of mortgage information.
Rates averaged 5.77% for the day on a 30-year, fixed rate loan, down from 6.06% Monday, according to Gumbinger. They fell as far as 0.75 percentage points during the day, according to Orawin Velz, Associate Vice President for Economic Forecasting at the Mortgage Bankers Association.
That could save a typical homebuyer more than $90 a month on a $200,000 mortgage.
“The government action was geared to bringing mortgage rates down,” said Velz, “and it did.”
The drop was the largest since early September, when the administration announced that it was taking control of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), and stemmed from similar market sentiment.
Both actions sought to give confidence to the investment community. Most mortgages are sold to investors in so-called secondary markets but with foreclosure rates so high and expensive write downs of mortgage-backed securities so common over the past several months, investors had fled the mortgage market.
Instead of buying mortgage bonds, they’ve been snapping up Treasurys, a virtually risk-free investment. That showed up in the falling yields of Treasury bonds and the greater difference between Treasury yields and mortgage interest rates.
Normally, interest rates on 30-year fixed rate mortgages are only slightly higher than yields on 10-year Treasury bonds, about 1.5 percentage points. That difference compensates mortgage investors for taking on extra risk.
Lately, however, because investors have perceived, quite reasonably, that risks of mortgage-backed securities were far greater than previously supposed, they demanded greater reward for investing in them.
That sent the difference, or spread, between mortgage interest rates and Treasury yields to 2 percentage points or so over the past year. That had widened even more recently, to about 3 percentage points, before the government took action yesterday. Even after the big drop in rates, the spread is still more than 2.5 points.
Whether the government action will lead to lower mortgage rates over the long term remains to be seen. “In theory, it should stimulate investor demand but there are a lot of unforeseen things that can occur,” said Velz.
She initially thought the Fannie-Freddie takeover would have much the same long-term impact because it meant that the government was guaranteeing all the loans the two were backing.
“But the government started backstopping almost everything,” she said, “so demand for mortgages declined and the spread increased again.”
This time might be different, according to Mike Larson, a real estate analyst with Weiss Research, but he’s far from certain.
“There’s been some short-term bang for the buck,” he said. “We have to see if it sticks.”
Helping it stick could be the downward pressure from deflation concerns and the still unusually wide spread with Treasurys.
“Even if the spread just got a little tighter you’d get some added horsepower,” said Larson. “We could see rates in the low fives pretty soon.”
Nov
26
Government report shows sales of newly built homes fell more than expected to an annual rate of 433,000 in October.
NEW YORK (CNNMoney.com) — Sales of newly constructed homes slumped in October to an annual rate not seen since 1991, according to government figures released Wednesday.
The U.S. Census Bureau reported that new home sales fell to an annualized rate of 433,000 in October. That’s down 5.3% from the revised 457,000 annual rate recorded in September.
October’s sales pace was well below the consensus forecast of 450,000, according to economists surveyed by Briefing.com. And it was the lowest number since January 1991, when the sales rate was 401,000.
“October was definitely another disappointing month for the home-building industry,” said Mike Larson, real estate analyst at Weiss Research. But he added that the decline was not surprising given the ongoing weakness in the housing market.
The number of new homes on the market decreased in October to an estimated 381,000 from 414,000 in September. At the current sales pace, it would take more than 11 months to sell through the inventory.
The median sales price of new houses sold in October was $218,000, down from $218,400 the month before. It was the lowest level since June 2004, when the median home price was $215,700.
Nov
25
Home Prices in Record Decline
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A Case-Shiller survey shows a 16.6% annual decline in the summer months as the housing picture continues to deteriorate.
NEW YORK (CNNMoney.com) — The home price plunge stayed on a record pace this summer, according to a widely watched gauge of national real-estate markets released Tuesday.
The S&P Case-Shiller Home Price national index recorded a 16.6% decline in the third quarter compared with the same period a year ago. That eclipsed the previous record of 15.1% set during the second quarter.
Prices in Case-Shiller’s separate index of 10 major cities fell a record 18.6%, while its 20-city index dropped a record 17.4%
With foreclosures soaring at record rates, the economic picture dimming and job losses ramping up, all the elements were in place to push prices lower.
“The turmoil in the financial markets is placing further downward pressure on a housing market already weakened by its own fundamentals,” said David Blitzer, Standard & Poor’s spokesman for the indexes, in a press release. “All three aggregate indices, and 13 of the 20 metro areas, are reporting new record rates of decline…Prices are back to where they were in early 2004.”
The 10-city index is now 23.4% off its peak price, which came in June 2006; the 20-city index is down 21.8% from its July 2006 high and the national index has fallen 21% since the third quarter of 2006.
Home prices in the 10-city index have fallen for 26 consecutive months. The decline has broadened over the past 12 months, with prices dropping in every city of the 20-city index during September.
In the weakest market, Phoenix, the 12-month loss came to 31.9%. Las Vegas prices plummeted 31.3% and San Francisco recorded a 29.5% decline. The best performing markets, Dallas and Charlotte, N.C., still posted drops – 2.7% in Dallas and 3.5% in Charlotte.
With San Francisco and Las Vegas, the other members of the 10-city index are: Miami, down 28.4% year-over-year; Los Angeles, down 27.6%; San Diego, down 26.3%; Washington, down 17%; Chicago, down 10.1%; New York, down 7.3%; Boston, down 5.7%; and Denver, down 5.4%.
In addition to Phoenix, Dallas, Charlotte and the cities in the 10-city index, the 20-city index is made up of: Detroit, down 18.6%); Tampa, Fla., down 18.5%; Minneapolis, down 14%; Seattle, down 9.8%; Atlanta, down 9.5%; Portland, Ore., down 8.6%; and Cleveland, down 6.4%.
Foreclosures continue to take a heavy toll, with sales in some cities dominated by properties repossessed by banks and then put back on the market, often at bargain prices. In Las Vegas and Cleveland, for example, about half of all homes for sale are bank-owned properties, according to the real estate Web site, Trulia.com.
“Foreclosures are clearly a part of the market now,” said Blitzer.
He added that the national index price trends tend to be more moderate because they encompass many more exurban and rural areas, where, in many cases, home prices never skyrocketed as they did in some of the hotter, urban markets.
Karl Case, the Wellesley economics professor who is the Case in Case-Shiller, said during a news conference about the latest index report that he would hesitate to put a number on how much further prices could fall, but the increasing job losses will surely worsen the situation.
“There’s no cushion against unemployment,” he said.
And Pat Newport, an economist with Global Insight, pointed out that the latest numbers don’t even capture the impact of some of the events of the past couple of months.
“The real economy took a sharp turn for the worse towards the end of the third quarter,” he said. “Since then, housing permits are down, the National Association of Home Builders index of activity dropped to a record low in November and purchase loan applications were down 15%. That’s telling us the housing market has worsened a lot.”
Add to that a jumping unemployment rate and more bank woes and it portends lousy home price numbers for months to come, according to Newport.
“As bad as the latest Case-Shiller numbers appear to be, they are bound to get a lot worse,” he said.
Nov
23
Worst of Financial Crisis Yet to Come: IMF Chief Economist
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The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday.
Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.
“The worst is yet to come,” Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that “a lot of time is needed before the situation becomes normal.”
He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.
The International Monetary Fund on Friday promised to help Latvia deal with its economic crisis after it assisted Iceland, Hungary, Ukraine, Serbia and Pakistan.
But Blanchard said the IMF was not able to solve all financial issues, in particular problems of liquidity.
Withdrawals of capital leading to problems of liquidity “can be so significant that the IMF alone cannot counter them,” he said, adding that massive withdrawals of investments from emerging countries could represent “hundreds of billions of dollars.
“We do not have this money. We never had it,” he said.
The IMF had spent a fifth of its 250 billion dollar (200 billion euro) fund in the last two weeks, Blanchard added.
He also urged central banks around the world to cut interest rates, after the Swiss National Bank made a surprise one percentage point rate cut Thursday.
The central banks “should lower interest rates to as close to zero as possible,” he said.
Nov
18
DETROIT (Reuters) – Bank of America Corp (BAC.N) Chief Executive Kenneth Lewis said on Tuesday it is “pretty clear” the U.S. economy is in a recession, and forecast no recovery until the housing market stabilizes around the middle of 2009.
“We won’t see a real turnaround until the core problem, housing, reaches a bottom, stabilizes and turns the corner,” he said at the Detroit Economic Club.
Lewis said immediate, short-term actions by the government and the private sector to save homeowners and get the foreclosure crisis under control was needed to “get out of this mess.”
“I can’t promise the pain won’t get any worse before it starts to get better,” he said.
Bank of America became a major lender in Michigan last October, when it bought LaSalle Bank Corp from ABN Amro Holding NV for $21 billion.
Lewis spoke in Detroit, where the economy has been hit hard by some of the highest foreclosure rates in the nation and a deepening crisis sweeping through the Big Three automakers.
The chief executives of General Motors Corp (GM.N), Ford Motor Co (F.N) and Chrysler LLC (CBS.UL) were set to take their case for a $25 billion bailout to the U.S. Congress later Tuesday. They say a financial rescue is imperative if the industry is to survive the escalating liquidity crisis.
Blaming the housing crisis on government subsidies and excessively low interest rates, Lewis said the mortgage industry needs a “realistic” view of the ability of customers to handle rising payments and rethink its view on short-term, low-interest “teaser” rates.
Mortgage lenders should also retain a portion of originated loans on their own balance sheets and keep servicing responsibilities to the extent possible, he added.
Bank of America became the nation’s largest mortgage lender and servicer when it paid $2.5 billion for Countrywide Financial Corp in July.
“The economy is under a lot of stress … and the industry that has formed the backbone of your economy for a century is in crisis,” Lewis said of Michigan.
Nov
13
Barbara Desoer, Bank of America’s mortgage chief and potential successor to CEO Ken Lewis, talks about cleaning up the Countrywide mess, credit card losses and more.
(Fortune Magazine) — Talk about being where the action is: Ground zero for today’s financial crisis is the business of home mortgages, and Bank of America’s Barbara Desoer oversees the biggest collection held by any financial institution in the U.S.
Many of them came to the bank with Countrywide Financial, the nation’s largest originator of mortgages and a major subprime lender, which Bank of America (BAC, Fortune 500) rescued from near collapse earlier this year by acquiring it for $4 billion.
Desoer’s new assignment further broadens her experience – a valuable move for someone widely regarded as a potential successor to CEO Ken Lewis.
She joined the company in 1977 and has held a notably wide range of jobs, overseeing technology, credit cards, deposit accounts, quality, productivity, marketing, and other areas. Such diverse experience is important in a mammoth institution that, besides being No. 1 in mortgages, has relationships with half the households in America and, after its pending acquisition of Merrill Lynch (MER, Fortune 500), will be the country’s top broker.
In her new role, Desoer, 56, recently moved from headquarters in Charlotte to Southern California, where Countrywide is based. She sat down recently with Fortune’s Geoff Colvin to talk about the state of the consumer, when the housing market will bottom, how long the recession will last, and much else.
Nov
13
As government and industry scramble to reverse the tide of foreclosures, filings jumped 25% in October.
NEW YORK (CNNMoney.com) — As government and industry scrambled to stem the housing crisis, another 84,868 homes were lost to foreclosure in October, according to a report released Thursday.
Last month 279,561 struggling borrowers received foreclosure filings, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac, an online marketplace for foreclosures. That’s a 5% increase from September, and up 25% from October 2007.
“October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year,” said James J. Saccacio, chief executive officer of RealtyTrac, in a statement.
A total of 936,439 homes have been lost to foreclosure since the housing crisis hit in August, 2007.
Foreclosures hit a record high in August when 304,000 homes were in default and 91,000 families lost their houses. Since then, a number of states have adopted legislation to freeze foreclosures and give homeowners a chance to modify their mortgages. These laws have helped slowed the rate of foreclosures.
“The really sobering reality for us is that despite these various state programs that are artificially keeping the numbers down, we are still up 25% from a year ago,” said Rick Sharga, senior vice president of RealtyTrac.
Making matters worse is the rapidly deteriorating economy, says Global Insight economist Pat Newport.
“It seems almost every day you hear about another company planning further layoffs,” he said. When people lose their jobs, they can’t make mortgage payments.
And while some homeowners are defaulting because they’ve fallen on hard times, Newport says that others have simply stopped paying their mortgages. “Falling home prices are providing an incentive for them to walk away from their homes simply because it just isn’t worth it,” he said.
Home prices have been on a steep decline, with 20 major markets plunging a record 16.6% year-over-year in August according to the most recent data fromCase-Shiller. That index has recorded declines for 25 consecutive months.
State legislation: A new law in California, one of the hardest-hit states in the housing crisis, requires banks to contact struggling homeowners 30 days before delivering a notice of default in order to give them time to restructure their plans.
Thanks to that legislation, foreclosures in the state fell 18% from September. But California still had the highest number of foreclosures in the country for October, logging 56,954 filings. That total was down from a peak of more than 100,000 filings in August, but up 13% from October 2007.
Clearly the housing crisis is not relenting. “While the intention behind this legislation – to prevent more foreclosures – is admirable,” said Saccacio, “without a more integrated approach that includes significant loan modifications, the net effect may be merely delaying inevitable foreclosures.”
The delays may also be masking the problem, he said. “The apparent slowing of foreclosure activity understates the severity of the foreclosure problem in these states,” Saccacio said.
Nevada had the highest rate of foreclosures of any state for the 22nd consecutive month in October, with one in every 74 housing homes receiving a foreclosure filing. Arizona had the second highest rate in October, with one in every 149 housing units in default. Florida was third, with one in every 157 homes there in default.
Banks, government step up: Both government agencies and a handful of major lenders have recently introduced new foreclosure prevention programs, but it will take a while before they have an impact.
“It took us the first half of the decade to get into this problem,” said Sharga, “so it is probably going to take a couple of years to get out.”
On Tuesday the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), unveiled a new program to help eligible borrowers stay in their homes by lowering their monthly payments to 38% of gross household income.
And on Monday Citgroup (C, Fortune 500) announced the Citi Homeownership Assistance Program, which it says will modify $20 billion worth of loans for 130,000 borrowers. Similar housing rescue initiatives were unveiled recently by FDIC-controlled IndyMac Bank, which says it will help as many as 40,000 homeowners, as well as Bank of America (BAC, Fortune 500), which estimates it can rescue 630,000 homes and JPMorgan Chase (JPM, Fortune 500), which expects to help another 400,000 families.
The moves are promising. “This is finally a step in the right direction,” said Sharga. “Those are the kind of programs we need to see executed to see the number of foreclosures slow down.”
Hurdles remain, including home loans that will be much harder to modify because they’ve been packaged and securitized into investments.
And Sharga notes that fixing existing loans is only part of the equation; banks must resume lending to new borrowers. “Just freeing up some funds for qualified home buyers would make a huge difference in getting the housing market back on its feet,” he said.
Mike Larson, a real estate analyst with Weiss Research, added that falling home prices and the slowing economy will also create strong headwinds for any government relief program.
“You can certainly fix some of these mortgages, you can certainly try to slow the foreclosures,” said Larson, “but until home prices stabilize and the economy gets back on its feet, it is going to be a tough slog.”
Nov
6
Forecast 2009
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The prediction: Prices will fall further before year-end.
(Money Magazine) — Forget the old saw that all real estate is local. What’s pummeling housing prices in your nabe is the same thing that’s hurting them around the country: the credit crisis.
You know the drill – banks’ troubles have made it harder for many home buyers to get mortgages, and those who do qualify have to pay more. A borrower with good credit and a 20% down payment recently got charged an interest rate of 6.7%, on average, according to HSH Associates.
It’s true that this rate is not historically high (rates often surpassed 9% in the early 1990s). But it’s more than the 6.2% that the same borrower would have paid at the beginning of 2008.
The fact that mortgage rates have remained stubbornly elevated despite the government takeover of Fannie Mae and Freddie Mac leads some experts to believe that those rates are not headed down anytime soon.
Then look at the fact that 18.6 million homes in this country are now sitting vacant, more than at any other time since the Census Bureau began tracking that figure in the 1960s. And that 2.8% of U.S. mortgage loans are now at least three months in arrears, up from 1.4% a year ago. That rate is projected to peak in early 2009.
But if a recession lasts for three-quarters of the year, as some economists are predicting, the number of foreclosures could remain high longer. Add it all up and you have another lousy year for real estate.
Home prices are down 20% nationwide since their peak in July 2006, according to the S&P/Case-Shiller home price index. Economist Nouriel Roubini of New York University, who accurately predicted the housing slide and credit crisis, expects another 20% decline in home prices next year. Patrick Newport of economic forecasting firm Global Insight projects a 15% drop.
The damage will likely hit even areas that have so far escaped many problems, such as New York City (see the chart on the previous page). “We don’t see the market turning until late 2009,” says Newport.
The wild cardHow much home values fall early in the year
If they go so low that investors can start renting out homes for enough to cover their mortgage payments, we could see a wave of people snapping up bargain houses in 2009 – which could push prices higher by the time the next 12 months draw to a close.
Lawrence Yun, chief economist of the perpetually optimistic National Association of Realtors, says he expects prices to rise 2.8% in 2009.
The action plan if you’re selling:Wait it out
In 2010, real estate should be stronger, with fewer homes clogging the market. So if you can wait until then to sell, do it. “I would,” says Barbara Brin, a real estate agent in Minneapolis. And if even realtors are saying that…
Make your place shine
In many markets, sellers will face the toughest competition not from fellow homeowners but from banks and builders. Both will be willing to cut prices dramatically to sell a foreclosed or new home.
To convince buyers that your house is worth paying up for, make sure that it’s in move-in condition (foreclosures almost certainly won’t be). Point out unusual qualities like wide-plank floors or stained glass that cookie-cutter new construction lacks.
Price it below market
Go to Zillow.com to see how much nearby homes fetched recently. Once you’ve figured out what a buyer might pay, price your house 5% below that.
Sound painful? A recent study by a New Jersey appraiser found that houses priced below market ended up selling for more than similar houses listed above market. That’s because lower prices attract more buyers.
If you’re buying:Look for homes that have been sitting around
In many areas of the country, such as Phoenix, San Diego and Washington, D.C., it’s common for perfectly good homes to linger on the market for six months or more. So start your search by looking for properties that have been up for sale for at least three months: At that point most sellers will be willing to deal.
Drive a hard bargain when you find a house you’re interested in. Sellers know you have a lot to choose from. They also know that if they wait they will probably get less. So offer less now.
Barry Miller, a buyer’s agent in Denver, suggests you make your first offer as much as 13% below the seller’s asking price. “You might not get the house for that, but it’s a good starting point,” he says.
Improve your credit score
More than ever, that three-digit number could cost you. Lenders have begun imposing fees for everyone who doesn’t fall into the top tier of credit – and that’s a whole lot of people.
“Let’s say 680 got you the best rate on a mortgage 24 months ago,” says John Ulzheimer, a credit expert with Credit.com. “Today you need to shoot for 780 to 820 to get the best deal.”
Boosting your credit score from 660 to just 740 can lower your mortgage rate by a quarter of a point. To improve your score, focus on paying down debt, which will bring your crucial debt-to-credit ratio down.
Nov
6
Bad loans were originally the main culprit driving homeowners into foreclosure. But now it’s unemployment that’s fueling the mortgage meltdown.
NEW YORK (CNNMoney.com) — For years, bad loans and their aftershocks have been sending homeowners into foreclosure. Now it’s lost jobs that are putting troubled borrowers over the edge.
As the economy tanks, unemployment is the major factor driving a much larger proportion of foreclosures now than in the earlier stages of the mortgage meltdown.
In June, 45.5% of all delinquencies reported by Freddie Mac (FRE, Fortune 500) were due to unemployment or the loss of income, according to the company. That’s a rise from a level of 36.3% in 2006.
“The two economic factors that most contribute to foreclosures are falling home prices and rising unemployment,” said Richard DeKaser, chief economist for National City Corp (NCC, Fortune 500). “It’s hard to pay your mortgage when you don’t have a job.”
And that’s a situation that more and more people are finding themselves in. Nearly one million Americans have lost their jobs so far in 2008. The Bureau of Labor Statistics reported in early October that 159,000 private sector jobs were lost in September, and on Friday, economists expect the BLS to report that 200,000 jobs were lost in October.
“The rise in job losses will increase and extend the delinquency trend,” said Doug Duncan, the chief economist for mortgage giant Fannie Mae (FNM, Fortune 500). Foreclosures spiked 71% in September alone according to RealtyTrac.
A double whammy
Chris Berio, a Long Island N.Y. man, worked in two industries that have been particularly hard-hit by layoffs. During the boom he worked in construction as a steam fitter, while also moonlighting as a mortgage broker on the side. The 28-year-old was very confident when he bought a $350,000 fixer-upper in Deer Park in 2006, taking an 11% mortgage to finance it.
In 2007, he lost both of his jobs in quick succession. “I went from making good money to nothing,” said the married father of two kids. Berio was one of the lucky ones; he got his mortgage modified this past September, reducing his interest rate to just 5%.
“The number of people we’re helping has tripled,” said Sal Pane, founder of the for-profit Amerimod Modification Agency that helped Berio. “And much of the increase in our business is due to job loss.”
But Berio has found a new job, working in what should be a growth industry for years: He’s become a foreclosure prevention counselor.
Of course the housing crisis is driving unemployment which in turn has exacerbated the housing crisis – particularly in bubble states like Florida, Nevada and Arizona.
The unemployment rate in Florida was just 3.3% in May 2006, when the subprime crisis began to emerge – far below the national average of 4.7% at the time. Today Florida’s rate stands at 6.6%, well above the current national average of 6.1%
Jacksonville resident Paula Seabrooks lost her mortgage brokerage company this year in the wake of the Florida economy’s deterioration. She has worked in the industry since 2001, first as a contract underwriter for companies such as Wells Fargo (WFC, Fortune 500) then opening her own business. Her income dropped from nearly six figures in 2006 to less than $20,000 last year.
Seabrooks bought a $165,000 home in March 2006, financing it with a hybrid adjustable rate mortgage (ARM), which recently reset to 8.375% interest.
“I thought I’d be doing well,” she said, “I took the low rate, intending to refinance within two years.”
She has a new job but it pays only $38,000 a year – not nearly enough to afford her $1,400 monthly mortgage bill, much less to make up the five months of missed payments and fees that now total about $11,000. She’s seeking a loan modification with the help of counselors from the National Community Reinvestment Coalition.
Ironically, her new job involves handling applications from people seeking to refinance their own unaffordable mortgages into FHA-insured loans.
“Every other loan application I get, it seems, either the wife or the husband is unemployed,” she said.
Dark days in the Golden State
Like Florida, California has seen its economy devastated by the housing meltdown. Foreclosure prevention counselors now have far more clients seeking help because their jobs disappeared, rather than because their ARMs are resetting.
Wes Lobo, a foreclosure counselor for the Community Housing and Credit Center in Chico Calif., said that his last three clients of the day Wednesday were all victims of job or income loss.
Now, Lobo says that he’s seeing mostly middle-class Americans who have lost their jobs, exhausted their savings and investments and can’t pay their bills.
One of his clients was employed for years by a used car dealer and had worked his way up to a management position. With auto sales way down, he got laid off and now can’t pay his $240,000 mortgage or his $60,000 home equity loan.
With the auto industry on the ropes, his chances of finding work in his original line of work are diminishing. The unemployment rate in the Chico metro area has climbed to 8.1%, up two percentage points over the past 12 months.
If that keeps up, more Chico homeowners will be visiting both the unemployment office and their local foreclosure prevention counselors.