Mortgage woes creates trim Christmas

Susan and John Harriman normally spend about $500 on holiday gifts -_ $100 on presents for each other, $50 on their 29-year-old niece, then $25 on all of their other family members. But this season, the couple has a wrenching choice to make: celebrate Christmas or keep their home out of foreclosure.

”We’re just sending out Christmas cards, with us standing in front of the house – the house that cost us,” says Ms. Harriman.

With all their might, the couple is trying to hold on to their modest 1,100-square-foot ranch house in Central Islip, N.Y. In the six and half years since they bought their home on Long Island, Susan, a former postal worker, and John, a school district custodian, have watched their monthly mortgage payments skyrocket 66 percent to $2,454 due to home-equity loans for repairs, delinquent fees, and an adjustable-rate mortgage that has risen twice in the past six months.

”I think people pay less a month on mansions in the Hamptons than we do,” Ms. Harriman says with a bitter laugh.

Housing-related woes may turn out to be this year’s Grinch, not just for families like the Harrimans who are fighting off foreclosure, but for many other consumers accustomed to funding life’s little extras – from big-screen TVs to a Caribbean vacation – by borrowing against their home’s value.

Now, with mortgage delinquencies at record highs and mortgage-equity withdrawals well off the peak hit in the second half of 2006, the housing mess has begun to exact collateral damage on the larger consumer economy, beyond the furniture and home-improvement retailers that began to be squeezed a year ago. It is one of the main reasons that holiday sales are expected to be the weakest since the recession in the early part of the decade.

”Housing tentacles run deep into the consumer economy and threaten to choke it,” says Mark Zandi, chief economist at Moody’s Beyond the direct effect on the economy from home sales, which result in people spending to fix up and furnish their homes, almost 10 percent of all jobs are in housing-related businesses, from real-estate agents and mortgage brokers to landscapers and roofers.

”Every dollar change in housing wealth results in a change of five cents in consumer spending. And that adds up to hundreds of millions,” Mr. Zandi says.

During the giddy days of the housing run-up, convinced their home’s value would keep rising, many families dug further into debt by ”withdrawing” equity to raise cash for other purchases.

In addition to the common second mortgage, or home-equity loan, a popular method was to refinance with a larger mortgage reflecting a home’s greater market value. Borrowers then paid off their original, smaller mortgage and pocketed the remaining cash – called ”cash-out refinancing.” While interest on the new loan was usually less, monthly payments increased.

Mr. Zandi estimates the withdrawals hit their peak in the second half of 2006 and totaled $850 billion, or 10 percent of disposable income. By the third quarter of this year that amount had fallen to $550 billion.

”With home values falling fast, it is more difficult to cash out, which is particularly hard on lower and middle income households,” says Mr. Zandi. ”One-third of households pulled equity from their homes the last several years. Those homeowners that have cashed out have a collective saving rate of negative 10 percent.”

With the knowledge that just one missed payment will start the foreclosure process, Ms. Harriman has to be scrupulously thrifty about her holiday spending. The Harrimans’ attorney told them that if they make a year’s worth of mortgage payments on time, they might be able to refinance at a fixed rate of 8 percent, down from 10.5 percent now. They have about six months to go.

Ms. Harriman – who revels in decorating for the holidays – has three inflatable lawn ornaments, but will put up only one this year – a Charlie Brown Christmas globe – to save on the electric bill.

For the same reason, she won’t string multicolored lights on the outside of her house, nor put up the tiny white lights along the interior hallways. In their place, she will plant some cardboard candy canes along the front walk. To save money on the Christmas dinner, she’ll serve turkey or lasagna, but not both.

”Everything is being halved,” she says.

The Harrimans are following the advice of the Community Development Corporation of Long Island. A nonprofit organization that, among other things, promotes homeownership, the CDC’s caseload has mushroomed in recent months as problems with subprime mortgages – loans extended to the riskiest borrowers – have worsened.

Its work is particularly anguishing around the holidays when clients are tempted to overspend.

”Everyone who comes here has to make tough choices and some of them can keep their houses by budgeting to the bare minimum,” says Eileen Anderson, senior vice president of the CDC.

Ms. Anderson says it seems like the choices are increasingly harder to make as stores work overtime to lure shoppers with earlier promotions and no interest payments.

”Encouraging people to charge now and pay later is the worst thing to do when you’re struggling,” she says.

With home equity in the doghouse, consumers are turning back to credit cards, cushioning some of the blow to consumer spending. Recent data from Equifax Inc. shows that the growth in the number of new credit cards, as well as balances, is as strong as it has been since 2001, after remaining fairly flat in recent years. But defaults also are creeping up.

Retail experts have begun to see consumers curb spending by turning to lower-price stores and goods. That explains the projected softness in ”affordable luxury” sales at companies such as Nordstrom Inc. and Coach Inc. ”Nordstrom customers are trading down to Macy’s, and the Macy’s customer is trading down to Target,” says Bill Dreher, retail analyst with Deutsche Bank.

Trading down, themselves, the Harrimans are calling it their dollar-store Christmas. The couple are typically Wal-Mart shoppers, with an occasional splurge at Kohl’s. But this year they will give each other small tokens from the local dollar store.

This was not what they expected when they became homeowners in April 2001. They knew they were stretching when they bought their three-bedroom home – ”two bedrooms and one the size of a closet,” Ms. Harriman says – about eight months after they got married. But the couple, renting a room in a friend’s house, were ready for their own place, and they figured it would cost just as much to rent an apartment.

The house they bought hadn’t been updated since it was built almost 80 years ago; it needed a new roof, insulated windows, a new kitchen. Even the doors, which had rotted, needed replacing.

But their financial crisis was triggered when Ms. Harriman, who is 40 years old, began missing work due to flare-ups of her multiple sclerosis. She finally quit work in 2005, believing her pension and federal disability payments would make up for the lost salary. But it took six months for the disability to kick in and pension paperwork dragged on for two years.

They took out a new mortgage, replacing their former fixed-rate loan with a lower adjustable rate that reset higher after two years, giving them time to catch up, they hoped. But they still couldn’t manage, and ended up filing for bankruptcy protection.

In September, Ms. Harriman finally got her pension. John, 38, started working a second job three mornings a week as a stock clerk at A.C. Moore crafts store. But just as they felt they were catching up, their mortgage interest rate jumped to 8 percent. This month it rose by two and a half points – an increase of $800 a month.

”My husband was real down that there will be nothing under the tree this year,” Ms. Harriman says. But, ”it makes me want to work harder to get back to live my life normally again. It is a reminder and an incentive.”

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