As the housing slump winds on, builders and Realtors are getting very creative in their marketing. We could almost do an awards show about the best promotions. Here are a few of my favorites:

Pardee Homes has a red door list of complete comes they are putting on special sale price each week.

Shea Homes is offering a chance to win free gas for year to new home buyers.

Only in LA: I saw an ad saying a listing was the first duplex in the neighborhood offered for under $1 million since 2004.

I’m noticing that price reductions are now called price improvements. That's not an improvement for the seller.

My favorite pitch of all: DR Horton offering $100,000 off to any buyers, but they have to bring the coupon!

According to a recent analysis by Lehman Brothers, option ARMs that originated in 2006 performed about as well as fixed-rate Alt-A debt for the first 12 months. But by the time they were 2 years old, about 2.1% of performing loans were going 60-days delinquent each month. Compare that to a 1.2% of current loans going delinquent with other Alt-A loans. The rate of increase in delinquencies is even beginning to approach that of subprime, which is about 2.5%.

“It’s a better quality borrower but the rate of increase in delinquency is looking closer to subprime than Alt-A,” said Akhil Mago, the head mortgage credit strategist for Lehman Brothers, said.

Strange, right? The loans were generally given to folks with good credit, most of whom are still only making minimum payments.

Looks like these borrowers might simply be giving up on the mortgages because they have less and less of an incentive to keep paying. Option ARMs give borrowers a choice of making a minimum payment that only covers a small portion of the interest, the rest of which is added to the loan balance. With years of unpaid interest accumulating and house prices falling, some homeowners have seen their equity disappear and now owe more than their initial loan balance. The gap between the original loan balance and the value of their home is only widening as home prices fall. Many of these borrowers were given the loans with only a requirement that they "state" their income rather than verify it (The result: Lots of folks exaggerated their salaries). So, these borrowers might only be able to afford the minimum payment, which can increase by 7.5% a year and then more than double when the loan recasts.

A major concern is that 70% of option arms are concentrated in California and Florida – two states that have already been hard hit by the housing slump. Subprime mortgages, on the other hand, were dispersed across the country (about 60% of them were outside Florida and California) And as prices in those states continue to fall, refinancing options for these borrowers disappear even as recasts loom.

Option ARMs originated in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform similarly badly.

"Nice" is used almost exclusively for houses selling for $250,000 or less, while "gourmet" is saved for homes costing $1 million and up. Oh, and "beautiful" is used most often in Miami.

These are some of the results of a survey of real estate listings by Roost, an online search engines for homes for sale. (To see more on the survey, click here.)

For the country as a whole, here are the top 20 adjectives used to describe homes, by frequency:

New
Large
Great
Beautiful
Open
Huge
Finished
Spacious
Custom
Newer
Nice
Updated
Private
Fenced
Colonial
Gourmet
Covered
Lower
Remodeled
Formal

The “Pick-A-Pay” mortgage – coupled with Golden West’s vaunted underwriting process – created an aura around Golden West that Wachovia couldn’t resist. The bank loved to crow about how during the 1990 recession, its losses from mortgages-gone-sour was less than 0.20% -- a fraction of that traditionally suffered by mortgage lenders during a downturn. While much of Wall Street was in shock that Wachovia would acquire a big California mortgage lender at the top of the housing bubble, Wachovia execs acted as though they’d found the finance equivalent of Indiana Jones’ Crystal Skull. Buying Golden West not only gave CEO Ken Thompson the beachhead into California he’d long coveted, but also gave the bank a product and capability that would allow it to emerge from any housing correction unscathed. Or so they convinced themselves.

You know how this movie ends, right? The foreclosure rate at Golden West soared past the historical norms, the losses mounted, and last month Wachovia’s board forced Thompson to walk the plank—making him one of the highest-profile casualties of the housing bust. Wachovia recently told Wall Street that by the end of the housing bust, it could suffer losses on as much as 7% to 8% of the value of all Golden West mortgages. Just look at this chart from Credit Suisse showing the coming wave of option ARM mortgages that are scheduled to reset and you see the problems that are about to hit lenders like Wachovia.

And earlier today Wachovia announced it was suspending the prepayment penalties in Pick-A-Pay mortgages – and would strip out the “minimum” payment feature that resulted in negative amortization...

Thanks once again to the financial trade publication Investment News for this story. We’ve all heard about Countrywide starting foreclose proceedings on its $4.8 million loan on Ed McMahon’s house. The Beverly Hills estate is still listed at $6.5 million.

Other celebrity homes in foreclosure include Holyfield’s $10 million property which he lost in May. Baseball slugger Jose Canseco’s $2.5 million house in suburban Los Angeles. And homes owned by Rep. Laura Richardson and football player Adam “Pacman” Jones.

Actor Dustin Diamond, best known for playing “Screech” on Saved by the Bell sold T-shirts on his Web site and made a pitch to fans for money on the Howard Stern show. That saved his home.

Then there’s the saga of Michael Jackson who avoided foreclosure on the Neverland Ranch only because distressed debt investor Tom Barrack bought the $24 million loan. Barrack is now negotiating to feature Jackson in one of his casinos as part of a restructuring plan.

Sales could be picking up, especially in states like Nevada, California and Arizona because investors, first-time buyers and others are jumping on the low prices available for foreclosed homes. But the sales increase is small and the monthly home sales pace has stayed pretty close to 5 million since the credit crisis began last August.

The inventory of unsold homes in May did indeed fall by 1.4% to 4.49 million homes, which is a 10.8 months’ supply at the current pace of sales. But 10.8 months is still a huge number, about twice what it should be in a more stable market.

Harvard University’s Joint Center for Housing Studies came out with its annual snapshot of the housing industry this week and it is bleak. The report, the university’s 20th, calls this the worst housing downturn in a generation.

The report points the blame firmly at mortgage lenders. It notes that the number of homeowners shelling out more than half of their income on house payments jumped by 3.8 million to more 15% of all homeowners between 2001 and 2006. Last year the number of foreclosures doubled to 1.3 million as a result

This comes as the S&P/Case-Shiller Home Price Indices reports its April numbers. All 20 of the largest U.S. markets showed declines. The average decline was nearly 18%.

“The slump has not yet run its full course,” the Joint Center’s director concludes. Of course, you don’t need a degree from Harvard to figure that out.

It’s been another tough week for Washington Mutual, the nation’s largest and perhaps most troubled thrift. The company announced a major new restructuring called Project Restart. Some 1,200 employees were let go. Offices have been closed and major personnel changes made at the top, including the promotion of Arlene Hyde to head the home loan operations.

Wamu eliminated two mortgage products—the infamous option ARM loans which lets borrowers forgo interest payments by adding them to their principal and another product that was a combination home equity loan and mortgage. The Seattle-based company also increased its commitment to a fund to help troubled homeowners stay in their homes by $1 billion.

Meanwhile, David Dreman, an influential money manager, called for Wamu chief Kerry Killinger to get fired. This comes as opposition builds for private equity firm TPG’s $7 billion Wamu investment, which shareholders need to approve at a special meeting on June 24. In a note to employees on June 19, obtained by BusinessWeek, Killinger said:

“Quite a while ago, I told you that every day, each of us at WaMu has a choice to make. We can choose to be distracted and disheartened by the challenges we face. Or we can choose to take the actions needed and to fight to turn this company around. For the last year—day after day—I've seen WaMulians choose to move forward and fight. Thank you for all you are giving and doing to ensure a WaMu comeback.”

-Kerry

Looking for a gift for that special someone? How about a teddy bear, beach towel or football with the name of a recently-defunct Wall Street investment bank printed on it?

As Reuters reported, a few dozen Bear Stearns items are available for bid on eBay (pens, stock certificates, golf balls, t-shirts and even a wine-stopper set). The starting bid for this brand-new stuffed Bear Stearns teddy bear: $14.95.

“Commemorate one of the biggest and stunning collapses in U.S. history with this lovely and cute tan-colored teddy bear complete with an outfit of pants, collared shirt, Bear Stearns suspenders and neck-tie,” the description on Ebay reads.

The most prominent developers in Los Angeles’ downtown got together this week for the Central City Association’s tenth annual look at the real estate market. Tom Gilmore, who was early in renovating old buildings starting with his Old Bank District apartments downtown in 1998, tried to put the current market in perspective.

When Gilmore first started, he said the urban core of America’s second largest city was “kind of crappy. It wasn’t much of a downtown.” There were 2,300 apartments with an average rent of $1.35 per square foot per month. Today he said there are 8,200 apartments renting for $2.80 per square foot, “In a market that wasn’t supposed to go anywhere.” He said the number of condos has exploded from 829 to 4,800. Average condo sale prices went from $154,000 to $553,000.

He said, condo prices have been coming down recently, but less so downtown than in some other markets. The real estate industry “is not trading on a stock exchange,” Gilmore said. “You have to look at the market over ten years, at the broad trends.”

That’s certainly the view of Ted Tanner, he of the Anschutz Entertainment Group (AEG). AEG built the Staples Center, where the Lakers play, ten years ago and recently opened the Nokia Theater for concerts. Tanner said the company is building a “content campus” over the next two years, with an ESPN broadcast studio and a museum dedicated to the Grammy Awards, which he believes will draw 400,000 people a year to downtown.

Tom Cody, developer with the South Group, which has built condos right across from Staples Center, noted that one his company's projects sold out in seven hours, 191 units, when the market was hot in late 2005. Now he says, “People aren’t so eager to buy in a pre-sale.” The number of buyers who can afford prices of $600 a square foot for condos is “down dramatically.”

Bill Witte, developer with the Related Cos., has been trying to get a $2 billion, Frank Gehry-designed mega project off the ground. Financing has been an issue; as has local opposition to city contributions. Witte, who is based in Orange County, south of Los Angeles, noted that there are several other prominent builders in other parts of the city and state who have major projects stalled. “In Orange County, the land of eternal sunshine and money, I have a lot of homebuilder friends on suicide watch,” he said.

Mark Tarczynski, of CB Richard Ellis, said downtown condo prices had fallen from a peak of $581 per square foot to $469 recently. Still, he said, for a market with 500,000 people working everyday, there are less than 15,000 homes.

A new breed of animal has entered the real estate market the Property Shark. The latest results for Southern California from DataQuick Information Services show what’s going on. The media price in May fell a staggering 27% from $505,000 to $370,000, the largest drop since the firm began recording prices back in 1988. We’re now back to March 2004 prices.

Who’s buying? Plenty of first time buyers who got shut out of market by the stratospheric rise in years past. But there’s also anecdotal evidence investors are buying property. Smelling blood, they're swimming in to take advantage of other people's distress.

Hardest hit markets are those far off ex-urbs where residents are double-whammied by falling home prices and rising gasoline costs. An astonishing 37% of all homes resold in the Southern California market in May were foreclosures. In far flung counties such as Riverside, foreclosures were more than half of the market.

DataQuick reports that about 42% of homes sold for less than their prior sale price. Most of the prior sales occurred between 2004 and mid-2006. Sales were much slower at the high-end, $417,000 and up, which have held up better to date than entry level homes. “What horsepower this market can generate right now is mainly fueled by bargain shopping, especially by first-time buyers and investors in inland areas,” explained Andrew LePage, an analyst for DataQuick.

The foreclosure filing rate in Nevada was the worst in the country as it has been for many months. California had the highest number of foreclosures. And the problems continue to worsen in Florida.

Digging lower down the list, I found something interesting. Maryland, which had the sixth worst foreclosure rate in April, had fallen back to No. 22 on the list in May. The May rate of foreclosure filings dropped by 61% in Maryland from a month earlier. Why such a big drop off? One possibility: a new law in Maryland that took effect in April gives distressed homeowners a little breathing room. Lenders must wait at least 90 days after a borrower defaults on a loan before initiating foreclosure proceedings. Lenders must also warn homeowners at least 45 days in advance that they are initiating foreclosure actions.

Other states are also taking action to give borrowers more time to work out problems. Lenders are swamped with filings and can’t necessarily give borrowers the attention they need.

Here's his comment:

All right, I am the President & C.E.O. of Option Next, the leader in short sales mitigations, and it's time to set the record straight. So by popular demand (OK, so maybe just at the request of 'D'), here are some answers then:

Cass: On May 9th, you asked about why the bank might reject your short-sale offer, even at 'full-price'. The answer is that the full asking price that the realtor listed the property at is not the same as everything owed on the property. It is simply the price the realtor listed the property at, figuring he would find someone to put in contract at that price, and then hope that the bank approves it... It reality, that price is probably much lower (as much as 40 or 50 percent) than what's owed on the property, and the bank did not want to take that big a loss. If your offer is anything short of fair market value for the property, the bank may choose to wait and see if it can get more at the auction. You have 2 choices: If you're willing to pay more, make a higher offer, if not, look for a different property. Also, when considering buying a short-sale property, ask the realtor if it's already approved for the short payoff. If it is, you shouldn't have to wait for anything. If it's not, ask the realtor if they plan on mitigating it themselves, or handing it over to a professional loss mitigation company. If the realtor says they will do it themselves, just walk away. Realtors rarely get a good short sale approved when compared to good mitigation companies, and most of them will be a waste of your time...

Dee: Generally, having a PMI will discourage the bank from bothering to negotiate a short sale. After all, if their losses are insured, they can just wait until the thing closes, and have the PMI pay most of the difference. However, some PMI companies are now requiring the banks to take reasonable short sales offers in an effort to mitigate damages. So the answer is, it might go either way. Depends on your bank and PMI company...

RAIMIS: You didn't really have a question, but to comment on what you said, it will stay on your record for 6 years, but a competent loss mitigation company should be able to refer you to a credit repair company which can make it go away much sooner...

Yun Wang: Paying the seller outside of closing is highly illegal! The entire concept of the short sale requires that the bank take all of the proceeds of the sale and the seller walk away with nothing. If you pay the seller separately, not only is the short sale fraudulent, but you are exposing yourself to many additional liabilities (i.e. tax liabilities, as the 75k you give the homeowner will not be reportable as a house purchase). Whatever you do, don't pay the seller separately in a short-sale!

Kristen Canova: The effect on your credit will not be too severe. You can expect a 10 to 50 point drop in your score, which can be wiped away in a credit repair. You should have no trouble renting, as long as you keep your rent amount with your means...

Janine: Homeowners' Association fees are independent of your mortgage and are technically your responsibility. However, if you are completely unable to pay them, the bank may choose to pay them out of the short sale proceeds, simply to make the deal go through. Pay them if you can...

Patti: A short sale negotiation can be instituted at any time, as long as the homeowner is still the owner of record. In other words, a short sale can be approved and completed 5 minutes before the scheduled auction. The more time you have the better, but it's almost never too late to try. Also, a homeowner can begin the short sale process before they are even in default. Banks allow a loss mitigation company to negotiate a short sale if the homeowner will soon be unable to make his mortgage payments. You don't have to wait until you can't afford your bills!

CAROL: If you do a short sale, as long as the property was your primary residence, the bank will not go after you for the difference. In the event of a foreclosure, it depends on the state, many allowing them to go after you personally... Short selling is almost always a better solution than foreclosing, but if you do choose foreclosure, consult a good attorney in your area...

Danny Haws: The advantages to buying a short sale are few. In fact, there is only one. The Price! The disadvantages are that it is a slow process and that after you spend time and possibly money (attorney's fees, inspections, etc.), the bank may reject your short sale offer and you have to start from scratch. Also, beware of the really cheap deals, they usually have a lot of damage and require extensive repair...

Kathy: If you can't afford the promissory note for the difference, Don't Sign It! Tell the bank the situation. By that, I mean, draft a full letter of explanation, explaining your hardship in detail and illustrating why you can't possibly make such a payment. Be as descriptive as possible and appeal to their compassion and humanity. Remember, the bank mitigators are people too, and they want to be able to sleep at night. If they realize how much of a hardship it is for you, they will try to work out some better alternatives, one of which may quite likely be a complete write-off of the difference owed...

Suzanne: The first step is to get a qualified loss mitigation company on your side. This is at no cost to you! The loss mitigation company should then refer you to a realtor who is well qualified in the short sale field. The realtor will list and market your property at the short sale discounted price, and the loss mitigators will negotiate with the bank on your behalf. You don't have to pay a cent for all this work, as it gets paid for by the bank as the real estate commission. That's pretty much it... As for the likeliness of approval, considering you need a drop of about 25-30%, I am reasonably confident that a good loss mitigation company can get it done. As for the effect on your credit: yes it's a black mark, but no, it's not that bad. Considering your current credit score, as long as you make all of your other payments on time, you should have no difficulty with buying another house or getting approved for other credit.

Sam_Seek: It doesn't matter where your cash is. You have to disclose all of your assets to the bank, and if you have too much in liquid assets, they simply won't approve the short sale unless you pay some of the difference. Keep in mind, as long as it's just some modest savings, the banks will not go after it...

Heather: No you can't sue the bank. It's their choice whether to accept an offer for less than you owe. They are never obligated to accept anything other than a full payoff. However, if your realtor did the negotiations for short sale on his own, and did not consult a professional loss mitigation company, you may have a case against the realtor. The realtor owes you a fiduciary duty, and unless the realtor is HIGHLY qualified in loss mitigation, part of their duty is the refer you to someone who CAN help, and not just to try blindly. Whether you can sue your realtor will depend on this: 1. How experienced and educated was your realtor when it comes to short sale loss mitigation? 2. Did the realtor conduct the mitigation properly? If you need some help in figuring out the answers to these questions, don't hesitate to call me, I'll explain it in more detail...

Esmi: Sounds like a short sale is your best bet. Don't worry too much about the credit consequences, they won't be too sever. Considering the other options are to turn in the deed in lieu of foreclosure (a terrible hit on your credit), or to foreclose (even worse). A short sale should not affect your credit too poorly, especially since the property wouldn't be shorted by all that much (10-20%). If you are going to go with a short sale, don't spend your money fixing anything! Banks approve short sales faster when a property is in poor condition, so don't spend the few bucks you have left fixing it up...

Kelly: Well, your question is a bit lopsided. Yes, you put down money, paid every month, etc. However, the bank gave you a loan. They put their money down, with the understanding that you'd give it back with interest. Is it right that you're telling them you won't? Right has little to do with it. The fact is, it is money you owe. You can refuse to sign the promissory note, and they may approve the short sale without it, however, this is at their option, and if you have the money to pay them back, then they'll see no reason why they should just give up on the loan they gave you. Remember, every problem has two sides to it. I'd consult a good loss mitigation company if I were you, since a good one can often get the bank to let go of the promissory note idea...

Well ladies and gentlemen, this is all the time I have for today's answer session. I believe I've covered every question asked between now and April 7th. If you have a question, contact me at apaykin@optionnext.com, call me at 888-311-NEXT(6398) x.801, or just go to www.optionnext.com, and drop us a line. We attempt to answer as many questions as we can, and are in the business of providing short-sale, short-refi, loan modification and other foreclosure alternatives by negotiating a fair and reasonable compromise with your bank...

Alexander Paykin, J.D.
President & C.E.O.
Option Next, Inc.
www.optionnext.com