The government-sponsored mortgage giants were once again a focal point of the market, as Fannie Mae collapsed nearly 30% at one point in trading and Freddie Mac shed as much as 34%, after Moody’s cut the financial strength ratings and preferred share ratings for both stocks. The move comes after Sunday’s announcement of a federal bailout of the two companies. Fannie shares closed down 27.3% to $7.07, while Freddie shares plunged 26%% to $5.26.

The wider financial sector, however, received a late afternoon boost from Securities and Exchange Commission Chairman Chris Cox, who said the regulator would move to curtail naked short selling in Fannie and Freddie shares, as well as broker dealers like Lehman Brothers(LEH).

The beleaguered investment bank had tumbled to a new low at one point in early trading, but then rallied and pushed its way to a gain of 6.6% to $13.22. In addition to Cox’s comment, the stock was aided by a report in the New York Post that suggested Lehman was considering taking the company private. The share price has plummeted 80% over the past year, which makes privatization a very real possibility.

Washington Mutual, which has lost 92% of its value over the last 12 months, sought to soothe investors by publicly stating it has enough spare cash to handle the current weakness in the economy. Late Monday, WaMu said it had more than $40 billion in excess liquidity and that it exceeds the amount to be considered “well-capitalized.” Satisfied investors pushed the stock up 11.8% to $3.61.

First Horizon(FHN) shares also rose, even after it reported a net loss of $19.1 million for the second quarter. Net charge-offs increased along with expenses. The bank also named D. Bryan Jordan its new president and CEO. Shares in the Tennessee-based bank shot up 16.9% to $5.89.

State Street (STT) also finished in the black, after reporting a solid second quarter. The Boston-based bank reported revenue increases of 39% and gave positive guidance for the back half of the year. Shares finished up 7.1% to $59.65.

Losers, however, ultimately carried the day. The NYSE Financial Sector Index finished down 157.15 to 5,548.67.

Wachovia(WB ) dropped 7.7% after Oppenheimer analyst Meredith Whitney said that shareholders’ prospects were bleak and cut the rating to underperform from perform. However, the stock managed to recover somewhat to trade at flat to down levels.

Wachovia cut its investment rating and earnings outlook for American International Group(AIG), sending the insurer’s stock down 8.5%. The Wachovia analyst downgraded the stock to market perform and said the insurer could post up to $7 billion in second-quarter losses. Shares finished down $1.91 to $20.64.

Other big losers included MF Global(MF), which lost 20.4% to $3.48, and National City(NCC - Cramer’s Take - Stockpickr), which shed 4.5% to $3.60.

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Merrill said it lost $4.9 billion overall. On a continuing operations basis, it lost $4.6 billion, or $4.95 a share, down from a profit of $2.01 billion, or $2.24 a share a year ago. Analysts polled by Thomson Reuters were expecting the company to report a loss of just over $1.8 billion, or $1.91 a share on this basis.

The company has now lost more than $19.2 billion in the past twelve months, making it one of the hardest hit companies during the credit crisis roiling the nation’s big financial services firms.

Merrill (MER, Fortune 500) shares plunged about 6% after hours, nearly wiping out the stock’s 10% gain in regular trading on the New York Stock Exchange Thursday.

Driving the loss was yet another round of writedowns. Merrill took a $4.8 billion mark on its mortgage-related portfolio, a $2.9 billion writedown due to its exposure to the recently downgraded bond insurers Ambac (ABK) and MBIA (MBI), $1.7 billion in its investment portfolio of U.S. banks and $348 million related to leveraged loans.

That surpassed the nearly $6 billion total that some analysts were anticipating heading into this week’s results.

“Is the company a good franchise? It’s a very good franchise,” said Brad Hintz, senior analyst at Sanford C. Bernstein & Co. “The problem you have is it will be a long time until that balance sheet is clean.”

Those marks hit Merrill’s global markets and investment banking divisions particularly hard, as it suffered a pre-tax loss of $8.56 billion in the quarter from continuing operations.

Merrill’s global wealth management business remained profitable, but its earnings fell 16% from a year ago.

“Our core franchise continues to perform well despite the extremely challenging market environment,” said John Thain, Merrill’s chairman and chief executive officer in a written statement.

Merrill also took a pre-tax charge of $445 million due to staffing cuts. During the quarter, the company said it trimmed its ranks by 3,100, slightly more than it anticipated when it first announced the planned cuts in April. At the end of the quarter, Merrill’s total employee count stood at 60,000.

The New York City-based firm also revealed that it would sell its 20% stake in the media outlet Bloomberg LP for $4.43 billion to Bloomberg Inc., confirming long-running speculation that it would sell assets in order to raise capital.

Merrill added it reached a tentative agreement over the sale of a controlling interest in the financial services administrator Financial Data Services for more than $3.5 billion.

Ongoing deterioration in the housing market, mounting troubles in the economy and pressure from regulators has prompted brokerages, Wall Street firms and banks of all sizes to raise additional capital.

But Merrill said it is holding onto its 49% stake in asset manager BlackRock (BLK, Fortune 500). Larry Fink, BlackRock’s CEO, revealed earlier Thursday during his company’s quarterly earnings release that the two firms would stay together. BlackRock reported a 23% increase in its earnings, beating expectations.

Thain, just 8 months into his tenure as CEO, told analysts during a conference call Thursday evening that the company was in a “comfortable spot” in terms of capital, following the two sales.

But Merrill’s latest loss raised a red flag for one rating agency. Moody’s downgraded Merrill’s senior long-term debt rating Thursday evening following Merrill’s report.

“Management’s options to sell assets or raise more common equity to offset unexpected losses are now reduced given the difficult industry and capital markets environment,” wrote Peter Nerby, a senior vice president at Moody’s in a note.

Thain, the former NYSE Euronext CEO and Goldman Sachs alum, did not rule out the sale of its stake in BlackRock in the future should the company need to raise additional capital.

But he suggested, however, that the company would probably consider alternatives before making such a move.

“There are, in fact, other options on our balance sheet,” said Thain.

Merrill is the latest financial firm to deliver second-quarter results this week.

Both JPMorgan Chase (JPM, Fortune 500), which reported earlier Thursday, and regional bank Wells Fargo (WFC, Fortune 500), saw their profits plunge during the quarter, but still managed to stay ahead of Wall Street’s expectations. That news helped drive their shares, as well as the rest of the battered financial sector, higher the past two days.

Citigroup (C, Fortune 500) is expected to follow Merrill with its own ugly performance on Friday. Analysts expect the nation’s largest bank by assets to lose more than $2.8 billion, or 61 cents per share.

Wachovia has $150 billion in liquidity, spokeswoman Christy Phillips Brown said today in an e-mailed statement. The bank attracted $800 million in deposits yesterday and remains well capitalized with more than $50 billion in Tier 1 capital, she said. The shares erased most of a 21 percent decline.

Wachovia commented after Oppenheimer & Co. analyst Meredith Whitney downgraded the shares to “underperform” because of rising losses on home loans. Whitney reduced her rating on Wachovia to “underperform” from “perform.” The company will report losses of $1.35 a share this year and 35 cents in 2009, compared with prior profit estimates of $1.55 this year and $2.65 next, Whitney wrote.

Wachovia ousted Kennedy Thompson as chief executive officer on June 2 after cutting the dividend 41 percent and raising $8 billion in capital. The lender hired Treasury Undersecretary Robert Steel as CEO July 9, announced a second-quarter loss of at least $2.6 billion and said it plans to disclose information about cost cutting and “reducing its mortgage exposure” this month.

Wachovia declined 76 cents to $9.08 at 4:15 p.m. in New York Stock Exchange trading after tumbling as low as $7.80 earlier. The stock has declined 76 percent this year, the second-worst performance in the 24-member KBW Bank Index. National City Corp., Ohio’s biggest bank, has slumped 78 percent.

Source: Bloogmberg

Fannie Mae and Freddie Mac are struggling with an investor loss of confidence so great that, while they’re unlikely to go under, they could conceivably see their ability to function impaired. That would wreak yet more havoc on an already wrecked housing market - making loans tougher to come by and possibly pushing hundreds of billions of dollars in cost onto U.S. taxpayers.

The extent of their troubles is in debate. Several analysts and a former Federal Reserve governor have said the two companies desperately need to raise money to continue their business of buying and guaranteeing home mortgages.

Others, including Fannie and Freddie, their regulators, some Wall Street analysts, and Sen. Christopher Dodd, D - Conn., the chairman of the Senate Banking Committee, have defended the strength of the two companies.

“What’s important are facts - and the facts are that Fannie and Freddie are in sound situation,” Dodd said on CNN’s Late Edition on Sunday. “They have more than adequate capital. They’re in good shape. The chairman of the Federal Reserve has said as much. The Secretary of the Treasury has said as much.”

The Treasury Dept. and the Federal Reserve on Sunday outlined plans that would provide capital to Fannie and Freddie if it were needed.

Still, inherent problems
How could the companies end up in such awful straits? Given the way they were created and run, a better question might be: how could they not?

The two companies are so-called government-sponsored enterprises, created by Congress in 1938 (Fannie) and 1970 (Freddie) to help more Americans buy houses.

Their mandate is to maintain a market for mortgages - buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid.

This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.

But the companies are also publicly traded, with the usual mandate of trying to maximize profits for shareholders.

That effort, of course, involves risk, but as quasi-government programs, they’ve long carried an implicit guarantee that the feds wouldn’t let them fail.

Their hybrid nature created both the opportunity and the temptation for the enterprises to take on more risk and to make themselves ever larger, more important and thus more profitable players in the mortgage market.

Very special treatment
The market and ratings agencies have treated Fannie and Freddie as bulletproof, even though the actual business of dealing with interest sensitive loans is very risky. This is in large part because of the very special perks granted to the mortgage giants, but to no one else.

Each may borrow up to $2.25 billion direct from the Treasury. They are exempt from state and local income taxes and from Securities and Exchange Commission registration requirements and fees. And they can use the Federal Reserve as their bank.

One result of all this special treatment was AAA credit ratings. That means Fannie and Freddie could borrow at super-low rates, a benefit they used to purchase - and hold -high-yielding mortgage loans. The spread between the two provided an irresistible earnings stream and the companies just kept getting bigger.

The mortgages they hold on their books alone total about $1.4 trillion, said Mike Stathis, managing Principal of Apex Venture Advisors, a research and advisory firm.

In the meantime, the companies were allowed to operate in this manner, piling on risk after risk, with virtually no capital cushion (Wall Street speak for the rainy-day piggybank financial companies keep should one of their investments blow up.) As the company’s loan portfolio loses value and the mortgage market continues to crumble, it’s easy to see why this was a fatal misstep.

Some saw the crisis coming before this week. For example, Alan Greenspan famously warned in 2004 that Fannie and Freddie’s rapid growth needed to be curbed because their expansion threatened the financial markets.

Still, the cocktail of high credit ratings, domination of the mortgage securities market, and preferential government treatment led to the sort of shenanigans that go hand in hand with excessive privilege.

Fannie overstated its earnings by $10.6 billion from 1998 through 2004, and its chief executive Franklin Raines lost his job. Freddie Mac had understated its profit by nearly $5 billion from 2000 through 2002. Both companies missed earnings filings while their overhauled their books.

“If Fannie and Freddie had been created in the private sector, they wouldn’t look like this,” says Christopher Whalen, head of research firm Institutional Risk Analytics. “They have a public sector mission to expand housing and run what is essentially an insurance company. But they also have a conduit to securitize and sell loans, which is what broker-dealers like Lehman do; and they have an interest arbitrage piece (making money on the spread between interest rates) that looks like a hedge fund.”

Robert Rodriguez, the founder of First Pacific Advisors, hasn’t bought Fannie for Freddie bonds for over two years. “With the recent issuance of their financials, we were still uncomfortable with their leverage,” Rodriguez says. “We believed there was considerable balance sheet risk in both of these companies.

Now the dwindling pool of mortgages, higher foreclosure risk, and a shaky interest rate environment have the companies on the ropes; and investors are beginning to lose faith in Fannie and Freddie.

Both firms told Fortune that they have enough capital to weather the storm and continue to support the nation’s housing market.

And yet, Fannie has fallen 32% this week and 65% since the beginning of the year. Freddie plunged 47% so far this week and is down 75% since January.

Investors have lost faith that the companies can operate in their current incarnation without running into major problems.

If investors abandon these companies, what do we learn from this odd Frankenstein of a business model?

“Nobody every believed that Fannie and Freddie were truly private and they never should have been,” says Whalen. “Now we will all have to pay for a company that has gone astray.”

Shares are trading near where they were in 1996. Where’d the 12 years of prosperity, acquisitions, and globalization success go? Credit market mayhem and real estate pandemonium make up the bulk of the losses, but there’s more. You don’t need to be Sigmund Freud to realize that markets — especially the financial sector — are being held hostage by a complete and utter bout of psychological trauma. Until the market gets back on track (might not be for a while), what companies are perceived to be doing is probably more important than what’s actually going on behind the scenes. Need proof? Ask the bamboozled executives at Bear Stearns.

B of A could quickly and easily boost its perception in the market and save boatloads of cash immediately. How? Slash its dividend.

Call it reverse psychology, if you will
With a current yield of more than 11%, investors clearly have a much different perception of the company than CEO Ken Lewis, who “views the dividend as safe.” There’s only one reason investors would bid a stock so low that its dividend yield balloons to double digits — because they think it’s a fat chance the checks will keep coming for much longer. Last month, I wrote that it would behoove many banks to keep the dividends going just to let shareholders know the lights are still on. Bank of America is well past this point; its 11% dividend is turning into a symbol of impending trouble.

So now Lewis is in a sticky situation. Investors have clearly voted with their sell orders: They think he’s full of baloney. They’re not buying his claim that the dividend is safe. They don’t think a turnaround is right around the corner. They think there’s trouble lurking ahead. With that kind of attitude, skittish investors are likely asking themselves, “If B of A is trying to butter us up by expecting us to believe the dividend is safe, what else is it trying to hide?”

Of course, Lewis might be right; the dividend could very well be safe. Taking your marching orders from shareholders drowning in fear is probably a bad idea, too. But let’s be honest, it’s more than reasonable to assume B of A is going to need to raise capital in the coming years — maybe in large amounts. Lehman Brothers (NYSE: LEH) has had to raise capital in recent months solely to scare away short-sellers who thought the company wasn’t coming clean — and had to do so with a pathetic stock price. When it comes time to sell stock and raise capital, B of A’s going to want to have shareholders’ trust on its side.

Don’t get me wrong. I think Bank of America is a wonderful company with a strong brand name. It’s got some seriously choppy waters to deal with, but once the smoke clears and the banking industry crawls out of the hole it’s in, B of A is more likely than not to make it out alive.

This country will forgive anyone with enough pride and audacity to step forward and admit they made a mistake and are in trouble. However, tell one little white lie, or bend the truth in the slightest way, no matter how small it is, and it’s off to the gallows. Ask Martha Stewart about this. Citigroup (NYSE: C), UBS (NYSE: UBS), Washington Mutual (NYSE: WM), and Wachovia (NYSE: WB) are all purging out the mess faster than investors can keep up with it.

It’s your turn to come clean, Bank of America.

Source: Motley Fool

IndyMac Bank is the second largest financial institution to fail in US history.

Regulators feared the California-based bank did not have enough cash to cope after panicked investors withdrew more than $1.3bn in 11 days and seized its assets.

The business will reopen on Monday as IndyMac Federal Bank, under supervision of the Federal Deposit Insurance Corporation, which will try and find a buyer.

IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also founded Countrywide, another big mortgage lender whose loans helped fuel the housing boom.

Countrywide was taken over last week by Bank of America Corp.

IndyMac collapsed as shares in two of America’s home loan institutions - Freddie Mac and Fannie Mae - saw their share prices slashed in half.

US Treasury Secretary Henry Paulson indicated that a bailout - or putting them under public control - was unlikely.

Both firms insist they have enough capital to weather the storm.

Analyst Betsy Graseck downgraded Bank of America to “underweight” from “equal weight” and said the nation’s largest retail bank may have to raise $12 billion in capital and cut dividend by 20 percent in order to meet credit losses.

Graseck, who also expects Citigroup (C.N: Quote, Profile, Research) to slash its dividend by 20 percent and raise $11 billion in capital in the fourth-quarter, said the credit crisis was “far from over”.

The investment bank has a “cautious” rating on the large-cap banks. Fall in housing prices will lead to losses on residential mortgage loans, while slowing consumer spending will impact commercial loans, Morgan Stanley said.

Lowering earnings per share for large-cap banks by 37 percent in 2008, and 37 percent in 2009, the analyst said further provisioning of $265 billion for the large-cap banks from second quarter to the first half of 2010 was expected.

“Given the high degree of uncertainty on the ultimate size of the credit losses in this cycle, we believe the remaining underweight is the right call on the banks,” Graseck wrote in a note to clients.

The analyst expects an incremental $2 billion collateralized debt obligation write-down in the second quarter.

Citigroup (C.N: Quote, Profile, Research), Wachovia (WB.N: Quote, Profile, Research) and Bank of America have the largest capital needs, Graseck said. She has “underweight” rating on all three stocks.

However, Morgan Stanley raised Fifth Third Bancorp (FITB.O: Quote, Profile, Research) to “equal weight” from “underweight” and said the potential sale of its processor unit could reduce expected capital raises at the Midwest bank.

The investment bank also increased its dividend cut forecasts at several of the large-cap banks in order to bring dividend payout ratios to a range of 40 percent to 50 percent by 2010.

(Reporting by Sweta Singh in Bangalore, Editing by Dinesh Nair)

The brokerage cut the bank to “in-line” from “outperform,” and slashed its price target on the stock to $14 from $22.

Wachovia shares were down about 8 percent at $12.11 before the bell. They closed down 8 percent at $13.13 on the New York Stock Exchange on Thursday, a day after announcing that it expects a second-quarter loss of $2.6 billion to $2.8 billion.

The stock has tumbled about 75 percent from its 52-week high of $53.10 last September.

“We acknowledge the stock has declined materially in the past few months, but believe there is further potential downside and little catalyst to move the stock higher in the interim given likely capital actions, further credit charges and reserve build, and likely impaired earnings power,” Fox-Pitt analyst Andrew Marquardt said.

Fox-Pitt expects the bank to raise $5 billion to $7 billion in capital, and now expects a loss of 51 cents a share for 2008, compared with its earlier projection of a profit of 57 cents. (Reporting by Varsha Tickoo in Bangalore; Editing by Bernard Orr)

Shares of Fannie fell 27 percent to $9.66 in pre-market trading, while shares of Freddie fell 35 percent to $5.18. Both have tumbled by well over 80 percent since August.

Fannie and Freddie are government-sponsored entities generally viewed as having the implicit backing of Washington, and considered the last bastions of support for a U.S. housing market in its worst downturn since the Great Depression.

They have been under fire this week as investors questioned the companies’ ability to raise enough capital to stay afloat.

The New York Times said the government is considering a plan that would place the companies into conservatorship, citing people briefed about the plan.

This would mean the shares would be worth little or nothing, and the losses on home loans they own or guarantee — half of all U.S. mortgages — would be paid by taxpayers.

Officials involved in the discussions said no action by the administration is imminent, and that Fannie and Freddie were not considered in crisis, the newspaper said.

A spokesman for Freddie Mac declined to comment. Fannie Mae and U.S. officials could not be reached for comment.

European bond fund specialists said the government could not allow the failure of the two housing market pillars.

“In a nutshell, they are simply too big,” said Phil Barleggs, Insight Investment’s head of fixed product management. “There will be a lot of political pressure to bail them out.”

The fate of Fannie and Freddie has ramifications far beyond the United States.

U.S. agency debt and agency-issued mortgage bonds held by foreign central banks swelled by $9 billion in the last week to a record $978.98 billion, up 18 percent so far this year.

The European Central Bank accepts Fannie and Freddie loans as collateral from commercial banks. It declined to comment on whether a possible U.S. government move would affect its collateral framework, although a spokesman said framework rules depended heavily on debt agency ratings.

The dollar initially gained on the report, government bonds fell and stock markets climbed as investors felt a sense of relief, having fretted about the fate of the mortgage lenders. That optimism was misplaced, analysts said.

“If the situation is that serious, the U.S. stock market is likely to fall further on risk aversion and on concerns of a massive new share issue to capitalize the mortgage firms,” said Hideki Hayashi, chief economist at Shinko Securities in Tokyo. “The expected volatility in the stock market should result in a weaker dollar.”

NO LONG-TERM CURE

A government rescue would mark the second time that Washington has stepped in to support the financial system since mounting U.S. subprime mortgage defaults swelled into a global credit crisis a year ago.

In March, the Federal Reserve backed a plan for JPMorgan Chase & Co to buy investment bank Bear Stearns Cos for a cut-rate price.

Bondholders have obligations that would theoretically have priority in any insolvency. However, the quasi-governmental status of Fannie and Freddie complicates matters.

“Based on the previous experience with Bear Stearns and JPMorgan, bondholders seem to be rewarded and shareholders are significantly penalized,” said Jimmy Koh, a Treasury economist with United Overseas Bank in Singapore.

“But this is a little more dicey because we’re not dealing with a bank, we’re dealing with an agency,” he continued. “If there is something seriously wrong, I really don’t know what happens. We’ve never seen anything like this before.”

News the government was considering direct action to save the companies boosted Asian, and initially European, stock markets. The dollar edged up against the yen having fallen all week in tandem with shares.

“Any drastic move like that will only provide some short-term relief and won’t be a long-term cure,” said Albert Hung, chief investment officer at Alleron Investment Management in Sydney.

The Bush administration had considered calling for legislation to give an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies, the Times said. That was seen as a less attractive option because it would effectively double the size of the national debt.

Even before this week, the stock prices of the two government-sponsored mortgage finance companies have been pummeled this year after soaring delinquencies on home loans resulted in billions of dollars of losses.

This has spawned speculation about whether they can withstand more losses and need massive new capital to survive.

“It was very beautiful,” said Rios, who had saved for a decade to unite her children and grandchildren under one roof. “It was a dream come true.”

Christmas 2008, however, is shaping up to be a nightmare. No decorations. No tree.

No house.

In February, faced with an unexpected jump in her monthly mortgage bill, Rios stopped making payments and abandoned the home, shattering her life and scattering her family.

She and her new husband moved into a tiny rental apartment in Brooklyn and are trying to negotiate with the bank to sell the house without foreclosing. One daughter relocated to Queens, while the other is heading back to Mexico with her three children to escape New York’s high cost of living.

Rios is among the growing ranks of Americans trying to put their lives back together after losing their homes. About three million people were delinquent on their loans and one million homes were in foreclosure as of March 31, according to the Mortgage Bankers Association.

No one keeps track of what happens to people after they give up their homes, but their options generally are limited. Some move in with friends or family, while others end up living in their cars or in homeless shelters. Those with some means, like Rios, squeeze into rental apartments.

Rios knew when she bought the house she’d have to skimp to make the mortgage payments. But she felt it was worth it.

“It was a sacrifice but at least we’d have a home,” said Rios, who spoke through a translator and asked to be identified by her middle name. “Even though we were struggling, we were together and I was able to be with my grandkids.”

But counselors at the Nassau County Homeownership Center, to whom she turned for help in January, said they’ve seen cases like Rios’ too many times in recent years: Newhomeowners losing their houses after getting mortgages they didn’t understand and couldn’t afford.

“That type of loan should never have been made,” said Haydee Rosario, a homeownership counselor at the center.

$4,100 monthly mortgage

Rios’ housing saga began in 2006 when she approached a real estate agent to see whether she could qualify for a home. Since emigrating from Mexico in 1995 with her daughters, then ages 15 and 16, she had been renting apartments in Brooklyn and Queens. After working at her brother’s restaurant for a few years, she got a job at a Brooklyn factory making party goods, where she’s still employed.

Despite relatively meager earnings - she makes $25,000 a year at the factory - she managed to save $20,000 for a downpayment. Careful use of credit cards helped her establish a good credit history.

Ironically, it was this financial prudence that led to her downfall. Her nest egg and good credit score qualified her for an adjustable-rate loan that didn’t require documentation of her income.

Soon, Rios was the owner of a $489,000 four-bedroom home with a monthly mortgage payment of $4,100. She and one daughter split the two bedrooms upstairs, while her older daughter lived on the ground floor with her husband and two young children.

With her daughters each paying $1,500, she could cover the remaining $1,100. The real estate agent said she could refinance within two years and lower her payments.

Instead, the opposite happened. This past January, the monthly payments jumped to nearly $4,400, overwhelming the family. They were already struggling to make the payments and even a $300 increase was too much to bear.

She turned to the Homeownership Center, but the counselors couldn’t persuade the lender to modify the terms. Though it was difficult for her to accept, Rios decided to let the home go.

“We just couldn’t do it,” said Rios, who is in her 40s. “It was taking everything we had. It was just too much.”

Paying the price

With the center’s assistance, Rios is negotiating with her lender to do a short sale, in which she would sell the home and turn over the proceeds to the bank, which would then agree to forgive the remaining debt. But it might be tough to get the lender to go along since she now owes $503,000, including interest and late fees, and the home is only worth $372,800. If they can’t agree on terms or the home doesn’t sell, Rios faces being put into foreclosure.

The stress is taking its toll. She’s not sleeping, suffering from headaches and having trouble eating, noting that she’s already lost a dress size. She doesn’t know what she’ll do with all her belongings, most of which are still in the house, since they won’t fit in her studio. And she fears she’ll be arrested for being delinquent, even though the counselors have told her otherwise.

“Not being able to pay the debt is weighing on me,” she said. “And I lost all this money I worked so hard for.”

Most of all, however, she’s devastated at the scattering of her family. She’s concerned her older daughter’s children will not have as good a life in Mexico as they could have in the United States. And she doesn’t often see her younger daughter’s new baby because Rios has to work Saturdays and take care of household matters on Sundays. When they were all living together, having the grandchildren around made her forget about her problems, she said.

Still, despite all her troubles, Rios has not given up.

“I have to be strong to keep moving forward,” she said. “I have faith I’ll overcome and be in a better place in the future.”

First Published: July 10, 2008: 7:16 AM EDT
Source: CNN