In a four-part series, Inman News, a web-based news source for the real-estate industry, discusses various approaches taken by the lending industry and real-estate proffesionals to deal with the increase in sub-prime foreclosures.

Part 1: Workouts could soften impact of subprime lending woes

If experts can't seem to agree on the impact of the subprime lending crisis, maybe it's because nobody can predict the future.

While many lenders are making headlines as they crash and burn, what may be more important is how the loans they made perform when they're gone -- and whether home buyers will still have access to credit.

One of the keys to loan performance is home prices. Former Federal Reserve Chairman Alan Greenspan observed in March that, if home prices went up 10 percent, "the subprime mortgage problem would disappear."

That's because home-price appreciation helps borrowers who purchase homes using adjustable-rate mortgages to refinance their loans before their monthly payments reset.

In one of the most recent and comprehensive studies of the issue, First American CoreLogic Inc. researcher Christopher L. Cagan predicted 1.1 million foreclosures among ARM loans originated between 2004 and 2006. But each 1 percent change in home prices could increase or decrease that number by 70,000 homes.

If home prices fall by 5 percent -- which Banc of America Securities analysts predict is the likely outcome of tightened lending standards -- that's another 350,000 homes on the market.

Considering that more than 7 million homes are bought and sold each year, Cagan and other experts say foreclosures alone won't put enough additional inventory on the market to do serious harm.

But the latest forecast from the Anderson School of Management at University of California, Los Angeles, predicts that the "credit crunch" now underway as lenders tighten their standards will trigger a "second leg" of reduced housing production and prices.

Although home prices are expected to have a major impact on loan performance, there's another important factor that's just as difficult to forecast -- the willingness of lenders to work with borrowers in distress.

As consumer groups call for a crackdown on abusive lending practices and Congress considers tighter regulations, lenders have been arguing that market forces are already putting a damper on the use of some of the riskiest loans. And, they say, the delinquency and foreclosure numbers are not as dire as they seem because lenders have financial incentives to keep borrowers in their homes.

Foreclosing on a property can lead to expenses and losses of 30 percent to 60 percent of a loan's outstanding balance, groups like the Mortgage Bankers Association have told Congress. Lenders say they would often rather bring a delinquent loan back into compliance than take possession of the property that secures it.

In some cases, mortgage lenders are working with borrowers to modify loan terms, lowering interest rates or extending terms to lower monthly payments.

In instances where borrowers are coping with temporary job losses or health problems, lenders may show temporary "forbearance" by suspending payments for up to 90 days.

In other cases, lenders are negotiating longer-term repayment plans that give delinquent borrowers a set time period, such as 18 months, to catch up on their payments.

As a last resort, lenders are often agreeing to "short sales" in which they collect all of the proceeds from the sale of a distressed property, in exchange for letting borrowers off the hook even if the sale price doesn't repay their loan in full (see parts 2 and 3).

Although statistics are hard to come by, there's plenty of anecdotal evidence that some lenders are working with borrowers to avoid foreclosure.

The Department of Housing and Urban Development requires lenders who service FHA-guaranteed loans to employ loss-mitigation strategies, academics Joseph R. Mason and Joshua Rosner wrote in a recent paper, "How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?"

Government-sponsored mortgage repurchasers Fannie Mae and Freddie Mac have claimed a nearly 50 percent success rate in efforts to work with troubled borrowers, Mason and Rosner said. Subprime loan servicers have implemented "some of the most aggressive approaches to servicing delinquent loans," they said, and probably have similar success rates.

But studies suggest the rate of re-default FHA loans with modified terms may be as high as 25 percent, Mason and Rosner noted, an issue recognized by analysts at Standard and Poor's.

When analysts at Standard & Poor's Ratings Services talked to loan servicers for a report last month, they found several, including Saxon Mortgage Services Inc., GMAC ResCap, and Option One Mortgage, were taking a proactive approach.

Without prudent underwriting, workouts with borrowers will only worsen the problem of delinquencies, the Standard & Poor's analysts said, recommending that servicers "focus their most seasoned default management personnel on loss-mitigation negotiations."

Senior managers, the report concluded, should "closely monitor recidivism rates and forbearance break rates to ensure that the decisions being made by staff are sound and provide long-term solutions.

Prudent underwriting is the basis of the approach to workouts at Wells Fargo Home Mortgage, said Mary Coffin, executive vice president of loan servicing.

"The important thing is you have to look at each situation individually, so you're not prolonging the inevitable," Coffin said. "We have to make sure we can get them back on a performing loan."

Wells Fargo services $1.34 trillion in mortgages held by 7.6 million customers, Coffin said -- including 1.3 million loans originated by Washington Mutual that Wells Fargo took over servicing last summer.

To keep track of those loans, Wells Fargo employs about 6,000 workers at seven servicing centers distributed across the nation's time zones.

The company is constantly analyzing the loans it services, and in cases where ARMs are scheduled to adjust borrowers are notified at least 45 days in advance that their payments will soon be going up.

"We know that the sooner we work with a customer, the higher percentage the workout solution," Coffin said. "Getting the customer to call us immediately and work with us is most important thing."

Agents who work with customers can call up electronic records of their loan terms and payment history, and input information on their current financial state to "help them make the best decision" on how to proceed, Coffin said.

"If that payment is not plausible, we're being proactive in helping them before they become delinquent so we can protect their credit," Coffin said.

Some borrowers have complained that their attempts to do workouts with lenders have been complicated by the fact that no single person takes charge of their case. Servicing agents may be located in overseas call centers, borrowers say, handle large caseloads, and lack decision-making authority.

Coffin said Wells Fargo does "everything in house," and hasn't been outsourcing work to overseas subcontractors because the company has been "aggressively staffing up."

"We were able to predict through the origination volume, the volume we would need to handle in the back end," Coffin said. It takes three to six months to hire and train additional staff, she said, "Because you don't put a brand-new, untrained person on a loss-mitigation call."

Vicki Vidal, senior director of Residential Loan Administration for the Mortgage Bankers Association, said many subprime lenders are also "well staffed for the delinquency factor."

In some cases where homeowners perceive that lenders aren't willing to work with them on a workout, they may have unrealistic expectations, Vidal said.

If a borrower doesn't have the income to make the payments under a workout, there's no point in postponing the inevitable.

"You have to be able to prove you can afford whatever the new payment plan is," Vidal said. "You can't just say, 'Drop my rate 1 percent,' and then I still can't make the payment."

Most mortgage loans are pooled and sold to Wall Street investors, who may place contractual limitations on loan modifications or short sales. Workouts may also have tax implications for the holders of such investments.

The third-party companies servicing such loans must abide by the agreements for each loan pool. While the agreements may give them some leeway for workouts, some steps are subject to the approval of investors.

"It's not because they don't want to work with borrowers," that a workout can't always be arranged, Vidal said.

Although keeping track of more than 7 million mortgage loans might seem like a logistical nightmare, the same sort of technology that allowed lenders to increase their origination volume is now helping them service them.

Wells Fargo uses software that tracks every document, every payment and every phone call electronically. The system not only keeps an electronic record of when a call is made, but stores a digital recording of what was said. The "100 percent monitoring" of phone calls helps the company spot trends, better train its loan servicers, and accurately assess what's transpired with individual loans.

How well are the company's efforts working? Coffin offered Wells Fargo's historical foreclosure rate of .49 percent -- compared with .67 percent for the industry as a whole -- as proof that they are succeeding.

Although Wells Fargo never originated the "exotic" pay-option ARM and interest-only loans that have proved especially troublesome for some borrowers, about half of the loans originated by WaMu were backed by the FHA or another government agency. Those loans have traditionally had higher foreclosure rates.

"We are now 33 percent of the FHA, government lending, and to take that large a piece and stay below the industry average speaks to our ability to work with customers early and as often as we can," Coffin said.

Melissa A. Huelsman, a Seattle-based attorney who represents borrowers in disputes with lenders, said workouts can be "a complete waste of time," for her clients.

One client that had arranged a workout with Countrywide Home Loans discovered their property remained in the foreclosure process, even after they had made three monthly payments, she said.

"In the middle of January, we get a letter from Countrywide, saying they don't take personal checks," Huelsman said. Although one payment had been a few days late, the company had previously accepted two personal checks.

"Now they say they don't take personal checks, and give them a number to call," Huelsman said. "So we call, and in the mean time, they've sold their house in foreclosure. People think the sale has stopped, and unless the (borrower) knows to go stand on the courthouse steps, they never know that it's only been continued."

Countrywide did not respond to a request for comment.

Huelsman says she sees similar problems with repayment or forbearance agreements, "all the time" and believes lenders don't always want them to succeed.

"This attitude (by lenders) that the bank doesn't want your house is a bunch of crap," Huelsman said. "The whole system is set up to get your house."

Huelsman recommends that borrowers get the terms of a workout in writing, and to ask for a legal document indicating that the foreclosure process has been halted.

For borrowers who can't show that they're able to make payments under a workout plan, there's always the short sale.

Sean Purcell, the founder of CQ Financial Group in San Diego, said most subprime lenders "have come around" to the idea of the short sale.

"On some, you even have the lenders out front, saying here's what we'll take," Purcell said. "You never saw that two months ago."

The number of real estate-owned properties lenders have taken back through the foreclosure process has skyrocketed, Purcell said, "and there's only so much they can have on their books."

"The A-paper lenders," Purcell said, "I'm not sure they see the situation for what it is," noting that many real estate professionals in Southern California have reported problems negotiating short sales with Wells Fargo.

"We can do short sales," Coffin responded, but said Wells Fargo has not seen an increase in preforeclosure transactions.

Part 2: So you want to get into short sales?

If 2006 was a slow year because fence sitters were waiting for sellers to lower their asking prices, the fallout from the subprime lending crisis could make this year equally problematic.

Even as prices in overheated markets come down from the stratosphere, bargain-hunting buyers may not be able to take advantage of them because lenders are tightening their underwriting standards

Analysts at Banc of America Securities LLC predict a credit crunch could push demand for homes down 15 percent this year. While the National Association of Realtors is less pessimistic -- credit issues may dent home sales by about 3 percent for two years, the group forecasts -- there's little talk of an immediate turnaround.

But the problems in subprime lending are providing new opportunities for some real estate professionals.

Millions of homeowners who purchased property using adjustable-rate loans are facing higher monthly payments as their interest rates reset. If they're able, some will bite the bullet and make the higher payments. Others who want to stay in their homes will try to refinance or work out new loan terms (see Part 1).

But thanks to the slowdown or reversal in home-price appreciation, many who put little or no money down on their purchases may owe more than their homes are worth. For many in such situations, the only way to avoid foreclosure is a short sale.

In a short sale, a lender agrees to let a borrower pay off their mortgage by selling their home for less than the loan balance. Sellers are typically barred from receiving any of the sale proceeds (in some cases they receive a small sum to cover their moving expenses).

In a sense, everybody loses in a short sale. Lenders get less than they are owed, and borrowers often walk away from such deals with blemished credit (a short sale stays on a credit report for seven years, unless a lender agrees not to submit it).

But short sales are often the best solution for all involved. Lenders can avoid the considerable costs involved with foreclosure, and borrowers are relieved of the obligation to pay off the balance of a loan on a home they no longer own.

Whatever their drawbacks or benefits, short sales are expected to keep many agents busy in the current down cycle.

A recent analysis by First American CoreLogic Inc. projects that 13 percent of the 8.37 million adjustable-rate mortgages originated between 2004 and 2006 will default in the next six to seven years -- a total of 1.1 million homes. If even a percentage of those homes end up as short sales, they could prove to be a significant source of business for those with the knowledge and desire to cash in.

For many agents who have only experienced the boom half of the boom-and-bust business cycle, short sales are uncharted territory. While some may be able to learn on the fly, entering the world of short sales requires a thorough understanding of a complex process, and connections with lenders. It also helps to have patience with borrowers and an eye for shady operators, say those with experience in the field.

The basic steps involved in conducting a short sale include:

• Proving that a borrower is experiencing hardship and won't be able to continue making loan payments
• Demonstrating that a home is worth less than the loan it secures
• Finding a qualified buyer
• Convincing the lender's loss-mitigation department that it's in their best interest to approve a short sale

Since borrowers are often in trouble before taking steps to initiate the short-sale process, all of the above steps may have to be executed on a demanding timetable.

Jaclyn Erwin, a Charlotte, N.C.-based Realtor, got started in the real estate business four years ago. In the last year, the former biology and anatomy teacher has developed a specialty in short sales.

When she started getting calls from homeowners facing foreclosure, Erwin did her own research and took a course on short sales. Now that she's established, she finds her connections with lenders' loss-mitigation departments opens doors for her.

"A lot of agents just don't know what to do or how to do it," Erwin said. "It takes a very special personality. I talk to people in loss mitigation -- I get all the way up to the vice president with some companies."

While some of her short-sale clients got into trouble because they lost their jobs, others are victims of mortgage fraud or did not understand their loan.

"Most of them have ARMs, and … a lot of them tell me they didn't know (that the rate would go up so much)," Erwin said. It's common for homeowners facing foreclosure to have worked directly with a listing agent or builder when they bought the property, she said.

Erwin said she also prospects FSBO listings to find clients. In some cases, homeowners may be too embarrassed to reveal that a property is facing foreclosure -- even to their agent.

"To them that's a very emotional thing," Erwin said. "They're so scared; they feel like they're trapped."

Erwin first talks to distressed borrowers over the phone, obtaining permission to call lenders on their behalf. She also checks to see whether the home's loan is in a special program such as FHA, which provides for a 90-day extension in getting short-sale approval.

Although foreclosures are on the rise in the Charlotte area -- the default rate among homes built and financed by Beazer Homes USA is the subject of a federal investigation -- Erwin said she's able to pull off the average short sale in about 30 days.

"The last one I got an offer on day 12," she said. "Foreclosures are on the rise, but the market is still very good in Charlotte," because of an influx of buyers from areas like Florida and Atlanta.

Another way to get into short sales is by working with lenders on sales of real estate-owned, or REO, properties (see Part 4).

In Columbus, Ohio, Rich Kruse works with property owners, lenders and attorneys to sell homes, businesses and goods that have foreclosed on by lenders or placed in receivership by courts.

Kruse said that as of late his firm, Gryphon USA Ltd., has also been doing more short sales. Because of the glut of REO properties in the Columbus market, lenders have begun referring troubled borrowers to him to negotiate a short sale instead of foreclosing on them.

"They (lenders) are saying if we take this property back through REO, we're going to have Rich sell it anyway, so why don't we recommend they call Rich as an alternative to foreclosure?" Kruse said.

According to a 2003 Federal Reserve study, lenders stand to lose 30 percent to 60 percent of an outstanding loan balance going through the foreclosure and REO process.

Not only is the foreclosure process itself expensive, but lenders are often reluctant to take possession of a property because they will have to maintain it and may end up paying utility bills and homeowner association fees. The glut of REO properties in some markets means houses may stay on the market for months, and there's always the risk that a property will be vandalized before it's sold.

"It's a huge foreclosure market right now" in North Carolina, Erwin agreed. "There are a lot of foreclosures. I can show you (the lender) why it's more beneficial for you to take (the short sale)."

Kruse said he's been working mainly with small community banks, which have an added motivation to avoid foreclosure: their reputations depend on their close ties to their customers.

"They not only have this financial issue, they also have a political issue," Kruse said. With a community bank, "you run into the bank officer while you're at the grocery store."

Kruse said he hopes mid-size and large banks will see the success community banks in the Columbus area are having with short sales, and become more open-minded to that option.

"Right now, some of these big lenders have so many problem loans, and they're not staffed up to deal with customized solutions for all the borrowers," Kruse said. "With the big organizations, you have to choose A, B or C -- you don't have the luxury of negotiating some of these other custom solutions."

Part 3: Potential roadblocks and common mistakes with short sales

Real estate agents and homeowners considering a short sale of a property should be aware of potential problems that can occur and common mistakes to avoid.

In testifying before a congressional subcommittee looking into subprime lending in March, John M. Robbins, chairman of the Mortgage Bankers Association, noted that some two-thirds of all mortgage loans are securitized and sold to Wall Street investors. The third-party companies that service these loans must often abide by agreements with investors that limit their ability to modify loan terms or approve short sales.

While some agents might chalk up their problems in closing short sales to a lender's inflexibility, problems can also originate on the other end -- with borrowers and buyers.

Potential roadblocks to a short sale also include:

• Low-ball offers
• Second mortgages
• Borrowers' finances
• Deals that generate a profit for sellers
• Mortgage fraud schemes

Mortgage and real estate industry consultant Jeff Corbett -- known for his blog, The XBroker -- says it's best to approach lenders with a purchase agreement in hand, with "good hard numbers" that back up the offering price.

A frequent mistake among beginners is "low-balling the bank right off the bat," Corbett said. "You're much more likely to achieve success (with a substantiated offer) than if you say, 'I'm going to whack 20 percent off the assessed tax value,' which is a popular, but not very successful approach."

Corbett recommends seeking out an experienced loan processor who has worked with mortgage brokers, and understands the process.

"A lot of the people inside the banks won't deal with unsophisticated individuals who don't know the ropes," Corbett said. "That's probably where the frustration is coming from" among agents who have hit seemingly insurmountable obstacles in negotiating short sales.

Unlike a conventional sale, where only the buyer's ability to repay a loan is at issue, a short sale involves demonstrating that the person currently in the home is insolvent or unable to continue making his or her loan payment.

Borrowers can expect their lender to ask for a stack of documents, which may include tax returns and paycheck stubs, bank statements, and proof of any hardship the borrower is experiencing, such as unemployment.

Lenders will also want to see a purchase contract signed by the borrower and buyer, a completed loan application or loan preapproval, a copy of the transfer disclosure statement, preliminary title report, and an estimated closing statement.

It takes 15 to 18 hours for husband-and-wife team Steven and Tiffany Wright of HER Real Living in Gahanna, Ohio, to get all of the seller's financials together.

"We supply all the documents for the lender and do what's like a reverse mortgage -- (we) de-qualify them," Wright said. "They're unqualified to where they can't afford the property they got themselves into, (and) the debt outweighs what they're bringing in."

A short sale is even more complicated if there are "piggyback" second or third loans.

"If you buy a property (with piggyback loans), you're still subject to those other liens," Corbett said. "If it's a first, you get clear title."

But the presence of second or third lienholders is not an automatic deal killer, Corbett said, since those lenders know "they are staring nothing in the face" and may be willing to negotiate.

Erwin said the purchase contract will stipulate that the sale is based on the lender's approval.

"I submit it to the loss-mitigation specialist (of the lender) and let them decide if it's a go or if they're going to counter," she said.

If it's a go, some lenders will insist on a 5 percent cap on commissions. Erwin said she usually charges 6 percent -- 3 percent each for the buyer's agent and herself. In cases where commissions are limited to 5 percent, she takes the smaller, 2 percent cut.

Although investors often approach distressed borrowers directly, many lenders will only participate in short sales if a Realtor is involved, Erwin said.

"They know we're credible; they know we are licensed. We can easily be traced," Erwin said. "A lot of mortgage companies will not do a short sale unless it is Realtor-represented."

Still, even among Realtors, experience counts.

"To try to call the bank and have them explain it to you is probably a waste of time," Kruse said. "The real estate agents that do this, for the most part, they want to corner the market. They don't want to give up all the secrets."

Like Erwin, Kruse recommends that those who want to get into short sales take a continuing education course. There are many good two- to three-hour seminars available, he said.

"I think the educators are realizing people need to know how to do this, because it's coming on like a freight train," Kruse said. Informal sources of information include blogs and agent networks such as ActiveRain, where Kruse maintains an informative -- and entertaining -- blog detailing his exploits in the colorful world of distressed property management and sales.

While there's plenty of good advice available online, "the truth is, you're never really going to figure it out until you go through one," Kruse said. "It's a baptism by fire, because each lender uses a different program."

Realtors can also become willing or unwitting participants in fraud perpetrated by unscrupulous "investors" who approach homeowners who have equity in their homes but are having difficulty making their loan payments.

Melissa A. Huelsman, a Seattle, Wash.-based attorney who represents mortgage borrowers in disputes with lenders, said she has had several cases involving short sales where Realtors participated in attempts to cheat homeowners out of equity they don't realize they had.

"I have friends that are Realtors, and I'm not bashing them at all, but they are salespeople, and they don't always stop and think about what's happening," Huelsman said.

Realtors should be wary of short-sale transactions that misrepresent a property's true value to lenders, allowing buyers to walk away with the borrower's equity. 

"Whenever (Realtors) get into a situation like that, they say, 'Well they were going to lose the house to foreclosure anyway,' " Huelsman said. "Well, maybe not -- they might be able to refinance or get the loan terms renegotiated, or if they have equity, there might be money left over after a foreclosure sale. If the house is sold, you are entitled to that money -- Realtors very often don't know that."

Of course, there are many reputable investors using short sales as a legitimate tool.

Wright said he works with a group of investors who buy homes in "pre foreclosure," fix them up, and turn them around into rentals, using the MLS to help sell the properties.

Some buyer's agents don't want to work with the properties because of the limitations some lenders place on commissions.

"A pretty good percentage of foreclosures is in these new subdivisions," Wright said, particularly where builders used in-house financing and appraisals.

Investors can pick up homes that sold for $165,000 or more for as little as $120,000, he said, turning them around and doing a lease option.

Wright said he and his wife work with preforeclosure properties full time, and have about 70 listings in inventory currently.

Their main competition is not other Realtors but private investors whose "main interest is to get properties for 50 cents on the dollar. They can basically out-and-out lie to people. When they can't get the property for what they want to get it for, they fall off the face of the earth. They leave the seller hanging, and unfortunately they get a foreclosure on their credit report."

These days, Wright said, "Everybody and their brother" is trying to buy foreclosure properties. "Ohio is pretty much the national capital of foreclosures."

Some, he said, are amateurs who have only attended a seminar or watched a video about real estate investing.

The Wrights subscribe to a legal paper that publishes foreclosure filings, and send letters to homeowners whose homes appear in the publication.

"I'm telling them that even though they're upside down, chances are I can still sell the property," Wright said. "My letter beats the certified letter they get from the sheriff, typically three days before the sheriff."

Within the first week after a public notice of foreclosure, homeowners tend to receive a flood of mail. "They generally get 150 letters in the first week, from very neat written stuff to a piece of notebook paper stating, 'I buy houses,' " Wright said.

While short sales aren't for everybody, those who have found success in the field say the rewards are great.

"If you are willing to do your due diligence, and know the ropes of the county you're interested in, you can make it into a very lucrative business," Corbett said.

Kruse agrees there's money to be made, but it's not easy money.

"I've been doing this since '96 … and I've never known any other way to deal with real estate," he said of his experience selling REO properties and doing short sales. "I think that many Realtors think that this is a great business to be in, but if they get into it they will realize it's very difficult. I have the benefit of never having known anything else."

One thing to keep in mind is that short sales and REO sales are cyclical. Kruse said he's made a good living because his company is diversified -- helping lenders liquidate not only real estate but commercial businesses, machinery and equipment.

"I think the people who do only residential REO and short sales will probably do very well over the next 1 1/2 or two years, but if they don't diversify, they'll get stuck in a position where their business starts to decline," Kruse said. "I really think this is a cycle that's going to be a couple of years, and with any luck it will be back to real estate as normal."

Part 4: Foreclosures: The dark side of the American Dream

The darker side of owning a home is losing one.

And that's why Kimberly LaBell tells prospective buyers of bank-owned foreclosure properties to carry a flashlight. "Often they're boarded up and there's no light," she said.

LaBell, who has a growing business in the greater Detroit area handling bank-owned foreclosures, also known as real estate-owned, or REO, properties, said, "We don't hold open houses on these properties. Ninety-five percent of them are dirty and need repair. Basically we just make sure (buyers) are dressed comfortably and appropriately for the environment and have flashlights."

If home ownership is the American Dream, foreclosure is the nightmare. But this misfortune for some homeowners also presents an opportunity for real estate agents and bargain-hunting buyers alike. With a nationwide surge in foreclosure properties, LaBell and other agents have found a booming niche in working with foreclosure sales while the standard market is stagnant.

The work is not glamorous, and it can be dangerous.

"One of our agents goes out with her spouse if it's in a questionable area. In rougher areas we always go early in the morning. We never ever go at night. We walk around the home before we go in -- make sure there are no broken windows or open doors. We talk to neighbors, ask them how things have been around the house, if (they've seen) any funny activity," said LaBell, who is team owner for the LaBell team, a group of real estate foreclosure specialists affiliated with Premier Realty Group in Trenton, Mich. "Keeping them clean and crisp is 90 percent of the battle. A lot of homes are broken into several times a week."

She added, "Some of our agents have taken personal safety classes and self-defense. Some agents carry a concealed weapon." Some carry Mace. "It just depends on the agent."

The LaBell team, which focuses on a five-county area surrounding Detroit, includes four agents, and LaBell is in the process of hiring three more. The team is handling about 230 properties "and it grows by the week," she said. "Probably by the end of 2007 we'll see 300-350."

The volume of foreclosures in the area is about four times higher than it was five years ago when LaBell began working with bank-owned real estate, she said. "The values have dropped so drastically," and banks are experiencing portfolio losses "in the millions." A report last month by First American CoreLogic Inc. predicts 1.1 million foreclosures nationwide in the next six to seven years among adjustable-rate mortgage loans that originated from 2004-06.

With rising foreclosures, price depreciation has accelerated in the Detroit area. LaBell said it's common for foreclosure properties to sell for $35,000 to $40,000 in Detroit and surrounding areas, with prices roughly double that in the suburbs. But foreclosures come in all price ranges these days, she said. "There is no typical (foreclosure) anymore. Everything is foreclosing."

And several agents in the area are attempting to represent foreclosure properties to get in on the action. "We've seen huge growth in the amount of agents who claim that they handle REOs," she said, including agents whom she said may not be surviving in the traditional market.

Newcomers, she said, "are not always prepared for what the reality is in that marketplace. They don't understand the differences, and they don't always understand the buyers' mindset either." Buyers of foreclosure properties can include savvy investors, she said.

"It takes somebody who's not timid to work in different markets. We have a lot of very, very rough neighborhoods that we have to go into." Agents working with foreclosure properties have to regularly inspect properties and work with cleanup crews and handle the eviction process -- in some cases working with law enforcement to forcibly remove homes' occupants.

"All of these things are extremely intimidating for the traditional agent," she said. "The pay is small and we make a living by handling volumes of properties at a time. If you're looking to get rich on a couple of properties it's not going to happen."

Banks can pay a commission ranging from 4 percent to 6 percent of the property's sale price, and in some cases the bank asks for a referral fee that can range from a flat fee of $300 or more to 1 percent of the sale price.

LaBell specializes in working with buyers and in some cases she earns the full commission for REO properties because the buyer is not represented by an agent. A former salon owner, LaBell shifted her focus to foreclosure properties as the real estate market turned. She began mailing resumes to banks, and received broker procedure packets that outline performance expectations. "After that point you try a listing (for them) or they have you do several price opinions to view your assessment of the market."

These broker price opinions, or BPOs, are like an informal appraisal of a property. In some cases banks request BPOs in conjunction with an actual appraisal to gauge a property's market value. Foreclosure properties can carry more risk for buyers than traditional properties because they are in as-is condition, lack a seller's disclosure statement and the utilities may be shut off.

Banks will hand off properties to LaBell's team at different stages of the foreclosure process, and it's common for her company to be involved with a foreclosure property before the home's occupants have been evicted. In these cases the banks are typically willing to make a "cash for keys" offer in which they offer money for the home's occupants to relocate.

"Often it's tenants who didn't even know there was a foreclosure, or a homeowner ... they don't necessarily expect a person to show up at the door," LaBell said. "Sometimes evictions get really rough. Sometimes the occupant moves back in and you have to keep booting them out multiple times."

Landlords are struggling to keep the rental income flowing in the Detroit area, she said, and are losing properties "left and right because they can't keep them occupied and keep the rents steady. That's a huge part of the foreclosure rate." Over-mortgaging is also a problem, she said, that is magnified by depreciation of 20 percent to 40 percent in some areas.

The market won't likely bounce back for several years, she said, perhaps seven to 10 years in the city of Detroit. In the mid-1990s the market was hot and houses sold within days of listing. Appreciation rates in those days were "just astronomical," LaBell said. "Now it's just a complete 360. We definitely had our bubble burst and every market needs that, unfortunately, at some point."

Foreclosure auctions are becoming more commonplace now, LaBell said, as foreclosures are saturating the market.

"There is a client of ours that has 700 foreclosures a month, on average. With the volume that (banks) are holding in their portfolios it's imperative that they move them quickly," she said.

While it can take anywhere from 48 hours to a week just to get a counteroffer for a single bank-owned property, auctions can speed up the sales process but don't allow a lot of time for buyers to conduct market research.

Skilled investors can do well at auctions, she said. "(Auctions) attract the typical investor who is doing it full time for a living. They can glance at a property and know what it's going to cost them (to rehab)," she said.

Her company's investor clients "may walk away with 10 properties in one weekend" from an auction, she added.

In her past career, LaBell owned a beauty salon. She said she is glad to be working in real estate, and to have steady business during tough economic times.

"That's my reward -- making a living when most are not," she said. Not everyone in Michigan is so lucky, as the state's unemployment rate is among the highest in the country, at 6.6 percent in February.

"When the market isn't moving it's a reward to stay in the business and to not give up on the dream that I've had of being a licensed Realtor. Also, (I'm) able to employ a lot of other agents who are struggling in the business. I came into this business because I cared about people and I loved homes and architecture. After I sold my salon, (real estate) allowed me to be connected to the public." REO properties now make up about 75 percent of LaBell's total business.

Dominic Monariti, a real estate agent who works with REO properties in the Houston, Texas, area, said he feels for the homeowners who ended up in foreclosure. "I kind of blame it on the agent sometimes -- not explaining to them the kind of loans there are. I think a lot of responsibility lies on the agent's hands. I warn all my clients that they don't want to get the (adjustable-rate mortgage) -- it's basically the ARM that's going to throw them out of the house in the long run." Owners in some cases don't seem to realize what they were getting into, he said, or they couldn't buy the home with a more conventional mortgage loan.

Foreclosed homes can take a lot of rehabilitation to make habitable in some cases, he said, adding that he has seen properties that are missing faucets and sinks "and sometimes the toilet bowls." Monariti works for Performance Realty Inc., a company that specializes in REOs.

The national rise in real estate sales, followed by a boom in foreclosures, is like "a vicious circle," Monariti said, with super-low interest rates getting people into homes and a subsequent rise in interest rates and resetting of temporary loan rates leading to the loss of homes. "Who's benefiting from this?" he asked.

Foreclosure homes are selling close to market value these days in the Houston-area market, he said. The buyers can be individual investors and investment companies. And they typically are buying the properties to turn into rentals, he said.

"People are quitting their full-time jobs and becoming investors now," he said. Investors from California have shown a lot of interest in the Texas market, he said, and he recently received a call from a woman in Italy who wanted to buy a townhome to rent out. "There are more and more foreclosures on a regular basis. I can't even keep up with the hundreds of foreclosures that come on the market."

Lora Darter, a Realtor for Stanfield Realtors Inc. who works in the North Texas market, said she has also seen a rise in foreclosure properties. "It seems to me there are more foreclosures on the market and they are staying on the market longer," she said.

She said that buyers of new homes in some cases faced rising interest and tax rates that they did not expect. "When you purchase a new home a lot of times they have to estimate taxes at the time," she said, so that the actual rate is actually higher.

Typically, homeowners wait too long before trying to work their way out of a foreclosure process, she said. Darter said her buyer clients in some cases ask to see foreclosure properties, though typically they don't end up buying these properties.

"It's a little more risky, a little scarier (for typical buyers)," she said. "You never know what you're going to find when you walk through the door." While some properties are rehabilitated to move-in condition, there are others that "you walk through the door and it looks like a bomb went off in there," she said.