From MarketWatch

http://www.realestatejournal.com/

To some it's a source of family harmony. To others, however, it's a source of great family division, anger and strife. Yes, it's the old family cottage or vacation property or compound or camp or call it what you will. And now with summer coming to a close, many Americans are trying to figure out what to do with their piece of heaven on earth.

Should they sell the property that has produced fond memories of times spent with loved ones? Or should they give it their children? Or should they do something entirely different?

Andrew Lee, a lawyer with Schaden Katzman Lampert & McClune in Broomfield, Colo., says families should deal with the issue in four steps.

1. Have a heart-to-heart

The first step is a sit-down between the family cottage owners - the parents usually - and their children. "It's best to talk about it ahead of time," he says. "Otherwise it could be a huge mess."

The parents need to ask their children straight out whether they want the property long before asking an estate-planning attorney to draft some expensive legal document. In his experience, Lee says there is a good chance, about 50%, that the kids don't want the property for one reason or another.

In some cases, the kids already have their own second home. In other cases, some of the children may live very far away from the cottage. And in still other cases, some or all of the kids may not be able to afford the property or its upkeep.

Indeed, parents should not be surprised to learn that the only reason children and grandchildren go to the family cottage is because of the parents or grandparents and if the senior generation were to pass away the kids would have no interest in visiting the property, says Lee.

"Often parents find that keeping the cottage in the family is more trouble than it's worth," he says. So, if the parents determine that the next generation has no interest in owning the family cottage, well, case is closed and the parents have saved a bundle in legal fees.

Children who do have an interest in the property, however, must go into it with their eyes wide open. They need to know the monthly nut: the mortgage, if there is one; real estate taxes; utilities; any management fees or association dues and the like. And if the family cottage doubles as a rental-income property, they'll need to know what sort of income the property generates.

In some cases, parents will learn that some but not all of the children will want the cottage. In that case, Lee says the parents will have to figure out how to pass on their assets; the house goes to the kids that want it while more money goes to the kid that doesn't want it.

2. Transfer the property

Getting a handle on whether and who wants the cottage is one piece of the puzzle. Figuring out the right way to pass the property down is the other big puzzle piece.

Often, families will use the cheap and easy way to transfer property, says Lee. They will simply add members of the next generation as joint owners with rights of survivorship or they will completely transfer the property to the next generation during the owner's lifetime by deed.

"Though easy to implement, these types of lifetime transfers can often have unintended consequences," says Lee.

For instance, adding a family member to the title of property or completely transferring the property to a family member is a taxable gift that, in some cases, could trigger a current federal gift-tax bill, he says.

In addition, if a child is co-owner on the property, then it would not qualify for the marital deduction, a tax break given to the first to die of either parent. Again, Lee says putting a child as a co-owner could create an unintended estate tax bill.

And in still other cases, adding a child as owner to a family cottage could result in a transfer tax and, worse yet, higher real estate taxes.

3. Create an LLC

Figuring out what "legal entity" should hold the family cottage must also be addressed, says Lee. Lee prefers using a limited liability company or LLC rather than a trust or "C" corporation to hold the property. The LLC is tax friendly. Plus, the LLC reduces exposure to liability.

"If mom and dad can get the kids to agree now and they are bound by those agreements there'll be less problems later," says Lee, who also recommends that family-cottage owners create an LLC to hold the property whether or not they have designs on passing it down to future generations.

4. Draft an operating agreement

Not matter how the family cottage is owned, Lee says it's crucial that there's an "entity agreement" in place that becomes the law of the land. The operating agreement, for instance, will spell out how the bills will be paid and the source of those funds.

In some cases, family members who don't use the family cottage as often as others will feel they may not have to pay as much toward the bills. The agreement will address that. In other cases, family members will collide on who gets to use the family cottage, especially around the holidays. The agreement will address that. Lee recommends that a family member serve as the calendar manager and another server as the operational manager.

And in still other cases, there will be disputes. The agreement will address how decisions will be made and how disputes will be resolved. That's especially important when it comes to sell the family cottage or one member of the LLC wants out.

In the latter case, Lee says the operating agreement will address how a member's share will be valued as well as perhaps how often a member can cash in their share of the family cottage.

-- Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.

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Sales of previously owned homes in the U.S. fell less than expected in August, as prices fell compared with a year earlier, the National Association of Realtors said Monday.

The median home price was $225,000 in August, compared with a revised $230,000 in July. Last month marked the first year-to-year median price decline since April 1995, and it was the second-biggest in the survey's 38-year history.

Home resales fell to a 6.30 million annual rate, a 0.5% decrease from July's unrevised 6.33 million annual pace. Inventories of unsold homes rose to 3.92 million, a 7.5-month supply at the August sales pace, the most since April 1993.

The weakness in existing home sales followed a report last week that construction of new homes and apartments plunged by 6% in August, pushing building activity to the lowest level since early 2003.

The housing sector, which had enjoyed five boom years of record sales, has been slowing sharply this year under the impact of rising mortgage rates and a slowing economy.

NAR chief economist David Lereah said an anticipated decline in prices compared with a year earlier has begun and is likely to continue until the end of the year, helping to support sales. "With sales stabilizing, we should go back to positive price growth early next year," Mr. Lereah said.

The August resales level was above Wall Street expectations of a 6.20 million sales rate for previously owned homes. The average 30-year mortgage rate was 6.52% in August, down from 6.76% in July, according to Freddie Mac.

Existing home sales were mixed regionally. Sales rose 0.7% in the Midwest and 1.9% in the Norhtheast. They were down 2.3% in the West and 0.8% in the South.

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A

Adjustable-rate Mortgage (ARM):

An Adjustable-rate Mortgage (ARM) is a mortgage loan with an interest rate subject to change over the term of the loan. The interest rate is tied to the performance of a specified market rate, such as the cost of funds index calculated by the 11th District of the Federal Home Loan Bank Board, or the yields on one-year or six-month U.S. Treasury securities. The amount of times the interest rate can change and how often it can change are usually determined at the time the loan is created. Usually there is also an interest rate maximum that is set for the loan. One thing to remember regarding adjustable rate mortgages is that even a minor increase in interest rates can greatly affect the monthly payments on a mortgage loan. For example, a 30-year mortgage on a $250,000 loan at 5.5% results in a monthly payment of $1419. If, over time, interest rates rise to 7%, the monthly payment jumps to $1663 for a difference of $244 per month or almost $3000 more per year. When reviewing an adjustable rate mortgage loan, make sure that interest rate changes and subsequent increases in monthly payments will not stretch your budget beyond its limits. The benefit of an adjustable rate mortgage is that it generally has lower fees and a lower interest rate than a fixed rate mortgage. There are also many more variations of adjustable rate mortgages, allowing borrowers more flexibility and ease when getting that first home loan. Also, if rate drop significantly, borrowers with adjustable rate mortgages will automatically benefit from a lower rate without having to refinance. Something to consider regarding adjustable rate mortgages is that if interest rates are hitting their all time lows and are expected to rise in the near future, it may be a good time to refinance to a fixed rate mortgage loan and lock in the low rate.

Amortization:

The paying down of principal over time. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the term of the loan.

Basis Point:

One one-hundredth of a percentage point. For example, if mortgage rates fall from 7.50% to 7.47%, then they've declined 3 basis points. A full percentage point is 100 basis points.

Bill of Lading:

The receipt for your goods and the contract for their transportation. It is your responsibility to understand the bill of lading before you sign it. If you do not agree with something on the bill of lading, do not sign it until you are satisfied that it is correct. The bill of lading is an important document. Don't lose or misplace your copy.

C

Cash-out Refi:

A refinancing of a mortgage in which the new principal (the borrowed amount) exceeds the outstanding principal of the original loan by at least 5%. In other words, the homeowner is taking equity out of the home. Of the mortgages it owned that were refinanced during the first three quarters of 2000, Freddie Mac estimates that more than 4 out every 5 were cash-out refis.

Conforming Mortgage Loan:

Any mortgage loan that's at or below the amount that Fannie Mae and Freddie Mac can purchase and/or securitize in the secondary mortgage market. For 2001, the loan limit is $275,000. In 2000, it was $252,700.

Consumer Price Index (CPI):

A measurement of the average change in prices paid by consumers of a fixed market basket of a wide variety of goods and services. The broadest, and most quoted, CPI figure reflects the average change in the prices paid by urban consumers (about 80% of the U.S. population). The so-called "core CPI" excludes the volatile food and energy sectors in an attempt to determine the underlying rate of inflation. Strictly speaking, the CPI is not a "cost of living" index because its fixed market basket does not allow for the substitution of goods and services due to price changes. The CPI is released by the Bureau of Labor Statistics in mid-month for the previous month.

Conventional Mortgage Loan:

Any mortgage loan not guaranteed or insured by the government (typically through FHA or VA programs).

Credit Rating:

A seemingly arbitrary number that determines if your money situation is healthy, in need of a little cold medicine or a full body cast.

Credit Report:

A credit report shows borrowing and repayment history. It shows the amount of an individual's past and present debts and whether any debt payments have been missed. Debts can include money owed on credit cards, auto loans, mortgages and more. Credit reports also show an individual's address history, indicating how often and to what extent a person has moved. Lenders use the credit report information to determine a loan applicant's borrowing potential and interest rate. A credit report that shows late payments on debt may cause a lender to charge a higher interest rate or not lend at all. In addition, a credit report that shows little or no history of borrowing can also raise the interest rate. Lenders prefer to see some history of borrowing and repayment rather than none at all. Three main companies track the credit histories of individuals and issue credit reports. These are Equifax, Trans Union and Experian. These companies get their information from a variety of sources including creditors and public records.

Credit Score:

A credit score is a number based on an individual's credit report that indicates overall credit risk. If a borrower has a high credit score, he or she is considered more likely to be able to pay off debt in a timely manner. A low credit score indicates higher credit risk and may cause a lender to charge a higher interest rate or not extend credit at all. The most common type is called a "FICO" score, named after the Fair Isaac Company that created it. FICO scores range from 350 to 850 with the median score falling around 720. A score above 750 gives a borrower the best chance of securing the lowest possible interest rate on a loan. High scores qualify for lower interest rates and increase the number of lenders competing to provide the loan. Components that determine an individual's credit score include their borrowing and payment history, the length of this history, the amounts currently owed, the types of credit used and the level of recent credit history.

E

Existing Home Sales:

Based on the number of closings during a particular month. Because of the one-to-two month period between a signed purchase contract and a closing, existing home sales are more influenced by mortgage rates a month or two earlier than the prevailing mortgage rate during the month of closing. New homes sold, on the other hand, are counted when the purchase contract is signed. The reported figure is generally a seasonally adjusted, annual rate. Data are released by the National Association of REALTORS® on the 25th of each month (or the following business day) for the previous month.

F

Fannie Mae and Freddie Mac:

The nation's two federally chartered and stockholder-owned mortgage finance companies. Forbidden by their charters from originating loans (that is, from providing mortgage loans on a retail basis), these two Government-Sponsored Enterprises (GSEs) purchase and/or securitize mortgage loans made by others. Due to their directive to serve low-, moderate-, and middle-income families, the GSEs have loan limits on the purchase or securitization of mortgages (in 2001, the conforming loan limit is $275,000). The difference between these two entities often comes down to size (Fannie's larger), business strategy and execution.

Federal Funds Rate:

Also known as the fed funds rate, this is the rate that banks charge each other on overnight loans made between them. These loans are generally made so that bank can cover their daily cash flow and reserve requirements. As the rate rises, banks have an increased incentive to keep more of their own cash on hand - making less money available to lend out to households and businesses. The Fed doesn't actually set the fed funds rate, which is determined by supply and demand of the funds; instead, it sets a target rate and, through its own purchases or sales of securities, affects the supply of funds.

Federal Open Market Committee (FOMC):

The arm of the Federal Reserve that sets monetary policy, the FOMC is scheduled to meet eight times a year. The 12 members of the FOMC include the seven governors of the Federal Reserve System, the president of the New York Federal Reserve Bank, and, on a rotating basis, four of the presidents of the other 11 regional Federal Reserve Banks.

Fixed-rate Mortgage (FRM):

A fixed-rate mortgage (FRM) is a mortgage loan with an interest rate that does not change over the term of the loan. At the time the loan is created, the rate is set and the borrower will not be subject to fluctuations in interest rates due to changing market and economic conditions. A fixed rate mortgage usually comes with higher fees or interest rates than an adjustable rate mortgage and is best when rates are expected to rise significantly in the future. While borrowers with fixed rate mortgages don't benefit from drops in interest rates, they still have the option of refinancing the mortgage loan to take advantage of the lower rate and reduced monthly payment. The only drawback is the cost of refinancing which should, if you are refinancing at a significantly lower rate, be offset by your savings in interest payments. To recap, the main risks of a fixed rate mortgage are higher closing costs and potential additional closing costs when the borrower refinances to take advantage of a drop in interest rates. The main benefit is the peace of mind knowing that the mortgage rate and monthly payment on your home loan will not change, even if market interest rates triple.

H

Home Equity:

Home equity is the difference between the current value of the house and the amount of money owed on the mortgage. For example, if you owe $75,000 on your mortgage, there are no other liens on the property and the current market value of your home is $125,000, then the home equity amount is 125,000 - 75,000 = $50,000. The down payment that you make when purchasing a home will provide you with some initial equity.

Home Equity Line of Credit:

A home equity line of credit (HELOC) is a loan that allows you to borrow money when you need it. The amount you can borrow is based on the appraised value of your home and you can borrow and repay as much and as often as you like. The only requirement is that you make a monthly payment to cover the cost of the interest on the amount borrowed. A home equity line of credit is like having a credit card with a low interest rate and high credit limit. Because it is secured by the value of your home, lenders can offer much lower interest rates than a standard credit card company. And your credit limit can be up to 80 percent of the appraised value of your home so you have a potentially much greater borrowing capacity.

Home Equity Loan:

A home equity loan is a loan that is secured by a home and limited by the current market value of the home and any additional liens or mortgages that exist. A home equity loan is also known as a second mortgage and home owners can sometimes borrow up to 125% of their homes appraised value. For example, if the home is worth $200,000 and there is a mortgage on the home of $150,000 with no other liens on the property, then the amount available for a home equity loan may be as much as $250,000 - $150,000 = $50,000. The full 125% of the appraised value may not be available in all cases and every lender will have unique requirements and limitations. Home equity loans are used in place of other types of loans when cash is needed for bills and other expenses because the interest is tax deductible and the interest rate is lower in many cases. Borrowers can still use the money from a home equity loan to buy cars or pay for a child's college tuition. Unlike a home improvement loan or construction loan, the money does not have to be spent on the home itself and can be used for anything the borrower wants. With home equity loans, borrowers can put their home equity to work for them by using the equity to buy income property or other sound investments. One thing to remember is that a home equity loan will reduce your equity in the home by the amount of the loan and will increase your monthly mortgage payment. As with any financial or investment decision, you should first consult with a financial advisor.

Home Improvement Loan:

A home improvement loan is money lent to a property owner for home repairs, updates or remodeling. Home improvement loans are not necessarily secured by the property they are intended for and may simply be classified as home improvement loans by the lender. These loans can be secured or unsecured and are usually short term. Home improvement loans are intended to increase the value of your home so it is important to think carefully about where best to put the money. After all, the money spent on home improvements is added to your overall cost of the home and you want to be able to recoup this cost if and when you decide to sell.

Home Loan:

A home loan is money provided to you by a bank or lending institution to pay for your home. In return, the bank holds the title to your home until you've paid back the loan plus interest. The money lent to you in a home loan is "secured" by the home itself. This means that in the event that you are unable to pay back the loan, the lending institution has the right to sell the property in order to pay back the loan in a process known as foreclosure. A home loan is also known as a mortgage and has many variations with different terms and interest rates. One of the key benefits of a home loan is that the interest paid on the loan is tax deductible. Home owners can deduct interest on up to one million dollars of their mortgage debt. This can translate into huge savings in income tax.

Homeownership Rate:

The number of households residing in their own home divided by the total number of households. Late in the month following the end of each quarter, the U.S. Census Bureau releases an estimate based on a quarterly survey. A record homeownership rate of 67.6% was reached in the fourth quarter of 2000.

House Price Index:

A quarterly measure of the change in single-family house prices. The HPI is a repeat sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties, and is based on mortgages purchased or securitized by Fannie Mae and Freddie Mac. Homes with mortgages above the Fannie/Freddie conforming loan limit (in 2001, it's $275,000) are not included in the sampling, nor are homes insured or guaranteed by the FHA, VA or other federal government entity. This index is distinct from the similarly constructed Conventional Mortgage Home Price Index published by Freddie Mac. Indexes are available for the nation, nine Census regions, each of the 50 states and the District of Columbia, and 329 Metropolitan Statistical Areas (MSAs). Released by the Office of Federal Housing Enterprise Oversight (OFHEO) on the first business days of March, June, September and December for the previous quarter.

Housing Starts:

The Census Bureau's monthly count of the number of private residential structures on which construction has started. Data for a particular month is released about two weeks into the following month. Data on permits issued is also released. The reported figure is generally a seasonally adjusted, annual rate.

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M

Mean Home Price (of New or Existing Homes Sold):

The mathematical average of the prices of all homes sold in the period. The mean price of homes sold generally runs higher than the median price due to the number of very high-priced homes. The National Association of REALTORS® usually releases home price figures for existing homes sold on the 25th of the month for the previous month; corresponding figures for new homes are released a few days later by the Bureau of Census.

Median Home Price (of New or Existing Homes Sold):

Of all the homes sold during the particular period, precisely half sold for more than the median price, and half sold for less. When determining the median, only one home price matters - that of the home in the middle. Because homes sold for exceedingly low or high values only count as one unit when determining the median - i.e., their values don't matter - median home prices are generally a better indicator of home price trends than mean, or average, home prices (where all the values matter). The National Association of REALTORS® usually releases home price figures for existing homes sold on the 25th of the month for the previous month; corresponding figures for new homes are released a few days later by the U.S. Census Bureau.

Mortgage:

Mortgage loans are long term loans, usually spanning 15 or 30 years, that are directly tied to a home or other piece of real estate property. The borrower acquires a mortgage loan in order to take possession of their home. While the borrower, also known as the mortgager, has ownership and use of the property, he or she does not hold the actual title until the mortgage loan has been paid back in full. Mortgage loans come in many forms and with many options and terms. Some common types are fixed and adjustable-rate mortgages. Borrowers can either lock in a fixed interest rate or let the rate change as rates change in the market. Even though mortgages are long term loans, they can be paid off in full through a process known as refinancing. Essentially, the borrower gets a new mortgage on the home and uses the proceeds to pay off the existing mortgage. If you are considering refinancing your home, there are several factors you should think about before making your decision. These factors include the interest rate on your current mortgage, the current market interest rate, how long you plan to live in your current home, and whether or not you need money for other things such as home improvements, a new car loan, or paying off credit cards.

Mortgage Application Index: Purchase:

An index published weekly by the Mortgage Bankers Association of America which gauges the number of applications submitted for the purchase of a home. The survey covers about 40% of all retail residential mortgage transactions and is released every Wednesday for the week ending the previous Friday.

Mortgage Application Index: Refinance:

An index published weekly by the Mortgage Bankers Association of America which gauges the number of applications submitted for the refinancing of a home. The survey covers about 40% of all retail residential mortgage transactions and is released every Wednesday for the week ending the previous Friday.

Mortgage Broker:

Many lenders use the services of a mortgage broker to perform what is known as the "Origination" of the loan - to meet with and pre-qualify the borrower, verify the credit and property aspects of the loan, and then provide it to the lender for actual funding. Mortgage brokers represent the consumer. Their goal is to try to understand the needs of each consumer as well as possible and then identify and source the best loan possible for that consumer. Mortgage brokers typically generate their customers either from marketing directly to consumers or through referrals from happy customers. Be sure that you ask for customer referrals when selecting a mortgage broker.

Mortgage Loan:

A mortgage loan is money lent for the purpose of buying real estate. Mortgage loans are secured by the property that they are used to buy. If the borrower or "mortgagor" fails to pay back a mortgage loan, the lender can seize the property in a process known as foreclosure. There are many different types of mortgage loans available and each one is designed for a specific purpose. Some are more flexible that others and it is important to learn a little about each type to better determine which one is right for you. It's like shopping for anything else. You need to see all of what's out there before you can make the final decision.

Mortgage Quote:

A mortgage quote is an interest rate offered to a borrower by a lender for a home loan. The mortgage quote is tied to a number of factors including the loan type, loan length and the credit history of the applicant and can vary quite a bit among lenders. Mortgage quotes are an important step in purchasing or refinancing a loan. Mortgage rates can change hourly so it is important to check rates frequently and when you do make a decision, make sure you find out if the mortgage quote you have been given has any expiration period associated with it. When considering a mortgage rate, be sure to understand not only the specific interest rate you are paying but also whether or not your loan is an interest-only loan or you are paying off principal at the same time. You should also be sure to understand the term of your mortgage, is it a 5 year, 10 year, 30 year or one of the many hybrid variations available. Depending upon the number of years, the amount you end up paying in interest and principle and vary enormously. Lastly, be sure to find out if there are any other costs associated with closing your mortgage that are not included in your mortgage quote. Generally mortgage quotes do not include closing costs, property taxes, insurance costs, PMI costs and other miscellaneous costs which are all important costs to understand when thinking about what you can afford.

Mortgage Rate:

A mortgage rate is the amount of interest charged on the money lent for the purchase of a home. Mortgage rates are expressed annually as a percentage and have fluctuated greatly over the years. These rates are tied specifically to the purchase of real estate property and the loans associated with them are secured by the property. Mortgage rates can also vary greatly by lender and borrower and are based on many factors including market conditions, the loan type, geographic location, the loan term and the credit history of the borrower. When mortgage rates go up, it becomes more expensive to borrow money for the purchase of a home. As mortgage rates drop, consumers are able to afford to borrow more money and purchase a more expensive home. When mortgage rates drop, existing homeowners with fixed-rate mortgages should consider refinancing to lock in the lower rate.

N

New Home Sales:

The Census Bureau surveys builders nationwide and bases their figure on the number of contracts signed for new homes. Because it reflects contracts rather than closings (as is the case with existing home sales), new homes sold should more quickly reflect changes in mortgage rates and the economic environment. The reported figure is generally a seasonally adjusted, annual rate.

R

Refinance:

Refinancing is when you get a new loan to pay off an existing loan on the same house. Your new home loan may have different terms, a lower interest rate or be larger than the amount of debt owed on your existing loan. In the case of the latter, you would end up with a cash surplus known as "equity take out." Your are taking equity from your home and converting it into cash to pay for other things. Home refinancing is often done when interest rates drop because home owners can lock in a lower rate and lower their monthly payments. It is also a great way to consolidate bills and pay off expensive credit card debt.

S

Searchitis:

An uncontrollable addiction to checking home listings multiple times per day. Please remember to feed your cat/dog/fish/kids.

Second Mortgage:

A second mortgage is a mortgage on real estate which has already been pledged as collateral against another mortgage, the first mortgage. The second mortgage typically has rights to the same real estate but those rights are subordinate to the rights of the primary or first mortgage. When getting a second mortgage, the lender will typically only lend up to the difference between the total estimated value of the real estate minus the first mortgage. Like all mortgages, lenders will also consider your cash flow to ensure that you can afford to make their interest and principal payments on top of your other mortgage payment commitments. Like standard mortgages, second mortgages can have varying terms, ranging from a year up to 20+ years depending upon your personal situation. Second mortgage rates and costs tend to be similar to other mortgage rates and costs although sometimes second mortgages are more expensive to reduce the risk lenders are taking by being subordinate to the primary lender.

Securitization:

The pooling of mortgage loans into a mortgage-backed security. The principal and interest payments from the individual mortgages are paid out to the holders of the MBS security.

T

Turtling:

An overwhelming urge to pull your shirt up over your head and hide from the world as you try to grasp all the real estate industry jargon. Consult a doctor if it lasts

U

Underwriting:

The determination of the risk a lender would assume if a particular mortgage loan application is approved. Ability and willingness to abide by the mortgage loan terms, as well as the value of the property involved, are critical to the underwriting analysis.

From The Wall Street Journal Online

It was a tough week for the biggest U.S. home builders, as one company after another slashed earnings guidance to deal with a faster-than-expected downturn in the housing market.

Lennar Corp., based in Miami, was the latest bearer of bad news when it warned Friday that earnings in its fiscal third quarter, which ended Aug. 31, would be much lower than analysts on Wall Street were anticipating.

"The U.S. housing market has continued to deteriorate," said Stuart Miller, Lennar's chief executive. He blamed increased use of sales incentives and certain land adjustments for the shortfall, and cut fiscal-third-quarter guidance to a range of $1.25 to $1.35, down from Thomson Financial's consensus estimate of $1.81.

However, Lennar fared better than many of its rivals when it came to orders. It reported only a 5% decline in orders, which is significantly better than its peers. Los Angeles-based KB Home, for example, said on Thursday that orders for new homes fell 43% in its fiscal third quarter, ended Aug. 31, and the company cut earnings guidance to a range of $1.85 to $1.95 a share, down from Thomson's estimate of $2.31.

Beazer Homes USA Inc. said on Thursday that orders fell 49% and cancellations surged to 50% in the first two months of its fiscal fourth quarter.

As a result, the Atlanta builder reduced its 2006 earnings guidance to a range of $8 to $8.50 a share, down from previous estimates in the range of $9.25 to $9.75 a share.

Meanwhile, St. Joe Co., based in Jacksonville, Fla., announced late Thursday it planned to leave its home-building business altogether. The company said it would continue to entitle and develop its massive land holdings in Florida, but would no longer build homes. Instead, it would sell lots to home builders. The decision came after the company had seen orders fall 50% in the first quarter and 55% in the second quarter.

So, does the small order decline at Lennar mean the company is faring better financially? Not necessarily.

Raymond James analyst Rick Murray sees the small order decline as a warning sign that Lennar has been far more aggressive at offering incentives and slashing prices than its rivals. He said this will likely take a toll on Lennar's gross profit margins, which he estimates fell 6.10 percentage points to 18.9% in the quarter from 25% a year earlier.

Morgan Stanley analyst Rob Stevenson said the difference in orders between Lennar and other builders reflect different strategies. He'd prefer to see builders be frugal about incentives -- even if it means giving up sales.

"If you're just throwing as much product out there regardless of the price, that's a dangerous slope for these guys," he said. That's because once prices fall on a widespread basis, home buyers will sit on the sidelines waiting for prices to trough. This will delay sales, and make it tougher for home builders to bring pricing back up to previous levels.

Mr. Stevenson hasn't seen any builder get overly aggressive yet, "but that is the fear at the back of your mind."

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From The Wall Street Journal Online

Federal regulators are trying to hit the brakes on commercial real-estate lending. That annoys Bradley Rock, the chief executive officer of Smithtown Bancorp Inc.

Wheeling his black Lexus sedan toward the clubhouse of the Fox Hill Golf & Country Club, Mr. Rock gazed at the lush fairways of the 175-acre property, appraised at more than $15 million. The owners of the club owe $2.7 million to his bank. "You could sell the property for massively more than the debt," Mr. Rock said. "It's impossible for the bank to lose money."

Like thousands of community banks across the U.S., Smithtown, of Hauppauge, Long Island, has feasted on commercial real-estate loans. About 80% of Smithtown's $800 million loan portfolio is concentrated in that category, which Mr. Rock calls "the last safe, profitable niche" for community bankers trying to compete against giant banks. The banks consider these loans -- the $1 million to $10 million loan to a home builder or strip-mall owner -- to be their sweet spot.

To bank regulators, the rapid growth in commercial real-estate loans -- up 16% in 2005 alone to $1.3 trillion -- is alarming. In January, four regulatory agencies, including the Federal Reserve, proposed a clampdown. In a draft of new "guidance," they said banks exceeding certain levels of lending in construction and commercial real estate should step up risk monitoring or add capital, or both.

The proposed guidance wasn't a hard rule and didn't impose limits on lending, but the bankers went bonkers. The Independent Community Bankers of America, the American Bankers Association and more than 1,000 banks wrote protest letters. The community bankers, citing the government's own reports, said commercial real-estate loan performance is healthy and growth is driven by employment and population growth. Bankers argued that their lending practices had become far more sophisticated since the last real-estate bust in the early 1990s, while the regulatory guidance had all the finesse of a meat cleaver.

A hearing on the issue before a House subcommittee is set for Thursday. Regulators probably will issue final guidelines sometime after that, and the implications could be significant. If regulators are too lax, there could be a raft of bad loans. If they are too tough, they could prompt a credit crunch, with small business owners unable to get loans. That could cast a chill on the entire U.S. economy.

Commercial real-estate loans "can be the sweet spot -- or the tar pit" for banks, says Susan Bies, a governor of the Federal Reserve. It supervises bank holding companies and about 900 state banks, including the Bank of Smithtown, a wholly owned subsidiary of Smithtown Bancorp.

The regulators conjure up memories of the late 1980s and early 1990s, when aggressive lending led to overbuilding, vacant properties, price collapses and huge losses for taxpayers. From 1987 through 1994, more than 1,100 banks and nearly 1,000 savings-and-loan institutions failed or required financial assistance, according to the Federal Deposit Insurance Corp.

"It is hard to overstate the impact of that crisis on our economy," John Dugan, the comptroller of the currency, said in a speech to New York bankers in April. Mr. Dugan's agency, part of the U.S. Treasury, supervises more than 2,500 nationally chartered banks.

Cracking Down

Though the guidance isn't finalized yet -- and, even when completed, won't include hard-and-fast lending caps -- examiners already are cracking down, say bankers. TransAtlantic Bank, of Miami, has cut back commercial real-estate loans in reaction to the regulators' proposals, while expanding unsecured loans to doctors, lawyers and other business customers. Chief Executive Miriam Lopez says the unsecured loans are actually riskier; the bank has more than doubled its credit department to handle the change in strategy.

"Talk about unintended consequences," says Mr. Rock, who as vice chairman of the American Bankers Association is helping lead the charge against regulators.

The 54-year-old banker grew up in Hauppauge, 50 miles east of Manhattan, where he was a high-school football star. He worked as a lawyer before becoming chief executive at Smithtown in 1990.

He has produced strong results: soaring loan and deposit growth, rising profits and minimal bad loans. The bank says investors who bought its Nasdaq-listed stock in 1995 have enjoyed a more than 20-fold return on their investment.

The Smithtown formula involves gathering deposits, currently about $835 million, at 13 branches on Long Island. The bank then lends out the money at interest rates that are more than four percentage points higher, on average, than what it pays on deposits. Demand is robust in Long Island's mostly white-collar economy, which has enjoyed strong job growth in health care and education, according to Moody's Economy.com Inc., although it says high costs could crimp that growth.

The bank mostly steers clear of consumer lending, such as auto loans and credit cards. Residential real estate is just 14% of the loan portfolio. Mr. Rock says Smithtown can't compete with the big banks that blanket the greater New York market.

"Citibank, Chase, Bank of America, they spend enormous amounts of money on the mass market," Mr. Rock says. "You need to be on television every night" with advertising, he says. "There's no way we can afford to do that."

Instead, Smithtown has a small lending team of five people who specialize in making real-estate loans to businesses. One banker focuses on loans to homebuilders. Mr. Rock's 24-year-old son recently joined the bank and is cutting his teeth on mortgages for small commercial buildings. The bank also lends to owners of multitenant office buildings and family restaurants.

In recent years, Mr. Rock has moved into the five boroughs of New York City, lending to smaller developers who might, for example, need a $5 million loan to convert an industrial building in Brooklyn's trendy Williamsburg section into condominiums or rental apartments.

He has an army of loyal borrowers, such as Vincent Di Canio, a Smithtown developer who has received dozens of real-estate loans from the Smithtown bank over the past 25 years. Mr. Di Canio says he goes to the big banks only when he needs more than $10 million. He is worried the regulators' guidance will cause Bank of Smithtown to cut back lending. "It would be detrimental to me and all midsized entrepreneurs," he says.

Mr. Rock acknowledges that real-estate busts occur and can be devastating. In his first years as CEO, in the early 1990s, his own bank had several loans go sour. Often, the bank hadn't paid attention to the income stream on the borrower's property, he says.

He slows his car to an intersection in Melville, just off the Long Island Expressway, and gestures at rows of 250,000-square-foot office buildings that were built in the 1980s, sometimes with financing from big banks. By the early 1990s, a number of the Melville buildings lay vacant and were sold at a loss.

"Here's your 1980s real-estate bust," Mr. Rock proclaims. "The biggest amounts came from the biggest banks putting mortgages on the biggest buildings."

Mr. Rock believes most smaller banks such as his aren't engaging in the sort of indiscriminate lending that caused trouble 15 years ago. Nowadays, he says, he ensures that a developer's income from property is enough to pay down the mortgage, and he leaves an ample margin of safety in his loan portfolio in case real-estate prices turn south.

Mr. Dugan, who took over as comptroller in August 2005, is less sanguine. A former Washington lawyer with many financial institutions as clients, Mr. Dugan was heavily involved in the savings-and-loan cleanup as a U.S. Treasury official from 1989 to 1993. He declined to be interviewed, but his speeches leave no question about his concerns.

At a conference last October of credit experts from the Office of the Comptroller of the Currency in Atlanta, Mr. Dugan noted that about a third of national banks had commercial real-estate loans amounting to 300% or more of their bank capital. In its simplest definition, capital is equal to a bank's assets minus liabilities. Under U.S. regulations, banks are required to hold a certain amount of capital, measured in various ways, as a financial cushion. Mr. Dugan urged his credit staffers to continue "carefully monitoring banks where these concentrations could become, or already are, significant."

Warning Letters

Within weeks, the office's regulators in the field were sending out letters to banks, warning about concentrations.

Community bankers say the letters made them shudder. "I was very upset," says Everett Crawford, chief executive of First National Bank of Artesia, N.M. If he has to cut back such lending, "it will diminish the franchise," says Mr. Crawford, who worries the 103-year-old institution may have no choice but to sell itself.

By all accounts, banks have a much better handle on their loan portfolios these days than two decades ago. Nonetheless, regulators fear standards still aren't strict enough sometimes.

The letter Mr. Crawford received was from Kay Kowitt, a deputy comptroller of the currency. She didn't single out his bank but dwelt on several emerging problems among the 400 banks supervised by the western district of the agency. Noting that "competition in virtually all markets is intense," the letter fretted about "liberal terms for speculative land loans" and said some borrowers had only a thin margin between the cash flow from their property and their loan repayments. It also questioned whether some banks are getting fully independent property appraisals.

Regulators also believe new forces in the market are pushing up real-estate prices. One new factor: Unlike small banks, the biggest banks often are selling their commercial loans to be packaged into securities and sold to global investors. That market is making it easier for banks to come up with money for loans, which in turn boosts demand for commercial property.

In April, Mr. Dugan sounded the alarm bells again, this time before the New York Bankers Association. In the late 1980s and 1990s, he said, failed banks had three times the real-estate concentrations of banks that survived. With Mr. Rock looking on, Mr. Dugan also defended the guidance proposed by his agency and three others. It would single out for scrutiny banks that have lent more than 100% of their capital in construction or more than 300% of their capital in commercial real estate generally.

Smithtown's portfolio is way over the guidelines because its commercial real-estate loans amount to 750% of, or 7.5 times, its capital. Mr. Rock believes it is simplistic to lump all commercial real estate into "a single bucket." His portfolio, he argues, should instead be viewed as "75 buckets" of diverse loans with different maturities and risks. Mr. Rock says he welcomes examinations, but he thinks examiners should dig down and assess the risks of individual loans and various types of loans.

In a June 20 meeting that Mr. Rock and officials from the American Bankers Association held with regulators, Mr. Rock complained that field examiners are using the measures in the guidelines to "beat up" banks with heavy concentrations of commercial real-estate loans. "Susan, here's the essence of the disconnect," he says he told Gov. Bies of the Fed. "You call it guidance, but examiners are in my bank, criticizing me for having too many commercial real-estate loans."

Gov. Bies, in an interview, says she hasn't received concrete evidence of overzealous activity by bank examiners, but she says the Fed will start a training program for its staff once the guidance becomes final. Regulators say their metrics are a valuable screening device to flag potential problems. Bankers say the definition of a commercial real-estate loan is too broad.

On a recent afternoon, Mr. Rock drove around Suffolk County, his prime lending area, and stopped outside a medical office building. He has extended a $350,000 line of credit to the doctors backed by the property, which he said is valued at two to three times that amount. He drove past one of Mr. Di Canio's housing developments, with 34 single-family units under construction, and said his lenders minimize risk by doling out money little by little as the work progresses.

Then Mr. Rock drove a few miles out to the Fox Hill golf club. If the property ever got developed into houses on half-acre lots, he said, it could be worth $40 million or more. "This is just my idea of an absolutely great loan," Mr. Rock said. "But the regulators are saying I have a 'concentration.' So if another one comes along like this, I'm supposed to turn it down."

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By Sara Schaefer Munoz
From The Wall Street Journal Online

When it comes to flat roofs, beauty is clearly in the eye of the homeowner.

Eager to squeeze in more square-footage -- and increase property values -- while adhering to community height restrictions, a growing number of builders and homeowners are building homes with flat roofs. But these box-like structures and their party-friendly roof decks are sparking a backlash among neighbors who think the houses are homely, detracting from neighborhood character and blocking views and sunlight. Now, a number of communities are slapping new rules on builders that require sloping roofs.

Communities everywhere from Delaware to Washington are addressing roof pitch. The waterfront town of Bethany Beach, Del., several months ago passed a minimum-roof-pitch requirement after a spate of new, box-like homes dwarfed the town's older cottages. St. Augustine, Fla., last fall banned flat roofs for homes on some smaller lots over concerns about style and rooftop parties, and the city of Kirkland, Wash., near Seattle, is holding a series of community meetings with homeowners and developers on house-to-lot ratios, which address, in part, concerns about the increase in flat-roofed homes.

Many popular home styles, of course, such as Prairie and Pueblo, have flat or low-pitched roofs. And in some parts of the country, such as Santa Fe, N.M., some ordinances even aim to keep roofs flat. Still, in many suburban American communities, the majority of homes have sloping roofs. But now, some Realtors, builders and local officials say, flat tops are increasingly infiltrating neighborhoods that traditionally featured sloping-roofed cottages and bungalows.

The trend is being driven in part by people seeking the best return on their investment amid soaring property values in recent years. It also demonstrates how zoning restrictions communities passed in recent years have backfired. In response to runaway development, many municipalities tried to prevent oversized homes on small lots. But in some cases, the unintended result was flat-roofed, boxy homes seen as out of character with surrounding styles. By using a flat roof, builders can sometimes squeeze in a second or third floor, adding square footage while staying under neighborhood height restrictions.

Kirkland, a city of about 50,000 people near the headquarters of Microsoft Corp., several years ago limited square footage on smaller lots, but officials say that move -- coupled with height restrictions -- may have encouraged flat roofs and boxy homes as people sought more space on the upper floor. "We may have gotten that wrong," says Kirkland Mayor Jim Lauinger. "When you have people taking away a peaked roof and putting on a flat roof to get additional volume, you've really altered what the neighborhood used to look like."

Steve Rabuchin, a Kirkland resident, learned that first-hand when a 5,000-square-foot, flat-top home went up recently on the lot below his 2,700-square-foot hill-side property. Because workers on the house chopped down trees, the Rabuchins now have a view of Lake Washington -- but with a broad expanse of flat, black roof in the foreground. "They maxed out everything they possibly could and ended up with a box," he says.

Yet builders say the flat-roof style allows them to get the best return in areas where land is pricey. John Lux, a Kirkland-area developer, built five homes with flat roofs this year, compared with one in the previous two years, squeezing in two stories and a partially exposed basement by using the flat-roof style. "The city is wanting to see smaller homes on these lots, but it just doesn't make sense financially," he says.

Flat roofs can also have drawbacks for owners. They generally don't stand up well to heavy rain and snow, and can require more frequent maintenance than roofs with a traditional pitch, contractors say. Flat roofs can also be more expensive to build, requiring more structural support. Yet Realtors say that flat-roofed homes can have a "wow" factor from inside, offering higher ceilings and the possibility of roof decks.

But some Realtors say that out-of-place flat-roofed homes could be tougher to sell. "Most people don't want a place that sticks out like a sore thumb," says Chuck Riley, a Realtor in the Washington, D.C., area.

Most homes going up with flatter roofs are in older neighborhoods, where the lots are so expensive that developers build as big as they can to make the investment worthwhile. Some big home builders are espousing the design: Pulte Homes Inc., based in Bloomfield Hills, Mich., recently put flat roofs on a town-home development in Baltimore as a way to offer roof decks and add more living space. The Maryland division president says the company is planning more homes in the same style.

Flattening the roof isn't the only way builders are staying under height restrictions in certain neighborhoods. Builders will also grade the land higher at the base of the house, so the first story is partially underground and they can build higher, says Vince Butler, chairman of the Remodelers Council of the National Association of Home Builders. "When folks are trying to get the most space in their house they end up going up or down."

Builders also report that people on small lots increasingly are putting in big basements and protruding dormers -- portions of a home that often don't count against square footage restrictions. In some areas where regulations are strict and land is in short supply, it's not uncommon for builders to lift an entire house up on hydraulic jacks and put in a partially exposed first story underneath. This adds another story without going over height limits; it also makes for easier approval by architectural review boards because the addition is partially underground, says Paul Winans, a California remodeler and chairman of the National Association of the Remodeling Industry.

Flat roofs can spur some strong emotions. In St. Augustine, Fla., residents in a series of meetings debated the merit of boxy homes before local officials passed an ordinance requiring that roofs on smaller lots have a minimum pitch. "When you plunk down one of these square boxes, it stands out -- it's an affront to the historic nature of the town," says John Marples, a resident who spoke at one of the hearings.

But residents Thomas and Elizabeth Dreisbach are chafing under the new restrictions. They own a 1,300-square-foot home on one of the city's smaller lots. They would like to enlarge their house by adding a flat or slightly pitched roof to get a deck, more space and increase the home's value. Now, they will have to request a variance. Otherwise, they'll try to put a large roof deck on top of a sloping one, which Mr. Dreisbach says won't look as nice. "These restrictions are just causing architecture to be uglier and are taking money out of people's pockets," he says.

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Foreclosure Figures Suggest Homeowners in for Rocky Ride

By Danielle Reed
From The Wall Street Journal Online

By any measure, things are getting tougher for American homeowners.

Online foreclosure-data service RealtyTrac of Irvine, Calif., said yesterday 115,292 properties nationwide entered some stage of foreclosure last month, a rise of 24% from July and nearly a 53% increase from a year earlier.

Also yesterday, Foreclosure.com of Boca Raton, Fla., which also tracks foreclosures nationwide, said new residential foreclosures fell by 6.7% in August from July to 26,255 nationwide. The company's figures, however, show that foreclosures are up 7.3% compared to August 2005.

The divergent results can be explained by the way each company counts foreclosed properties. RealtyTrac data includes properties in the early stages of a foreclosure proceeding, even before the bank actually owns those properties. About 60% of these get remedied or the properties are sold before they get to the auction stage, said Rick Sharga, vice president of marketing for RealtyTrac.

A spokesman for Foreclosure.com said it only reports properties officially foreclosed and in the hands of the banks.

The trend is supported by data collected by the Mortgage Bankers Association, which reports the number of U.S. households late on mortgage payments fell slightly in the second quarter, but that a modest rise in delinquency and foreclosures is expected going forward.

The delinquency rate for residential mortgages was 4.39% in the April-June period, down from 4.41% in the previous three months, the MBA said in a survey that included 42.5 million loans. Home mortgages in foreclosure made up 0.99% of total mortgages at the end of the quarter, up from 0.98% three months earlier.

The MBA expects further cooling in the economy and the housing market, which in turn could lead to "modest increases in delinquency and foreclosure rates in the quarters ahead," said Douglas Duncan, MBA's chief economist and senior vice president of research and business development.

RealtyTrac Chief Executive James J. Saccacio noted that billions of dollars of adjustable-rate mortgages that have benefited from a stable fixed rate of interest over the past two years are due to shift to higher floating rates in coming months.

"With home-price appreciation continuing to decelerate," he said, August's "increase could be the beginning of an upward shift in the foreclosures market."

Foreclosure.com President and CEO Brad Geisen said while the company has continued to see fluctuations in month-to-month data, "as we near the end of the third quarter, most housing and economic indicators point to a sustained period of increased new foreclosure activity across the country."

Foreclosure.com noted that the West was becoming "an emerging foreclosure hot spot," with new foreclosures in Arizona up 155% in August from July. Foreclosures in California were up 32% and New Mexico saw a 10% increase.

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