Equity Conversion Plan

The credit crunch isn’t just taking a bite out of the housing and boating industries.  The automobile industry is starting to feel the effects of limited credit and reduced consumer spending.  Automobile sales for 2008 are on pace to be the worst in more than a decade.  During the housing boom more than 1 in 9 auto purchases was financed in part by a home equity line of credit.  Now that HELOC’s are being frozen and property values are declining consumers have run out of available cash to purchase new cars.

As mortgage payments have ballooned and credit has become more expensive late payments on cars has started to tick up drastically as well.  This combination of tightened lending guidelines, reduced profits and a deteriorating economy paint a bleak picture for the near-term future of the automobile industry.

From the New York Times on the spreading ills of the credit crunch to the auto industry:

“It is a bleak picture, and it all hinges on the availability of financing,” said William Ryan, a financial analyst at Portales Partners who has followed the auto business for years. “The whole universe related to the auto industry is touched in some way — parts suppliers, manufacturers, salespeople, trucking people, the paint and metals industries. Even semiconductors.”

As the pool of money available to auto lenders has dried up, they have cut back on making new loans. Since late last year, nearly every auto finance company has tightened its lending standards. They are forcing borrowers to put more money down. They are also demanding higher monthly payments and requiring stronger credit records and more stringent documentation.

Subprime auto lenders have been forced to pull back the most. AmeriCredit, a big subprime finance company, said it would issue about $3 billion in new auto loans this year, compared with $9.2 billion in 2007. That translates into around 340,000 fewer vehicles being financed this year. But lenders catering to less risky borrowers are also retrenching.

“Capital One is pulling back, Citi is pulling back, HSBC and Wells Fargo are pulling back,” said Mr. Ryan, the analyst. So are the finance arms of the major automakers, like GMAC, Chrysler Financial and Ford Motor Credit. “What you are seeing at AmeriCredit is probably happening everywhere else, but probably to a lesser degree.”

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Contractors, particularly in the Florida, California and Nevada bubble-markets, have seen business boom as banks try to maintain thousands of REO properties (bank-owned, foreclosed property) not yet sold at auction.  Banks need to maintain the properties in order to recoup as much of their investment as possible.  Contractors, who sign deals with mortgage companies and REO property management firms have been kept busy trying to clean up foreclosed homes in those areas hardest hit by the housing downturn.

Foreclosed homes often face a tough fate between the time they are abandoned by their owner and the time they sell.  From left-over trash of the evicted owners, to theft of everything from appliances to piping, and to the regular maintenance required to keep a house in shape contractors have seen business lost to the housing bust replaced by demand from mortgage companies to keep these properties in livable conditions.

According to economist predictions the business of keeping up foreclosures will be booming for some time to come as more people face foreclosure and properties get turned back over to banks.   Contractors, who can bill up to $5,000 every two weeks per mortgage company contract have seen work lost from construction of new homes replaced by the upkeep jobs.

The New York Times reports on the boom of contractor work for foreclosure properties and highlights some of the tough duties that come with the job:

These contractors and thousands like them see first hand the detritus of the subprime era: peeling paint, gutted interiors, family dogs left behind to starve, overgrown lawns infested with snakes.

In Florida, the crisis can seem overwhelming at times. It can take months, even years, for some homes to wind through foreclosure in the backlogged local courts. The longer a home sits vacant, the more vulnerable it becomes. After a few months, the Florida weather starts to takes a toll. Mold and mildew creep. Algae chokes forsaken swimming pools. Sometimes vandals strike. And sometimes wiring or plumbing just give out.

The problem of vacant homes is all the more striking when considered against predictions by economists that a couple of million more homes will enter foreclosure in the next two years, said Cheryl Lang, president of Integrated Mortgage Solutions, a company based in Houston that contracts with Mr. McCallister and Mr. Law on behalf of mortgage companies.

“We still have two million more people that need to go through this process,” she said. “That’s like the entire town of Tampa going through foreclosure.”

In most cases, the contractors do not interact with the homeowners, but sometimes the contractors are present during evictions that are conducted by county sheriffs. Mr. McCallister recalled the eviction of a 60-year-old man who had misread his eviction notice and thought he had one more week to leave.

“He fell down on the floor and started crying,” Mr. McCallister said. “We gave him 24 hours and he had his stuff moved out and he found another place to live.”

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