Here's a new one: Being too broke to sell

Most anybody in the mortgage business will tell you that August was a month that will live in infamy: The market was in turmoil, as doubts about the stability of subprime loans spread to other sectors of the mortgage world.

How bad was it? A survey of mortgage brokers suggests that one in three consumers who recently signed purchase contracts canceled in August -- up from just 4 percent three years ago, according to the research firm that conducted the survey for Inside Mortgage Finance, a trade journal.

The cancellation rate undoubtedly was fed by two scenarios playing out: Many buyers couldn't get mortgage approval because lending suddenly tightened; or, financially strained lenders yanked funding from their borrowers at the last minute.

But another factor was at work: Sellers -- not buyers -- were in trouble as their closing dates neared.

"Our office had four sales in one week that failed to close because the seller didn't have the cash," said the real estate agent, who declined to be identified because she feared office repercussions.

The sellers couldn't come up with the money?

It seems that for those homeowners on the margins -- those with some but not much equity -- the costs of a real estate transaction are turning into a kick in the pants.

The problem seems to start, she said, with those formerly easy-to-snatch mortgages that cover 95 or 100 percent -- or more -- of the purchase price.

The idea -- seems quaint now, doesn't it? -- was that home values would continue to spiral blissfully skyward, equity would build and that loan-to-value ratio would improve so the buyer would be richly rewarded when he sold.

Closing day approaches, and our leveraged homeowner apparently has forgotten how many folks have their hands out at the table -- and without appreciable appreciation he can't satisfy them all.

As an example, my real estate agent acquaintance grabs a settlement sheet from a recent transaction on a home that cost just under $600,000.

Reeling off a few of the line items, she notes that the seller had to cover $1,800 in title insurance, a $75 water-certification fee, nearly $900 in tax stamps to Chicago and Illinois; a $550 attorney's fee; a $40 "overnight processing" fee. Those and numerous other charges drove the closing costs to about $3,400.

And that didn't include the pro-rated property taxes for which the seller was liable and which weren't covered by the escrow account. In this case, the seller had to set aside $6,000 from the sale of the house to cover the taxes.

Then, ahem, there's the commission.

"If you're listing a house for $410,000 and the mortgage is $390,000, you've got a problem," she said, in a bit of an understatement.

Based on the 5 percent rate she says prevails among city real estate agents, a seller in her $410,000 example would pay a $20,500 commission.

"People get a call from their attorney the week before closing, and they're expecting to hear, 'This is what you're going to get at the closing;' instead, it's 'Here's how much you have to bring,'" she said.

So, in the recent cases that have put her brokerage's teeth on edge, the buyers have just said "forget it" to the deal, which might amount to simple disappointment, except that he lawyer, title company, et al, still expect to be paid.

John O'Brien, chairman of the Illinois Real Estate Lawyers Association in Arlington Heights, said he hasn't seen cases like these lately but isn't terribly surprised by the picture the agent is painting.

"They're probably people who have borrowed the equity out of their houses," he said. "Some people don't understand that a home-equity loan is a lien against the house and it has to be paid back at closing."

Or, he said, they may have been among the legions of borrowers with hefty loans who have come to find, gulp, that those promises of home prices appreciating in perpetuity have turned out not to be true.

If you, the seller, see yourself in either of those categories, don't be surprised if your agent insists on having an intimate chat about your closing's bottom line.

My friend said her fellow agents had been admonished by management that they should delicately wrestle their sellers' finances to the ground before matters progress too far.

"There used to be a rule of thumb that you needed to be able to set aside 10 percent of your sales price," she said. "Five percent covered the commission, and another 5 percent covered the miscellaneous fees, the cardboard boxes and the movers."

Now, in our over-leveraged age, that number seems just too tight.

"All those fees, they don't seem so big when you're looking at a $50,000 check coming your way," she said, her voice trailing away. "But when you've spent all your equity on a new car ..."


Hear Mary Umberger on WBBM Newsradio 780 at 6:21 p.m. and 10:22 p.m. each Thursday and Friday and 7:20 a.m. each Saturday and Sunday.