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[whitespace] Home A-Loan

Facing massive taxes on phantom profits, more homeowners are now opting to take out a second mortgage on their homes

By Mary Spicuzza

ALAN RUSSELL, the in-house loan agent at Coldwell Banker in Los Gatos, says that during his 20-year tenure working in Silicon Valley, he's never seen such a rapid increase in people looking to "consolidate debts." That's diplomatic-loan-agent-speak to describe the flurry of homeowner scrambling to take out second mortgages on their properties, or trying to refinance them so they can get out of debt.

"I don't have statistics," Russell says. "But I would say there has been a 50 to 100 percent increase in second mortgages recently. It started in November or December of last year, and it's increased again now because of tax time."

And amid the fluttering pink slips, closing dotcoms and high-tech layoffs, former stock option millionaires may soon face losing their homes if troubled economic times continue.

Russell, Coldwell's Advantage Financial agent, says that not everybody who takes out a second mortgage is a victim of the high-tech hard times. Some homeowners find an interest rate that is better than their initial loan or want to consolidate different debts. Others see it as a way to reduce taxes or finance their kids' college costs. But he admits that when the number of homeowners moving to borrow money for their mortgage doubles, there's a more troubling trend going on.

"I can tell you that when the market softens, the upper end is where you'd see it first," Russell adds.

Meaning that those who opted to move into sprawling estates and the valley's infamous monster homes will be hardest hit, as they were in this year's stock option tax mess.

"One guy got burned on his stock options," Steve Lenheim, the manager at Campbell Mortgage, says of a current second mortgage client. "He sold his stock options to purchase a $1.5 million home. He was going to sell more stock options to pay his taxes, but found his stock options aren't worth much these days. And he couldn't pay his taxes."

"I don't know if we have a flood of second mortgages," Lenheim says. "But it's more than ever before."

Monster-home owners weren't the only ones suffering as tax deadline day came and went. This year the alternative minimum tax law, known as AMT, has wreaked havoc in the bankrolls of stock option owners forced to pay taxes based on paper profits. Even Rep. Zoe Lofgren, D-California, has stepped in to help high-tech workers by introducing legislation based less on virtual reality and more on the stock's actual worth.

The drastic drop in the number of homes sold in areas like Los Gatos and Saratoga also reflects the cooling of Silicon Valley real estate. Realtors sold only 26 homes in Saratoga in March 2001, compared to 66 sales in March 2000, according to a Coldwell Banker Real Estate Watch published in the Los Gatos Weekly Times (April 11, 2001). In the Los Gatos area, the number dropped from 58 to 40 sales during the same time period.

Those who didn't make it rich during the new economy glory days shouldn't be counting on plummeting home prices, though.

"Only in the very upper end are real estate costs dropping," Carey Atwood, sales manager for Washington Mutual, says. "But we are starting to see a trend; we're not seeing the rapid rise in home costs."

The number of valley residents forced to take out second mortgages or sell their homes is difficult to track, but home costs and the explosion of new listings shows that plenty of people are either leaving the area or hocking their homes. According to the Santa Clara County Association of Realtors, there were 4,093 new listings on the market in March 2001--up from 2,480 last year.

Michael Mullinix, president of the San Jose Real Estate Board, characterizes this change as "significant" and "dramatic."

Or, as Coldwell Banker's Russell says, "People worth $10 million before are now worth a couple million."

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From the April 19-25, 2001 issue of Metro, Silicon Valley's Weekly Newspaper.

Copyright © 2001 Metro Publishing Inc. Metroactive is affiliated with the Boulevards Network.

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