During the last half of 2006, economists well versed in real estate investment were advising California homeowners to refinance their home mortgages to obtain fixed rate loans without delay.

Many homeowners discounted that advice. Checking into a fixed rate loan, they found their monthly payments would be higher than the payment on their current adjustable rate loan and for that reason alone ignored the advice.

Truth is, the economists' warnings were late in coming. Prices on housing had risen consistently for 10 years and even many experts didn't realize the high risk that was being created by poor lending practices and accepted by uninformed home buyers.

A new window of opportunity for mortgage refinancing has opened with the recent decline in interest rates. The information below will help you take advantage of this window and possibly save your home in the future.

Your ability to refinance a mortgage in California depends on three factors:

1. the appraised value of your real estate

2. your credit history

3. your verifiable income

Until 2007, appraisal of California homes was seldom a problem. Ballooning prices yielded huge profit for sellers, lenders and real estate companies. With rising interest rates, adjustable rate mortgages began adjusting payments higher and higher and loan defaults skyrocketed.

The resulting increase in homes for sale and unsold home inventories began to drive prices down. California, which had led the nation in price increases, took a big hit in home prices. The simple law of supply and demand has resulted in many properties that are now appraised far below what the current owner paid.

Credit history is important and homeowners should do whatever they can to repair their credit and raise their critical FICO score before applying to refinance their mortgage. Any incorrect information appearing on credit reports should be challenged and all financial obligations met in a timely way to show credit-worthiness to lenders. Part of the credit equation is that monthly debts, including your mortgage, do not exceed 50% of income. When calculating that percentage, don't forget to include the property taxes and property insurance

Income has gained importance in real estate finance. To qualify for a new mortgage, you must have verifiable income that is sufficient to meet your obligations and provide for day to day living expenses. Some lenders will excuse a less than stellar credit score when an applicant can prove they have a steady source of income.

If you meet the criteria above, mortgage refinancing in California may be a great option for you. If not, contact your current lender as many of them are finding it financially advantageous to rework a problem mortgage than to foreclose on yet another property. Persistence will pay off as the current mortgage crisis has cause some lenders to be more flexible in their requirements for refinancing.

A second mortgage taken as a home equity loan is often used to finance major expenses such as home improvement or college expenses. Increasingly, such loans have been used to consolidate debt payments from credit card and other obligations.

Until recently, lenders have been liberal in qualifying home owners for these loans. It is possible to borrow the difference between the amount of your current mortgage and the appraised value of your property. With good credit it was even possible to take a loan that was 25% more than the market value of a home.

Using this type of financing for major home improvements or additions, or to fund education or a similar large one-time expense has benefits for the borrower over and above the cash received. Interest on personal loans is not tax deductible while mortgage interest on a second home loan is fully deductible when applied to your main residence.

Using your home's equity to pay off credit cards is a riskier proposition. If the credit debt is due to an unusual circumstance such as illness, temporary job loss or other one time crisis, refinancing by using the equity of your home can help solve the problem.

Debt caused by simply overspending is another story. Using the equity in your home to pay off the debt is a good move only if you are willing to stop accumulating debt. If you are not willing to practice good money management and budgeting - and stop the habit of overspending - consolidating the original debt load will only increase your risk.

This type of re-financing has grown in popularity for several years because home values have also been rising. With real cash value available, using that asset was seen as good money management. We are seeing a reversal in this area currently, especially in California home equity loans, and current problems are expected to worsen in the next year. These second loans are based on the value of your home remaining stable so what happens when the value decreases?

Not even economists can agree on the effect declining prices will have on those with 100% or 125% second mortgages. Technically, according to the terms of agreement, the home owner may be required to pay a substantial sum to bring the combination of first mortgage and home equity loan into compliance with the current appraised value. Lenders are currently not insisting on this as they realize that would only add to the current high number of foreclosures.

If you fail to pay credit card bills, you have some options. You can file for personal bankruptcy or hope nonpayment will result in a "write-off". Either of those options will destroy your credit rating but won't risk your real estate ownership.

Home equity loans contain cross default provisions. This means that if you do not pay as agreed the lender can start a foreclosure just as the first mortgage holder can.

Known for its liberal leanings and innovative methods, California has led the nation in adopting new ideas and fashions. Years of creative lending practices has also placed California at the top of the list in the current mortgage and foreclosure crisis.

Rising home prices and a booming real estate market spelled dollars for lenders who competed with each other in offering to finance almost anyone regardless of credit history, income or down payment. Adjustable rate loans began at interest rates as low as 3% which allowed buyers to qualify for property that was priced higher than they could realistically afford.

Buyers looked only at the monthly payment due after closing and gave little thought to what would happen when the adjustment periods were reached. Interest rates were at rock bottom and those who could qualify for fixed rate loans and had the foresight to pay a bit more now for stability in the future have been able to survive the turmoil.

The precipitating factor in California was the large number of subprime loans issued. Thought it's easy to say that people who bought above their means are to blame, the information being released clearly points to predatory lending practices as the main contributing cause. Homeowner who refinanced their homes in the early 2000 thought they were getting better interest rates yet often found the rate had risen far above their previous fixed rate mortgage.

Subprime loans are not new. They have been part of the financial market for many years but accounted for only about 9% of mortgage loans mid-1990. By 2006 that percentage had risen above 20%. Buyers taking out these loans were often reassured that they could refinance after their credit had improved and the subprime loans most often ran for 2 years with no adjustment. At the time the first rate change was due, values had fallen and interest rates had risen.

As prices continued to fall, foreclosures and defaults were rising and by third quarter of 2007, 16 of 100 subprime mortgages were in default and that number is growing monthly. In the past a homeowner in financial distress could often make an arrangement with the lender holding his mortgage and interest rates might be reduced or past due payments added to the life of the loan. In some cases, the lender would increase the time of repayment of the loan to lower the monthly payments and avoid foreclosure. It was common for lenders to sell loans to other lenders but buyers knew who held their loan.

That is no longer true. Along with the housing and lending boom the practice of selling mortgages as financial instruments forged ahead. Subprime mortgages were sold to Wall Street brokers who package them in structured investments and sold them to investors internationally. When it became clear there was a worsening risk fact for these loans, brokers unloaded them by folding them into investment packages that were not property investment but where those weak mortgages could be included without mention.

This practice has led to the mortgage crisis in California to have international implications. Some homeowners have no idea who owns their mortgage and no way to contact the person or company. For them, arranging better terms that might allow them to keep their home is not a possibility.

The booming California mortgage market in recent years has often relied on the non-recourse purchase loan. As rising prices made it difficult to come up with

larger and larger down payments, buyers often took a purchase money loan

that would pay part of their down payment, including the closing costs

associated with the mortgage.

These were in the form of bank loans which acted as second mortgages or in

seller carrybacks and have been used both to supply the required down

payment and also to get cash back at purchase to make improvements or for

full renovation of the home. When used to improve the property these funds were often repaid by taking a conventional second mortgage on the property which had appreciated in value due to the work done.

In California, purchase money loans were most often non-recourse loans. If

payments were not made as agreed, the lender could foreclose on the property

but the loan liability did not extend to other assets of the borrower.

Unfortunately, many of these purchase mortgages enabled buyers to move into homes that were far above what they could reasonably afford. With an adjustable rate first mortgage at an artificially low interest rate, buyers added the financial burden of a purchase mortgage.

The consequences began to appear when the housing market in California

began showing signs of instability. The adjustment periods for first mortgages

were not taken into consideration by many buyers who were only concerned

with what their monthly payment would be on their new home. Buyers had mortgages that adjusted annually and many took loans that adjusted bi-annually.

With each interest change, the monthly payment became higher and many quickly found themselves unable to make those payments at all. Some have simply walked away from the homes they could no longer afford. The prevailing attitude has been that defaulting on both the first and purchase money mortgages allowed people to live in homes basically free for 2-3 years as they had never invested any of their own money in the purchase.

A home owner may owe $260,000 on a home purchased originally for $200,000 (with a purchase mortgage for improvements) and the value of the home currently may be only $150,000. The lender takes what is called a short sale; the original owner is off the hook for the difference. What is often not considered is that there may be a tax liability for the sale and that would be based on the $260,000 actually owed. This is not always the case, but adds to the risk of such financing.

Further complicating this type of financing is that many buyers chose to take adjustable rate second mortgages after their purchase to pay off the non-recourse purchase mortgage. Defaulting on a non-recourse loan damages credit and may have other consequences yet does not allow the lender to pursue further legal activity in an attempt to regain the loss.

Without realizing the consequences, owners have taken loans that make them personally liable because they have replaced a higher interest non-recourse loan with a recourse loan. When the home sells for less than the mortgages owed, the holder of the second mortgage can go after personal property and assets of the person who defaulted.

In a recent poll, California lending professionals were divided when asked to predict the "best time to buy in 2008".

31% - April - June

28% - January - March

21% - October - December

19% - July - September

The California Association of Mortgage Brokers conducted the survey in November 2007. Further predictions were that housing would be more affordable and that FHA loans would return to popularity. That could be rephrased as housing values will drop precipitously and FHA may be the only loan money available.

The main point made in the survey - and one which showed overwhelming agreement - was that mortgage qualification terms will be much more restrictive and finding available loan money could be difficult. Real estate brokers and mortgage lenders have urged Washington to approve Governor Schwarzenegger's appeal for special assistance for California homeowners.

The Governor's request is that Congress designate California as a high cost of living state and raise the limits on FHA and other government backed loans to provide an alternative to the non-traditional loans that have proven so risky.

The mortgage situation in California has worsened rapidly since that survey was taken just a few months ago. Prices have declined more rapidly than expected and the foreclosure rate has risen drastically.

This is good news for those planning to buy a home. With good credit and a stable work/income history new buyers may have to look more diligently for a lender but may be able to buy more home for the money. The high foreclosure rate in California has left many lending institutions with a glut of vacant homes. With no end in sight at this time, banks and mortgage companies may need to lower prices even further to unload the inventory.

The most likely answer to the "when to buy" question may well be the last half of 2008 as housing prices are now predicted to continue to fall for several more months. It is doubtful that the tighter qualifying rules for new mortgages will be relaxed during 2008 and many aspiring homeowners with less-than-perfect credit will find it impossible to obtain such a loan though they would have easily qualified in the past five years.

Those wishing to sell their current home and buy a new one will be hurt by the market downturn and the glut of properties available. They may find the appreciation in value they had planned on has evaporated and finding qualified buyers may be harder than finding a mortgage for a new home.

This current housing and lending crisis provides a tremendous window of opportunity for those planning to buy a first home in 2008. It will require a diligent examination to assess what is likely to happen to values in a specific area or subdivision and enlisting the advice of real estate or lending experts could be helpful.