Everyone likes a little room to stretch out at home, but with the new homes that KB Home is selling, that may be a little difficult.

As new homeowners look to find a mortgage that fits their budget, instead of buying as much home as a lender will let them qualify for, they may want to look at the compact two-bedroom, one-and-a-half bath houses that KB is selling for $64,000 in three suburban subdivisions in Houston, according to BusinessWeek. These tiny homes are 880-square feet.

The home builder is trying to compete with low-cost, bank-owned properties, which account for one of every three homes sold in Houston and nationally. If the Houston homes sell, KB plans to build the small homes in other cities and will target renters.

KB chief Jeffrey Mezger told BusinessWeek that the small homes are a return to his industry's roots in post World War II communities, such as Levittown, N.Y., where 800-square feet was a typical size.

"Any time there's been an age of exuberance and then the economy turns, people get back to 'What do I need?' rather than 'What could I buy?'" Mezger said.

On Monday, Freddie Mac reported that 97% of prime borrowers who refinanced adjustable-rate mortgages in the fourth quarter opted to switch into fixed-rate loans. Of borrowers who were refinancing fixed-rate loans, an astounding 99.7% opted for another fixed-rate mortgage.

In January of 2006, 41.9% of all mortgages originated were of the adjustable-rate variety. At least for now, consumers appear to be wising up to the dangers of ARMs. That's probably partly a result of the headlines about ARMs destroying people's lives, with low-interest rates also playing a major role.

But here's my question: Are ARMs ever a good product, or do they really just serve to let naive or greedy homebuyers overextend themselves with artificially low payments for the first couple years?

The argument in favor of adjustable-rate mortgages is that they're a good option if you only plan to stay in the home a couple years. The problem with that notion is that it encourages a short-term approach to real estate. The longer history of property appreciation, however, tells us that the benefits of home-ownership are by far more sizable when you stay in a home for a long time. if you buy a home planning to move in a few years, closing costs, real estate commissions and assorted other expenses will probably leave you in the hole -- worse off than if you had simply rented.

Famed celebrity photographer Annie Leibovitz is broke. The woman who shot John Lennon on the same day that Mark David Chapman did, the one who has done portraits of everyone from Queen Elizabeth to a pregnant Demi Moore, has had to sign away the copyrights, negatives, and contracts for all her work to a high-class pawn shop. That includes everything she's going to shoot in the future. In return, she gets $15.5 million to pay her debts, given at an interest rate of between 6-to 16%.

Many press reports are tracing the photog's money woes to 2004, when her partner Susan Sontag died and left her more properties and debt than she could handle. Certainly, the added financial pressure put her over the edge, and you have to wonder how things might have been different had Sontag and Leibovitz been granted the property rights and benefits that heterosexual couples get.

The San Francisco Bay Area has the fewest homeowners in the country who are eligible for the refinancing included in President Obama's housing rescue package, according to a San Francisco Chronicle story.

The real estate service Zillow.com offered an analysis of loan data and found that more than 90% of Bay Area mortgage holders can't qualify for the low-cost refinances.

"The Bay Area is being hit by the fact that it's high-priced, and therefore the loans that were made around the peak years were not conforming (meaning they were above $417,000), and secondly, that (the housing market) has gone into such sharp decline that many homes are underwater by more than 5%," Stan Humphries, vice president of data and analytics for Zillow in Seattle, told the Chronicle.

The White House plan calls for assisting homeowners whose home equity had dwindled by letting them refinance into lower cost mortgages, potentially saving them hundreds of dollars a month and reducing the risk that they may lose their homes to foreclosure.

But the plan is only available to people who took out conforming loans of less than $417,000 and whose homes are not more than 5% underwater, meaning what they owe isn't more than 5% greater than their home's value. The Chronicle used an example of a home now worth $300,000 and the homeowner owes $315,000 could qualify, but not if the value dropped further.

Just 8.4% of homes in the San Francisco metropolitan region meet those criteria.

Henrietta Hughes, the homeless Florida woman who asked President Obama for help at a town hall meeting on the economic stimulus plan, is moving out of her pickup truck and into the home of a state representative.

Earlier this week, Chene Thompson, the wife of Florida state Rep. Nick Thompson, offered to let Hughes and her adult son live in a house she owns in LaBelle, Fla. Hughes, who is on disability for cancer, was facing a two-year waiting list at her local housing department.

During a Q&A after Obama's speech in Ft. Myers on Monday, Hughes told the president she needed "something more than the vehicle and the parks to go to. We need our own kitchen and our own bathroom. Please help."

Our readers have sent in numerous questions asking why they can't refinance to a lower interest rate, which will make it more affordable for them to stay in their homes.

As interest rates reset, people in adjustable rate mortgages are finding their new rate jump to 7% or more. Meanwhile, mortgage rates for fixed rate loans are available at 5.5% to 6%, and with excellent credit scores possibly lower. So it's natural that these higher-rate people are looking to refinance.

Here's a recent reader question on the subject:

I have a 7% mortgage interest rate and wanted to refinance to a lower rate on my home.I got denied because they said my debt ratio is too high. I'm current on all bills. I keep 6k in savings for taxes insurance (not escrowed) each year. If you can pay the higher interest rate of 7%, why won't they give you a lower interest rate to lower your payments?

What's the answer?

With equity line rates lower than mortgage rates, some readers are wondering if it would be better to pay off their mortgage using their equity line. In some cases that might be true, especially since I expect interest rates to stay low for at least a year. But, if you do decide to use this strategy, be ready to jump back into a fixed rate loan when interest rates start to go back up.

Here's a good question on the topic by one of our readers:

My husband is 72 and I'm 66. We have $69,000.00 left on a mortgage with 8.5% interest and a home equity loan with $95,000.00 available with a very, very low interest rate. Our home is worth (on a good day) about $850,000.00. Is it wise for us to pay off the mortgage with the home equity loan? Is interest on the home equity loan tax deductible?
We took out the mortgage to help out a daughter buy a house only to have the husband run off leaving us with the mortgage to deal with. Barbara

Barbara, sorry to hear you're stuck with debt, but in your case based on the information you've given me it would be a good idea to pay off the 8.5% mortgage loan with a low interest equity line. That way you could avoid the costs of refinancing the 8.5% mortgage. Home equity loan interest is tax deductible in most cases up to the value of the home. But, do keep your eye on interest rates. If you do see them creeping up before you are near to paying off that debt, then think about applying for a fixed-rate loan.

If you are considering paying off a high-interest mortgage with a low-interest equity line, here are some things you should review first:

1. How much interest are you actually paying on your mortgage? You pay a large portion of the interest on an amortized loan like a mortgage during the first half of the loan. As you get nearer to the end of the loan, you may be paying primarily principal. So compare your anticipated monthly interest costs of the equity line with the monthly interest costs of your current mortgage. If you don't get a monthly statement showing the amount you are paying toward principal and the amount your are paying toward interest, ask your bank for the breakdown.

If you bought near the top of the housing bubble between 2005 and 2006, you could wait decades for the prices to reach that level again, according to a report in USA Today. People who must move for a new job or family crisis find they either have to come up with cash for closing (if they find a willing buyer) or they must walk away from the loan and give the house back to the bank either through foreclosure or through a deed-in-lieu of foreclosure.

The housing bubble that started to inflate in 2002 and burst in 2007 drove housing prices way out of the normal range. The normal ranges for housing prices track these measures:

* Income - The house price should not exceed three times your average household income, which was true from 1950 to 2000. In 2006 the average household income was $66,600, so the average home price should have been about $200,000. But during that year the average home price was about $300,000.

* Rent - Traditionally homes sold for about 20 times what it would cost to rent the home. In 2006 that number jumped to 32 times. Until prices fall back to the 20 times number we won't see stabilization of home prices.

* Appreciation - Between 1950 and 2000, the normal increase in home value was less than 0,5% per year after adjusting for inflation. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked at a 12.3% jump in 2005. Housing prices began to fall in 2006.

A nasty rumor is floating around that people should skip a few mortgage payments to get a better interest rate on their mortgage. While it's possible if you happen to have your mortgage with a bank under the new Fannie and Freddie program, you can't count on help.

When you stop making mortgage payments your credit rating will go down dramatically, impacting all of your loans and credit card rates.

We've been seeing a number of questions regarding mitigation services and whether to pay them $1,000 or more to help save a home from foreclosure. Most of these mitigation services are frauds. You not only could lose any money you pay them, you could also lose your house.

You don't need to pay for help to save your home. There are a number of excellent resources to tap that don't charge a fee.

If you're facing foreclosure, you're best first stop is the U.S HUD's "Guide to Avoiding Foreclosure." There you will find answers to many of your questions about foreclosure and how it works. You'll also find a link to a valuable resource - free HUD housing counselors, they can help you sought out your problem and point you in the right direction for help.

Another good place to get help is the Neighborhood Assistance Corporation of America's Home Save Program. NACA provides an effective solution for owner-occupant homeowners with an unaffordable mortgage. NACA's excellent program for restructuring mortgages is a permanent solution to reduce the interest rate and/or mortgage amount to a payment you can afford. You start the process by attending a workshop. All NACA services are free. If you are facing an auction, you'll find a special link for urgent response. They will try to suspend your auction to give you time to complete the NACA process.

A third good source for help is Hope Now. Hope now is an alliance between HUD approved counseling agents, servicers, investors and other mortgage market participants. All services provided by Hope Now are free and the sole purpose of this organization is to prevent foreclosures

Don't pay for foreclosure mitigation services when you can get them for free!

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and the "Complete Idiot's Guide to Improving Your Credit Score."

In Christopher Buckley's Thank You for Smoking, the main character, Nick Naylor, is a tobacco lobbyist. As his job pushes him to ever deeper levels of moral depravity, he repeatedly states, half-ironically, that he claims the Nuremberg defense: at the end of the day, he is "only following orders." After all, he, like everybody else, has to clothe his family, pay his mortgage, and put food on the table. If these responsibilities mean that his moral sense sometimes has to take a back seat, then such is life.

The trouble, of course, is that the Nuremberg defense didn't even work at Nuremberg, although it did inspire the U.S. military to state that its soldiers are allowed to refuse unlawful orders. This is particularly important as the mortgage crisis heats up. Over the next few months, more and more law enforcement officials will be called upon to evict people from their homes; some would argue (and, no doubt, will argue) that the rule of law and the economy require that evictions be carried out in a smooth and reliable manner. After all (as the reasoning goes) the stick of foreclosure and the carrot of a good credit score are necessary to force people to live up to their financial responsibilities. On the other hand, others will probably wonder if voters should be paying their law enforcement officials to be stormtroopers for a crumbling and poorly-run financial sector.

Tom Dart, Sheriff of Chicago's Cook County, recently took a stand on this issue, stating that his office will no longer "surprise tenants" with eviction orders. His argument is that landlords are often unable or unwilling to make mortgage payments, even though they are receiving rent. When this happens, the Sheriff's office is called in to forcibly evict innocent tenants. Dart claims that this is illegal, that the financial institutions are failing to perform their necessary due diligence, and that it exposes his office to legal liability. He notes that he has tried to institute reforms that would help him to connect renters to city social services and more strictly police banks, only to have these reforms blocked by financial lobbyists. In Dart's words, "We won't be doing the banks' work for them anymore." This may carry serious repercussions for Dart, who states that "I may be held in contempt of court over this [but] until the banking industry steps up and does the right thing, I won't continue to risk violating the law and open taxpayers to further liability."

It may seem odd to compare forcible evictions to the Holocaust, the Rwandan genocide, the Spanish Inquisition, or Cambodia's killing fields, yet every one of these tragedies was, in some level, the effect of a series of people who were all just following orders. I'm sure that, in the 1950's and '60's, there were law enforcement officials in the South who, while turning firehoses and German shepherds on protesters, found themselves wondering if they were still on the side of the angels. Luckily, while there will always be people who "just follow orders," there will also be the few who move beyond the strict boundaries of their jobs and find ways to maintain their humanity and morality. Here's hoping that Cook County will give Tom Dart the praise and support that he deserves!

Bruce Watson is a freelance writer, blogger, and all-around cheapskate. Once again, he's thanking his lucky stars that he didn't buy that house in Roanoke.

Ed McMahon has finally found a buyer for his multi-million dollar house avoiding foreclosure. Reportedly, his mortage lenders filed notice of default in Februrary when McMahon was over $644,00 in arrears. When McMahon was interviewed regarding his money woes, he blamed his financial problems on having broken his neck about 18 months ago, preventing him from working.

I certainly can empathize with health issues causing financial hardship, but where's the bucks? McMahon worked for over 30 years on the Tonight Show with Johnny Carson, was the host of Star Search and spokesperson for dozens of products. I repeat: "Where's the bucks?"

While several accounts connect McMahon's problems to the credit squeeze and U.S. housing downturn, I think it has a lot more to do with poor money management. At 85 years old, with a career that spanned decades, you would think that McMahon would be financial secure. But I have seen this before.

I got this email today (a good one) from a reader wanting to know who we should hold responsible for the mortgage "crisis."

Q: David: Can we hold our political leaders responsible for the financial crisis comprising misrepresented mortgage-based financial vehicles, like CDOs, derivatives, and other mortgage portfolio "packages" or is this so-called crisis just the by-product of a "natural" inclination of the mortgage market to correct itself in accord with principles of supply and demand? In other words, is there a specific group of humans culpable for this crisis?

A: Good question. Here's my answer.

The old adage, if 10 years ago makes for an adage, was to monitor your credit and close down any unused credit accounts. Before the advent of "instant" mortgage approvals and automated underwriting systems, loans were actually evaluated completely by a living, breathing human being: an underwriter.

When a borrower would make an application for a home loan, an underwriter would look at other credit accounts. Some that had a credit limit with a low or zero balance. If the potential borrower had any past history of running up his credit line to or beyond his credit limit, it would make an underwriter nervous. What if a borrower who was pushing his debt ratios to qualify for a home loan would suddenly go out and buy a boat, a new car and take a trip to Cozumel right after he closed on his mortgage loan? Suddenly that new homeowner might not have the ability to pay his brand new mortgage.

From another prudent point of view, having old, unused credit accounts simply should be canceled should anyone ever attempt to steal an identify or otherwise charge something on an old card. But that's old school. Here's the new school.

Many moons ago, we in the mortgage business would sometimes hear the phrase, "I've got terrible credit but my Uncle said he would co-sign for me" and we would put together a financing package that would allow the nice Uncle to appear on the loan with the person who had the bad credit.

Lenders understood that, just like other consumer loans, if something went awry with the mortgage loan they could come after the Uncle for payment. But not anymore and it's been that way for quite some time. Unfortunately, many consumers aren't aware of this lending rule.

Lenders will use the lower of the middle scores for each borrower. If the three credit bureaus report your scores as 589, 550 and 545, then the lender will the middle score for underwriting purposes. If the Uncle's three scores were 810, 779 and 766 the score for underwriting purposes would be 779. That's a great score. But there are some misconceptions about these scores, that lenders average them together or they use the highest one or they use the one who makes the most money and so on. The lender will use the lowest of the middle scores and if 550 is too low for an approval, then no-can-do. Misconceptions can cause a lot of heartache. What do do?

The first choice would be simply to wait, repair the negative credit items and wait for your credit scores to heal. Or second, the Uncle could buy the property as an investment home with you being on title. You don't have to be on a mortgage in order to be legally recorded as an owner of the property. Your name along with your Uncle's name will appear on the title report for all future generations to see.

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.