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Want to know the current state of home ownership? Consider this February 2010 report from a real estate analytics firm, a division of First American Insurance:

First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near?negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.

That’s a lot of people with negative equity or, to use the colloquialism, whose mortgages are “upside-down” or “underwater.” What happens when you owe more on something than it’s worth? Your pride of ownership is diminished, certainly. And we’re really only talking about two things where this applies: houses and cars. We can buy stock and have it lose value, but stocks have more liquidity, so we can sell them quickly. We expect cars to depreciate, so that’s no big deal (if you feel that way, lease them).

But homes — that’s a different story. We expect homes to appreciate, whether they’re our primary residence or an investment. So what happens when almost a third of mortgaged properties stop meeting their owners’ expectations? The First American CoreLogic report cites an interesting observation: when negative equity reaches 25% or $70,000, people begin to behave not like homeowners but like investors who don’t want to pay for a declining asset any longer. They stop making payments and walk away.

That’s a lot of people potentially giving up on the American Dream of a safe harbor, a place to raise a family, a place tightly woven into the concept of controlling one’s own destiny. If you own your home, you can’t be evicted, and your lives and those of your children disrupted. Your rent can’t be raised exorbitantly. You get a mortgage deduction (this year, anyway). You get equity (usually) over the long term.

That’s really the key phrase: over the long term. People who walk away from a mortgage clearly have no appreciation of the long term. Not only do they not believe in it relating to the value of their property, but they also ignore the long-term ramifications of their actions on other facets of their life.

They forfeit their down payment and any other payments they’ve made. They forfeit any opportunity to see the value rise. But there’s more. You want underwater? Walking away from a payment commitment is like drowning your credit rating for seven to ten years. Your credit rating isn’t just something people look at when you want to buy another house when the economy turns around in the future; it’s something they look at when you buy a car, an appliance, apply for a credit card, or even rent an apartment.

There’s more: with the easy accessibility of credit reports, employers are using them more frequently to make hiring decisions. It doesn’t even matter if you’re going to be handling money; employers look at credit ratings and payment histories as a reflection of trustworthiness and stability.

In a country nurtured on instant gratification, patience is not a virtue highly valued. But in this scenario, people must begin to value it, at the risk of devaluing — no, crippling — their future opportunities.

A California-born colleague of mine tells the story of being completely befuddled in a North Carolina ice cream parlor many years ago. The girl behind the counter was asking him a simple question. But because of both her thick accent and the words she was using, it took him a while to realize she was asking, “One dip or two?” A “dip” to her was a “scoop” to him.

I had the same reaction this week dealing with a Realtor in Des Moines, Iowa, where DBNR has a distressed property on 11^th St. that we’re selling. The Realtor is representing us on the 5BR, 1BA (believe it or not) 1,400-square-foot gabled house with porch and basement. It was a bank foreclosure that was transferred first to the middlemen from whom we purchased our cluster of distressed properties and then to DBNR.

We’ve gone through several rounds of negotiations around commission and closing costs because the price is so low, and I thought those would be the most of our aggravations on this property. I was wrong. In a phone conversation last week, the Realtor asked me where the abstract to the house was. That was my “one dip or two” moment, because I had no idea what an abstract was.

I’ve learned working with distressed properties across the U.S. that I’ve grown remarkably comfortable in the bubble of local Silicon Valley real estate. Whatever vagaries we have to deal with out there, I’ve long since grown used to them. I’d forgotten that lots of other places of vagaries too. In Iowa, it’s the concept of an “abstract of title.”

Apparently, a long time ago, the lawyers in Iowa pushed through legislation that forbid the use of title insurance, substituting a regulation in which real-estate lawyers draw up abstracts confirming the transfer of ownership. Whenever the title to a house is transferred, another page is added to the abstract, which is a physical sheaf of papers that stays with the house and is handed from owner to owner. The older the house, the thicker the stack of papers. It’s up to the homeowner to figure out whether to keep them in a binder, or a manila folder, or a box. Technically, if you don’t have the abstract, you can’t own the house.

But as you know, the bank foreclosed on the owners. This wasn’t a friendly transaction where one happy home seller handed off the keys to the house to another happy home buyer with their real estate agents beaming in the background, a scene where the abstract would presumably handed off as well. And DBNR was three owners later. Where was the abstract, indeed?

As it turns out, we did a little research and discovered that just because the state doesn’t have title insurance doesn’t mean it doesn’t have title companies. It’s not so antediluvian that the state doesn’t require copies of the abstract to be filed with the state. A title search — though expensive — can be done and a copy of the abstract ordered. (And yes, we would have expected a Realtor in Iowa to know that.)

But for a while there, we were wondering how we were going to lay our hands on this obscure document that could have been anywhere between here and Des Moines. Life is very educational when you get a glimpse of what’s going on outside your bubble.

If the title of this post sounds vaguely familiar, it’s because it’s from a song in the 1958 Broadway musical Flower Drum Song. It predates “Kids” from Bye Bye Birdie, but had the same sentiments.

However, I’m not complaining about the younger generation; I’m worrying about them. Not surprisingly, these concerns blossomed after a call this morning from my 33-year-old daughter. She lives with her spouse and two children in a two-bedroom rented duet home (one that has one common wall). With housing prices potentially bottoming out, she was asking about her options in terms of moving into home ownership.

This got me thinking about all the post-Boomer generation, colloquially known as Generation X (or the “baby bust” for their lower numbers), born between 1961 and 1981. My daughter was born in 1976. What are her peers’ options for home ownership, especially in light of so many economic shifts? For example:

Down payments. Because of new qualification criteria, it takes a lot bigger down payment to get into property these days.

Employment issues. The downturn has impacted employment in a devastating way. Families that used to have two incomes are down to one. For the most part, people are making do, but are not saving a lot. Plus acceptable forms and proof of what income they have has gotten more difficult to produce.

Parental problems. Down payments in the past used to come from what were jokingly called “GI loans,” where GI stood for “generous in-laws.” But now many parents, having lost their nest eggs in the stock market or declining real estate values, are in no position to help out.

Aggravating the situation is the fact that (my daughter excepted, of course) we have raised a generation of kids accustomed to instant gratification. The idea of saving for something and going without is as foreign to them as Studebakers.

The outlook is not completely grim. As with most difficult situations, I believe we’ll come up with creative solutions.

Rent. This may be the simplest option. With more single-family homes sitting empty, housing rental (as opposed to apartments) may increase. If the federal government rescinds the mortgage deduction to boost tax revenues, this option may become even more attractive.

Lease or co-ownership options. Lease options or rent-to-own options popped up in the 1980s when interest rates were appallingly high. Essentially, you rented the property with an option to buy, and the cost of the option was computed into your rental payments. At the end of say, three years, assuming you’d made all the payments, your option was converted into a down payment.

This arrangement has its drawbacks, of course — you end up with a higher monthly payment than if you’re simply renting; you have to be confident that the place you’re in is the one you want to buy; you have to be confident that your employment will stay in that area; and it’s not always easy to know what the value of a home might be three years hence.

Equity sharing. This is akin to co-ownership, where somebody owns the house and you set up an agreement with them that you’ll eventually share ownership as well. This probably works best between family members; otherwise, it’s a partnership, and in my mind, those are the only ships guaranteed to sink.

Regardless of what happens, I have one strong recommendation for Generation X: stop spending what you don’t have and start saving what you do. You don’t know the economic future, but I maintain that it’s always better to be master of your real-estate destiny.

A Catch-22, as defined by author Joseph Heller in his famous novel, is an unsolvable paradox of logic. As we approach the 50^th anniversary of Heller’s novel in 2011, those paradoxes show no sign of abating.

For example, consider the number of people with underwater mortgages. These are not necessarily people in danger of being foreclosed; they are simply people who bought at the wrong time for the wrong amount, whose houses are worth considerably less than the mortgage being serviced.

According to a February 3, 2010 article in The New York Times http://www.nytimes.com/2010/02/03/business/03walk.html, more people are ignoring both the potential impact on their credit scores and the possibility of a market turnaround, and simply walking away from their homes. They’re asking, why should I keep paying for an asset that’s worth less than I paid for it? If this trend continues, there’s going to be a second disastrous wave of empty homes, creating problems for banks and municipalities alike.

However, this is America, and in America, we like solving problems. Here at DBNR, we’ve become affiliated with a company called RescueRefi. Let’s look at how it works, using the example of one of my clients who has three rental properties, all of which are underwater. For one of them, in Riverside, Calif., he paid $637,000, but it’s now only worth $325,000. His remaining mortgage: $560,000.

The goal of RescueRefi is to reduce the principal of the loan, which in this case would be a $290,000 loan; it charges interest rates of prime + 3 percent (+ 4 percent for people with poorer credit ratings). RescueRefi charges a non-refundable fee of $1600.

What happens? The homeowner lowers his loan amount and his payment, the city of Riverside has to lower his taxes, and he now has 10% equity in the property. RescueRefi pays off the old mortgage at a significantly reduced rate, and gets the income from the new mortgage payments. The original lender avoids having to foreclose and resell a property with significantly reduced value.

Back to the Catch-22. The first problem is that RescueRefi is managed by a hedge fund, and many people blame the derivative-happy hedge funds for causing parts of this financial crisis in the first place. The second problem is that the hedge fund is a private company; there are no SEC statements or reports available to confirm its funding, its validity, or even the identify of its executives (to do this, one would have to hire someone to check its Certificate of Incorporation in its home state). As an affiliate of theirs, I can only conduct so much due diligence in order to convince my client that they’re legitimate. Their name is beginning to show up on sites devoted to scams, but only in the context of people asking if anyone else knows who they are. There are testimonials on its Web site, but anyone can write a testimonial.

This is the sad state we have arrived at in this crisis. Hank Paulson and Alan Greenspan have gone on Meet The Press and said that the government can’t make any further financial commitments to solve the housing crisis; it’s in the hands of the private sector. A lot of people are in need of assistance to reduce their expenses and the threat of foreclosure. A company in the private sector has stepped up, but no one knows whether they’re trustworthy or not. We have reached a point where an industry that thrives on trust no longer has any.

Now that the barn door is open and the horses have galloped off into a landscape of foreclosed homes, the U.S. Department of Housing and Urban Development has developed guidelines to help people more aware that they’re entering into dubious mortgage arrangements.

The Real Estate Settlement Procedures Act www.hud.gov/offices/hsg/ramh/res/respa_hm.cfm) took effect on January 1, and represents a whole new set of guidelines lenders must follow in order to keep consumers from doing stupid things and avoiding common sense entirely. Part of RESPA is the requirement that lenders deliver a new four-page good-faith estimate about the costs of a mortgage. In response to the government tradition of trying to bring simplicity to finance, Wells Fargo has issued a 35-page document to help brokers understand the four-page form.

I’m not going to come out against consumer protection, but these changes are doubling or maybe even tripling the workload of real-estate financing professionals. It’s not clear who’s going to pay for this added administrative time, though it’s likely that it’ll be taken care of by higher, hidden fees. Then the vicious circle will continue: the government will require another form to explain the hidden fees. The lender will have to have still another form for borrowers to sign saying that they have been given the hidden-free form and understands what that form explains.

Where does this extra work come from? We used to be able to get a good-faith estimate of costs at the beginning of a client’s search for a home. It was always helpful to give the client a sense of what kind of property to look for. Now RESPA requires one form at the beginning of the process, and another good-faith estimate when there’s a property in sight. And that good-faith estimate must be within a small percentage of the final cost, or the lender is out of compliance. This makes one wonder, then, why it’s called an estimate.

It’s a merry-go-round. Consumers do stupid things, like applying for no-money-down, interest-only loans, in the expectation that their property value will rise. Economic laws kick in, bringing down the house of cards, and the government comes along trying to fix a problem that’s already taken place. It asks for more forms and more signatures from consumers who still don’t know what they’re signing; they just look to their real-estate professionals, who confirm that if they don’t sign the form, they can’t get the loan. Those two-hour hand-cramping signing sessions are just going to get longer.

As longtime readers of this blog know, my goal for DBNR Investments has been simple: to put people into homes who want them, can afford them, and will improve their situation in life through home ownership. Without apology, there is more than a little altruism there, a throwback to the philosophy espoused in that Christmas classic It’s A Wonderful Life.

I believe, as Jimmy Stewart’s character George Bailey did, that at the heart of all our actions is simple human decency, however you characterize it - as a concern for humanity or the planet or people or just making a difference.

In this business, however, that philosophy sometimes collides with another strong American philosophy, capitalism. (Or, as it was described in that other Christmas classic, Miracle on 34^th Street, “Make a buck, make a buck, don’t worry about the other guy.”)

Don’t get me wrong - I have a strong profit incentive here, and my commitment to getting property back into the hands of people who need it is carefully balanced with the profitability that a business and its investors require.

But what I’ve been noticing recently - perhaps in counterpoint to the holiday season just passed - is that the conversations I’m having with potential buyers relate more to the idea of revenue and profitability than with our original goal. I understand that, but I miss the background element that I had hoped would drive the conversation. I’m looking for George Bailey and the people I’m meeting are Mr. Potter, the money-grubbing skinflint of Bedford Falls. I worry that we are losing sight of what we’ve committed to.

I’m looking for that same altruism in my colleagues as well. I was talking to my brother, who’s doing some sales work for us. He and I are a lot alike. While we acknowledged that there has to be some income for him to continue with this project, given how much time it takes, we also agreed that you don’t get wealthy simply by looking for ways to generate money. You get wealthy doing the work you’re passionate about, and that’s what pays you well. He’s going to continue, of course, because he believes. As Natalie Wood said in Miracle on 34^th Street, “I believe. I believe. I know it’s silly, but I believe.” She was talking about Santa Claus, but the theory still holds.

As the new year dawns, I’m going to keep believing, keep having faith, and keep looking for the George Bailey in everyone.

The late Speaker of the House Tip O’Neill used to say, “All politics is local.” That used to be true about the real estate industry too. In order to make investments, you needed a local expert, someone who understood the market and could guide your way.

The evidence continues to mount that the world is changing in that regard. I’ve talked frequently about the increasing number of opportunities for private individuals to invest in real estate anywhere, circumventing the need for assistance from traditional players in the real estate and financial community.

Part of it is, of course, the reach of the Internet, and the ability of anyone to track comparative housing prices through sites like Zillow, Cyberhomes, Eppraisal, Realtor.com, or to check advertising in multiple cities through sites like Craig’s List or Backpage. But that’s not all — low-cost travel through airlines such as Southwest is changing the landscape too.

Let me use just one woman I spoke to as an example. She was from Maryland, and had called regarding a property we have in Syracuse. She told me she had 15 properties in various states, though primarily in New York, Florida, and Ohio. The properties represented $1.2 million in property value and about $9,000 in monthly income (so-called “passive income,” the amount she gets after paying the mortgages). She wanted to know more about the property because she was flying to Syracuse to look at it the following day.

This is how she spends her time — talking to people in real estate, especially in the areas where she wants to invest, and traveling to see the properties herself. She ended up not pursuing the Syracuse property because it didn’t match the parameters she’s set for her investments. She calculated that it would have a market value after repair of $50,000 in the current market conditions, but that it would take as much as $25,000 for those repairs. Though we paid $7,000 for it, we were going to sell it for around $12,000. She said she likes to have no more than 70% of current value invested, so she passed. But she wants to stay in touch with us.

This woman and people like her are changing real estate investing. Now, you still have to have a title company involved to make sure title is transferred properly, and you need to know about the regulations real estate agents are familiar with. But by taking real estate agents out of the mix, you can save anywhere from 6-10% of your costs. Add to that the opportunity of finding growth areas beyond your own back yard, and the opportunities are staggering.

One of the hardest parts about starting a business, I’ve learned over this past year, is balancing the mundane with the mission.

The mission, of course, is being successful. To achieve this, we’re engaging in planning sessions for 2010, setting strategies and mapping milestones. Our goal for 2010: becoming wildly profitable.

Unfortunately, most small businesses don’t do this. It’s difficult to keep your eyes on the horizon because the items on your desk need attention too. Each one is a distraction to the other, but each is necessary. Admittedly, sometimes I get bogged down in my little to-do list. All of those items are important, relevant, and need their space and my time. And if I don’t focus on them, the whole never makes it into existence.

But we do set aside time for strategy twice a week. My partner Bob and I will frequently have conversations over lunch, but it’s something I need to put on my calendar, so I’m committed to it.

Even more difficult for small businesses, however, is the concept of flexibility. They frequently need to shift their strategy, tweak their tactics, and then communicate that to the rest of the staff. As situations evolve differently than we anticipated, we then face the question: what now?

If we ignore reality, we may suffer financially. If we incorporate the new reality into our tactics poorly, the business becomes a mish-mash with no real purpose. Such situations must be addressed.

But that’s the way life occurs in its natural habitat. It never goes as expected. There are unimaginable variables. Real leaders — which we’re learning to become — have the ability to flex with what happens, keep moving, and maintain their eyes on the far horizon. When life goes a different way, alter the plan and keep on going.

New York Times columnist Thomas Friedman frequently talks about how technology has “flattened” the world, which both makes connections easier and business models more fragile. This is nowhere more true than it is in residential real estate, which used to be local and, thanks to distressed property programs such as ours, is now shifting toward something broader.

But even in an electronic world, when all you face is a computer screen and all you hear over a telephone line or a Skype connection is a disembodied voice, participants must trust who they’re dealing with. I’ve made some interesting connections this past week that show both the potential and the pitfalls of this new flat world.

As regular readers know, I participate frequently in the forums of a Web site called BiggerPockets.com, a social networking site for real estate investors. I got a call from another member on the site, a young man with a South American accent but clearly fluent in English. He has a bachelor’s degree from San Francisco State in business administration, and like me, has worked in both real estate and as a mortgage broker. He has big dreams, and he’s savvy about the Web.

He unabashedly told me he was intrigued by what DBNR Investments is doing and asked if I would be his mentor. Although I usually associate the word mentor with someone who’s a celebrity in one’s field, I realized doing that has some of the same characteristics as being a coach, which I’ve certainly done before. However, I’ve always charged for coaching services; I’ve never known anyone to charge for being a mentor.

It’s conceivable that I could be teaching this young man everything I’ve learned over the past few years, only to find out that he’s struck out on his own and become a competitor.

The second connection came from one of those unsolicited e-mails that pop up in your electronic in-box with annoying regularity. But this one was intriguing. It was from someone in Las Vegas offering assistance in navigating the morass of grants and loans the federal government was offering small businesses for the acquisition of assets — including real estate.

I spent 15 minutes on the phone with this person, who turned out to be a grant writer. He offered no promises regarding the money, only his assistance in navigating the nightmare of red tape that was potentially involved.

Will working with each of these individuals be sinkholes of time and effort that will come to naught? I don’t know. I do know that the structure for trusting people is the same whether the world is flat or you never venture out of your neighborhood. I converse with them. I take notes. I compare their ideas to others I’ve talked to. Are their ideas concise and logical? Do they have conviction about what they’re doing? Are they confident about their skills? Most important, do they deliver what they say they will?

I consider establishing a connection with these people a low-risk effort. Finding connections in the business world may come from longer distances and be stranger than ever before, but over time, when both sides deliver on what they said they will, trust will always develop.