Real estate fix: Foreclosure report spurs housing recovery debate; FHA loans for high-end property

Home prices may be showing signs of stabilization in hard-hit markets such as Southern California but foreclosures will nevertheless likely be a major problem in the near term as the tough economy makes it harder for people to keep up on their payments.

The Mortgage Bankers Assn. said Thursday that the level of delinquencies and foreclosed homes in the U.S. had jumped to their highest levels since 1972, when the Washington-based lenders group began reporting the statistic. Check out our story here.

Combine that news with a report earlier this week from the Commerce Department that builders pulled back their construction of new homes in October, and the housing pessimists are out front and center arguing that residential real estate is headed for more trouble.

From Bloomberg News:

“I don’t think the housing crisis is over,” Mark Zandi, chief economist with Moody’s Economy.com, said in a telephone interview. “I think we’re going to see another leg down.”

And Calculated Risk quotes Goldman Sachs chief economist Jan Hatzius in a note to clients: A Renewed Sag in the Housing Market:

"Our current working assumption is a 5%-10% drop in home prices through the middle of 2010. ... house prices and credit quality ... to weigh on the US financial system, the availability of bank credit, and ultimately the pace of the economic recovery."

Plenty of others, of course, argue that the government’s efforts in propping up the market -- including Congress’ extension and expansion of the home-buyer tax credit and the Federal Reserve’s campaign to keep interest rates at rock-bottom levels -- along with the increase in affordability of homes will continue to stabilize the real estate market. But the debate is certainly stirring.

In more news, the (other) Times has an interesting tale of how the Federal Housing Administration is helping to prop up the market. It's a story about how one San Francisco man and a couple of his buddies went from broke to buying a two-unit apartment building that cost nearly a million dollars with a government-backed loan.

-- Alejandro Lazo

Pimco, Goldman dropped from Fed's mortgage-bond purchase program

The Federal Reserve Bank of New York plans to get along without the help of bond giant Pimco or Goldman Sachs Group as the central bank continues its massive purchases of mortgage-backed securities.

The New York Fed on Monday said it had "streamlined" its 8-month-old, $1.25-trillion program to buy mortgage bonds from four investment managers to two.

The bank is retaining Wellington Management Co. and BlackRock Inc., while Newport Beach-based Pimco (Pacific Investment Management Co.) and Goldman Sachs Asset Management will exit.

In a statement, the New York Fed said the changes were "not performance related."

The bank said it had "anticipated that it would make adjustments to its use of external investment managers as it gained more experience with the program. . . . The New York Fed is committed to implementing its programs in the most efficient and cost effective manner possible."

But the bank didn’t indicate why Wellington and BlackRock won out over Pimco and Goldman, or whether the latter two wanted out for some reason.

A Goldman spokeswoman said the firm had no comment. A Pimco spokesman couldn’t be reached.

The mammoth purchase program is aimed at keeping a lid on mortgage rates by providing a constant source of demand for home-loan-backed bonds issued by Fannie Mae, Freddie Mac and Ginnie Mae.

Bloomberg News calculates that based on the contracts the Fed had with Pimco and Goldman, they each stood to earn $7.8 million in fees per quarter once the Fed’s holdings of bonds reached $1 trillion. The Fed has purchased $742 billion of mortgage bonds so far, according to Bloomberg’s tally.

Pimco in July surprised Wall Street by dropping out of the running for the Treasury’s program of partnering with private money managers to buy rotting mortgage bonds from banks.

Some critics of the Fed and Treasury purchase programs have questioned whether participating money managers could benefit from inside information that would give them an edge in managing assets of their other clients.

-- Tom Petruno

Photo: The Federal Reserve Bank of New York. Credit: The Fed

U.S. raises home refi plan's loan-to-value ceiling to 125%

The Obama administration today eased eligibility rules for its Home Affordable Refinance Program, lifting the maximum loan-to-value ratio to 125% from 105%.

The shift, which regulators had hinted was coming, is aimed at making refinancing available to more homeowners whose homes are worth less than their mortgages.

HARP is open to homeowners whose loans are owned or guaranteed by Fannie Mae or Freddie Mac, the mortgage finance giants now under government control. It covers first mortgages only.

The refi program, launched this year, has gotten off to a slow start, in part because the maximum 105% loan-to-value ratio was too low to include many people whose homes have fallen sharply in value.

The new loan-to-value maximum of 125% means an eligible homeowner with a $375,000 mortgage could refi if his or her house is worth at least $300,000. But the borrower still would have to be able to afford the new loan, and income requirements are an increasing problem as unemployment soars and many workers are forced to take pay cuts.

Treasury Secretary Timothy F. Geithner said the move to raise the loan-to-value limit was "a crucial step in our broader efforts to get America's housing market and economy on the path to recovery."

But refi activity in general remains vexed by the jump in mortgage rates from their generational lows in April. Refi applications to lenders have tumbled since mid-May as rates have surged, according to Mortgage Bankers Assn. data. Despite a down tick in rates in the last two weeks, refi activity hasn’t rebounded.

-- Tom Petruno

Mortgage refi forecast slashed as loan rates rise

Citing the spring jump in long-term interest rates, the Mortgage Bankers Assn. is taking back the wildly optimistic forecast it made in March about home loan refinancings this year.

That will give Federal Reserve policymakers more to chew on as they gather in Washington on Tuesday for their first meeting of the summer.

The mortgage group said it now expected refinancing volumes to reach $1.3 trillion this year, down from the $2 trillion it had predicted just three months ago.

That means, of course, that a large number of homeowners won’t be realizing savings from cheaper mortgages.

MBA Chief Economist Jay Brinkmann said he scaled back the forecast because of the rebound in home loan rates, which have been pushed up by rising long-term Treasury bond yields. The average 30-year mortgage rate as tracked by Freddie Mac was 5.38% last week, up from 4.78% in late April.

Treasury bond yields have jumped amid the government’s record borrowing wave and as some investors sold Treasuries to buy stocks, commodities and other higher-risk investments. Although the Fed has been buying mortgage-backed bonds and Treasury bonds for its own portfolio this year, it hasn’t been able to keep a lid on long-term interest rates.

The Fed could end its meeting Wednesday by announcing that it will boost purchases of mortgage bonds and Treasuries, but many analysts believe that’s unlikely.

The mortgage group said its pared forecast for refinancings also reflected the very slow start to the government’s Home Affordable Refinance Program (HARP) for loans held or guaranteed by  Fannie Mae and Freddie Mac. The plan is aimed at homeowners whose mortgages exceed their property values by as much as 5%.

That still leaves too many underwater homeowners shut out of refinancing, critics of the program say. The chief regulator of Fannie and Freddie suggested last week that to boost participation in the program, the maximum loan-to-value ratio for HARP refinancings might rise as high as 125% from the current 105%.

-- Tom Petruno

Photo: The Federal Reserve building in Washington.

FHA loan program at risk as demand soars, watchdog says

A U.S. watchdog warned today that surging mortgage loan demand is threatening to overburden the Federal Housing Administration, raising the risk of higher fraud-related losses.

From Bloomberg News:

Record-high demand for government-backed home loans is overtaxing the Federal Housing Administration and may weaken the integrity of Ginnie Mae mortgage bonds, a U.S. inspector general said.

"FHA will be challenged to handle its expanded workload or new programs that require the agency to take on riskier loans than it historically has had in its portfolio," Kenneth Donohue, the inspector general for the Housing and Urban Development Department, told lawmakers today. "The surge in FHA loans is likely to overtax the oversight resources of FHA, making careful and comprehensive lender monitoring difficult."

The freeze in the mortgage markets has driven FHA’s market share to 63% this year, from 24% in the fiscal year ended Sept. 30, Donohue told a House Financial Services Committee panel on Oversight and Investigations.

FHA has historically been most vulnerable to fraud and exploitation when loan volume is high, Donohue said. He said that Ginnie Mae, the government agency that insures mortgage bonds backed by FHA loans, is also at risk.

Nearly 7.4% of FHA loans were "seriously delinquent" at the end of the first quarter, meaning they were 90 days or more past due or in foreclosure, according to the Mortgage Bankers Assn. That compares with a 4.7% seriously delinquent rate for prime mortgage loans and 25% for subprime loans.

More from the hearing:

Donohue said the rise of mortgage fraud among FHA lenders has depleted FHA’s mortgage insurance fund, which has fallen to $12.9 billion, or 2% of all insured assets as of Sept. 30, from $21 billion, or 6.4% of assets a year earlier. Under some economic projections, that ratio could fall below the statutory requirement of 2%, requiring taxpayer assistance or an increase in premiums, he said.

-- Tom Petruno

 

A tale of a debt binge, told by a man who knew better

Plenty of post-mortems on the mortgage debt debacle have focused on people who claim they didn’t know what they were getting into.

Now one of the country’s top economics writers explains how even otherwise intelligent people went deep into the hole. The kicker: He writes from personal experience.

The New York Times’ Edmund L. Andrews, who covers the Federal Reserve for the paper, bares his personal debt catastrophe in a new book, "Busted: Life Inside the Great Mortgage Meltdown."

From a lengthy excerpt published in the Times:

In 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others -- borrowers, lenders and the Wall Street dealmakers behind them -- I just thought I could beat the odds.

Looking to buy a house in suburban Washington, D.C., with his second wife, Andrews was stunned to find out that they could qualify for a $500,000 mortgage, despite their modest take-home pay after Andrews’ monthly alimony payments.

What they got was a "liar’s loan" -- a mortgage based on whatever Andrews wanted to tell the lender, which wasn’t much.

Andrews writes:

As I walked out of the settlement office with my loan papers, I couldn’t shake the sense of having just done something bad . . . but also kind of cool. I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun. I couldn’t help feeling like a high roller, a sophisticated player who could lay his hands on big money at a moment’s notice. Despite my nagging anxiety about the gamble that Patty and I were taking, I had whipped through the pile of loan documents in less than 45 minutes.

The story just gets better from there. I won’t give away the ending.

Go here for the full excerpt.

-- Tom Petruno

U.S. offers 1% second-mortgage rates via modification plan

The Obama administration is trying yet another program to stem home foreclosures -- this time by offering lenders incentives to cut payments on second mortgages.

The taxpayer-funded plan aims to slash second-mortgage interest rates to as low as 1% for the next five years for qualifying borrowers.

The Treasury said the program would work in tandem with the Making Home Affordable plan it launched in February, which focused on incentives to get lenders to modify first mortgages for people who have a fighting chance of holding on to their homes.

The problem for many distressed homeowners is that they have both first and second mortgages -- and can’t afford either. Treasury now wants lenders and loan servicers to agree to modify both loans as part of a "comprehensive" solution.

"Up to 50% of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien," Treasury said in its announcement today.

Under the new program, the government would share lenders’ cost of reducing second-mortgage interest rates. For second-mortgage loans that amortize (those with monthly payments that include principal and interest) the loan rate would be cut to 1% for five years. For interest-only loans the rate would be cut to 2%.

The fact sheet for the program is here.

Lenders also could opt to forgive a second mortgage entirely in exchange for a one-time government payment.

The Treasury estimated the plan could help up to 1.5 million second-mortgage borrowers, although it didn’t say how it arrived at that number.

In one example the Treasury provided, a homeowner with a $44,000 second-mortgage loan at 8.6% would see his monthly payment slashed from $349 to $155 with the new rate at 1%, for an annual savings of $2,336.

The risk with the new program: After five years, loan rates would step up again. This could be just another case of delaying foreclosure, not preventing it.

-- Tom Petruno

Photo credit: Brian Vander Brug / Los Angeles Times

Negative home equity nationwide: Ugly, and getting uglier

In sheer numbers, California and Florida are the West Coast and East Coast ground zeroes for underwater homeowners. But the horror of negative equity is spreading faster inland, a new study says.

The Calculated Risk blog has a great chart showing the percentage of mortgaged homes with negative equity in 43 states and the District of Columbia, as well as the percentage almost underwater -- defined as homes estimated to have less than 5% equity. Click here for the blog post and chart.

The data come from real estate tracker First American CoreLogic.

"Going forward, the largest increases in the share of negative equity will most likely occur in states that have not yet experienced deep declines" in home prices, First American says. "The reason: the boom/bust states already have very high negative equity shares and incremental declines in home prices will result in smaller negative equity share increases relative to other states given the same decline in prices.

"This means that as prices continue to decline in 2009, the rise in the negative equity share of states outside the boom/bust regions will begin to accelerate more quickly relative to the boom/bust states."

This assumes, of course, that home prices don’t stabilize soon.

Between a spreading wipeout of home equity and the continuing devastation of Americans’ stock portfolios, the government’s $787-billion economic-stimulus program is trying to make up for a loss of wealth many times that size -- and growing.

The U.S. stock market’s value alone has shrunk by $2.6 trillion just since Jan. 1, according to Wilshire Associates.

-- Tom Petruno

Don't they mean, 'Honk if I'M paying YOUR mortgage'?

I'm not sure the anti-housing-bailout camp really thought this one through.

The Tennessee Republican Party last week began selling the bumper sticker shown below. The party website says the sticker is "designed to let people express their frustration with the relentless march by the Obama administration and the out-of-control Democrat Congress to enact endless 'bailouts' and 'economic stimulus' packages that are pushing America trillions of dollars deeper into debt."

Uh, OK. But if I've got one of these on my bumper, doesn't that suggest to the unaware that I'm a bailout beneficiary -- and proud of it?

Isn't that just asking for my tires to be slashed?

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-- Tom Petruno

New rush to modify home loans raises 'moral hazard' issue

How far would people go to get better terms on their mortgage?

Would you feign financial trouble to qualify for a loan-modification plan?

As the government and private lenders face more pressure to aid struggling borrowers in a worsening economy, they’ll inevitably have to deal with the "moral hazard" issue: They may be encouraging applications for help from people who could otherwise scrape by without assistance.

On Tuesday the Treasury announced a new loan-modification effort for mortgages held by Fannie Mae and Freddie Mac, which the government took over in September.

My colleague Maura Reynolds describes the program in this story. Basically, the plan would reduce a homeowner’s payment to no more than 38% of monthly gross income, by cutting the interest rate, deferring payments or extending the loan term.

To pre-qualify, a homeowner would have to miss at least three loan payments and must still be solvent, at least in theory (i.e., you can’t have filed for bankruptcy protection). Apparently, your loan would have to be for at least 90% of your home’s value.

See more of the plan's specifics here. (There's a Q&A on pages 4 to 7.)

As usual with these programs, the onus is on the borrower to contact the lender, to see what can be worked out.

Brian Montgomery, assistant secretary of Housing and Urban Development, insisted in a statement that loan modifications under the Fannie Mae/Freddie Mac program "are not a gift." A principal reduction on the front end of a loan, he said, would be repaid at the end of the loan. "This is not loan forgiveness; the loans will be paid, but under terms that are affordable to borrowers."

But if a loan's interest rate is reduced, the loan holder (in this case, Fannie or Freddie, and therefore taxpayers) would be forgiving part of the expected return on the mortgage, unless the interest savings were added to the loan principal.

Is there really a big moral-hazard risk in this plan?

If you believe that many people will try to cheat their way to a modification, you will be interested in the views of the well-known libertarian investment manager Peter Schiff of Euro Pacific Capital.

Here’s his take, which he sent by e-mail Tuesday:

By offering to reduce mortgage payments to 38% of household income for homeowners who are 90 days delinquent, the mortgage program announced today will spark a new wave of delinquencies. In a classic case of unintended consequences, the plan will encourage homeowners to rearrange their finances to qualify for the benefit. Those who could conceivably economize to meet their existing obligations will now have a strong reason to forgo such sacrifices.

The intentional reduction of income is also a possibility. In many cases dual-income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work-related expenses will likely exceed the after-tax value of the lost paycheck.

It may also be tempting for some homeowners to temporarily quit high-paying jobs, or delay job searches, and accept low-paying jobs while the creditors consider their fate. Once their mortgage payments have been modified to fit their diminished incomes, these homeowners would then be free to pursue better-paying jobs. With mortgage payments reduced to a fraction of their prior payments, these workers will have much more employment flexibility than those foolishly struggling to meet non-modified mortgages.

Way too cynical a view?

And even if some people are going to cheat  -- as some obviously did to qualify for their mortgage in the first place -- do lenders really have any choice but to get more aggressive with loan modifications rather than risk an even bigger wave of foreclosures?

Photo credit: Damian Dovarganes / Associated Press