Residential Vacancies Rise in Third Quarter

The number of empty homes in the United States – including foreclosures, residences for sale, and vacation properties – rose during the third quarter, according to data released by the U.S. Census Bureau Thursday.

There were a total of 18.8 million vacant homes scattered across the country during the three-month period, the federal agency reported. That number is up from 18.7 million during the previous quarter and 18.4 million during the third quarter of 2008.

The record high for vacancies was hit in the first quarter of this year, when 18.95 million homes sat empty.

The Census Bureau lumps foreclosure vacancies together with vacation homes that are typically used year-round but empty, and properties that are unoccupied because they are the focus of a legal dispute. The federal agency documented 7.7 million of the homes in this group as vacant during the third quarter, up from 7.5 million a year ago.

For third quarter 2009, the regional homeowner vacancy rate was highest in the South, at 2.8 percent. In the Midwest, 2.6 percent of homes were empty, while in the West, that figure dropped to 2.4 percent. The Northeast part of the country had the lowest homeowner vacancy rate, at 2.0 percent.

Citing the census study, Bloomberg News reported that in total, there were 130.3 million homes in the United States in the third quarter.

Foreclosure Hot Spots Claim New Metros

Cities in California, Florida, and Nevada are still home to the 10 metro areas with the highest foreclosure rates, according to a new report released Wednesday by RealtyTrac.

But rising unemployment and a new round of mortgage resets have initiated a gradual shift in the nation’s foreclosure epicenters, away from the hot spots of the last two years, toward cities that, until now, could claim relatively small foreclosure numbers.

Based on RealtyTrac’s Q3 2009 Metropolitan Foreclosure Market Report, five of those top 10 metro areas in the Sand States reported decreasing foreclosure activity compared to the same time last year, while other metro areas in the top 50 reported especially sharp increases in foreclosure filings.

“While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A Option ARMs are spreading the foreclosure flood to more metro areas in 2009,” commented James J. Saccacio, CEO of RealtyTrac.

RealtyTrac’s market data shows that the three biggest year-over-year foreclosure increases popped up in Boise City-Nampa, Idaho, and Provo-Orem and Salt Lake City in Utah.

In California, the Chico metro area – not previously a focal point for foreclosure activity in the Golden State – posted the biggest year-over-year jump, with a 98 percent increase from the third quarter of 2008. The medium-sized metro about 100 miles north of Sacramento had a 12.8 percent unemployment rate in August, above the state and national averages.

A similar trend was seen in cities like Reno-Sparks, Nevada, with 80 percent year-over-year growth in foreclosure activity; Prescott, Arizona, where foreclosures are up 77 percent; and Jacksonville, Florida, posting a 64 percent increase. Rockford, Illinois also reported a 64 percent upsurge in foreclosures, and Lansing-East Lansing, Michigan posted a 41 percent increase.

Even though the foreclosure crisis seems to be dispersing, the usual suspects are far from out of the woods.

Las Vegas posted the nation’s highest metro foreclosure rate, with one in every 20 homes in Sin City receiving a foreclosure filing last quarter – an increase of nearly 9 percent from the previous quarter and up nearly 54 percent from the third quarter of 2008.

Despite a 13 percent decrease in foreclosure activity from the previous quarter and a 11 percent decline from a year ago, Merced, California posted the nation’s second highest foreclosure rate, with one in 27 of its housing units in foreclosure during the third quarter.

Foreclosure activity in the Cape Coral-Fort Myers metro area in Florida also decreased from the previous quarter and from the third quarter of 2008, but the metro area still registered the nation’s third highest foreclosure rate.

Fannie Offers Mortgage Forbearance to Real Estate Investors

Mortgage giant Fannie Mae said this week that it will retire its HomeSaver Forbearance (HSF) program and replace it with a new Payment Reduction Plan (PRP), which will extend the benefit to investors and owners of second homes.

Under HSF, which was introduced by the GSE in February of last year, mortgage payments can be reduced for up to six months for owner-occupants having trouble meeting their financial obligation. The PRP would make the same kind of mortgage relief available to property owners who do not live in the home.

The purpose of a PRP is to provide a borrower with temporary payment relief while the servicer and the borrower work together to find the appropriate permanent foreclosure prevention solution, Fannie said.

The GSE said servicers should first determine if a troubled borrower is eligible for the Home Affordable Modification Program (HAMP), but since property investors and second-home owners off-the-bat do not qualify for the government program, Fannie is hoping to offer them “new options of support” through the new PRP initiative.

Besides opening the benefit up to investors, the one significant difference between the two programs is that under HSF, the homeowner’s payments could be reduced by 50 percent. With PRP, however, the break is only 30 percent.

Servicers will be paid $200 for employing the new forbearance program upon the mortgage loan being brought to a permanent foreclosure prevention solution. This amount is in addition to the fee paid for the solution reached.

The HomeSaver Forbearance program will be officially terminated October 31, 2009.

GSEs' Regulator Reports Drop in Home Prices

U.S. home prices fell 0.3 percent from July to August, the Federal Housing Finance Agency (FHFA) said Thursday. The decline breaks a three-month streak of gains in the agency’s measurement of national housing prices.

For the 12 months ending in August, FHFA says home prices are down 3.6 percent, compared to the 12 months prior. Based on the agency’s market data, the U.S. index currently sits 10.7 percent below its April 2007 peak.

Only four of the nine census divisions in the regulator’s survey saw price increases in August. Home prices gained 1.2 percent in the Pacific, 0.8 percent in the Mountain region, 0.4 percent in the East South Central part of the country, and 0.2 percent in the West North Central.

Prices were flat in the West South Central, while falling 0.6 percent in both the Middle Atlantic and East North Central regions, 1.1 percent in New England, and 1.6 percent in the South Atlantic.

The FHFA’s monthly House Price Index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac.

MBA Conference Attendees Blame Unemployment for Slow Mods, Slow Recovery

Whether they were put on the defensive by charges of inaction or whether they were simply telling it as it is, executives at the Mortgage Bankers Association annual conference in San Diego this week spoke with one voice when explaining why loan modifications weren’t happening faster – and weren’t helping the economy all that much.

It’s the unemployment, stupid.

Since before the federal government instituted its own plan with lenders and servicers to modify loans for troubled homeowners, the servicers have been under fire for not doing enough to keep struggling borrowers in their homes. But now the servicers are fighting back, saying that all of their best efforts can’t speed the recovery if the U.S. continues to flirt with double-digit unemployment rates.

“We will be dealing with a different kind of borrower,” MBA president John Courson said at his group’s conference. In effect, he was saying that a borrower’s mortgage terms mattered far less than his or her ability to stay employed, married and healthy.

But the government’s Home Affordable Modification Program “just doesn’t work for these people,” Courson told reporters. “You can’t go to 31 percent if there is no income,” he said, referring to a HAMP rule that requires a borrower’s mortgage debt not exceed 31 percent of his or her wages.

Also at the conference Tuesday, the MBA’s chief economist Jay Brinkman said unemployment likely would continue to rise above 10 percent through next summer, and delinquencies would continue to rocket through the end of 2010.

“The recession is behind us but the effects of the recession will linger for some time in the form of higher unemployment and lower levels of business investment and home construction,” he said.

“Even when unemployment comes down,” he continued, “it will come down very slowly.”

That pessimism was echoed at the conference by Freddie Mac CEO Charles Haldeman. Haldeman said even rehiring businesses were slow to add personnel, and unemployment was the key reason homes were still being lost to foreclosure.

He and Brinkmann predicted that all this would spell a longer, harder recovery for the housing industry than many market observers were now expecting. Brinkmann said median home prices likely would continue to decline through the beginning of next year.

FHA Commissioner David Stevens acknowledged as much at the conference on Monday. “We’re forecasting about another 10 percent, roughly, price decline between now and the first quarter next year,” he said.

Foreclosure Activity Sets New Record in Third Quarter: Report

Foreclosure activity in the United States set a new quarterly record in the three months ended September 30, increasing 5 percent from the previous quarter and 23 percent from the third quarter of 2008, according to new data released by RealtyTrac Thursday.

The online marketplace for foreclosure properties said that foreclosure filings – default notices, scheduled auctions, and bank repossessions – were reported on 937,840 properties in the third quarter. One in every 136 U.S. housing units received a foreclosure filing during the three-month period – the highest quarterly foreclosure rate since RealtyTrac began issuing its report in the first quarter of 2005.

For the month of September, foreclosure filings were reported on 343,638 properties in September, down 4 percent from August but up 29 percent from September 2008. Even with the decrease, however, September’s total was still the third-highest monthly total since the RealtyTrac reports began, behind only July and August of this year.

“Bank repossessions, or REOs, jumped 21 percent from the second quarter to the third quarter, corresponding to jumps in defaults and scheduled auctions in the previous two quarters,” said James Saccacio, chief executive of RealtyTrac. “REO activity increased from the previous quarter in all but two states and the District of Columbia, indicating that lenders may be starting to work through some of the pent-up foreclosure inventory caused by legislative delays, loan modification efforts, and high volumes of distressed properties.”

Nevada continued to lead the states’ foreclosure rates in the third quarter, with one in 23 housing units receiving a foreclosure filing – nearly six times the national average. Foreclosure filings were reported on 47,925 Nevada properties during the period, up nearly 10 percent from the previous quarter and up nearly 59 percent from the year-ago period.

Arizona posted the second-highest state foreclosure rate in the period, with one in every 53 housing units receiving a foreclosure filing. California was third, also with one in every 53 units receiving a filing. Other states in the top 10 were Florida, Idaho, Utah, Georgia, Michigan, Colorado, and Illinois.

Just six states – California, Florida, Arizona, Nevada, Illinois, and Michigan – accounted for 62 percent of the nation’s total foreclosure activity in the third quarter, with a combined 579,541 properties.

With 250,054 properties receiving foreclosure filings during the quarter, California alone accounted for nearly 27 percent of the nation’s total. Florida was second in number of foreclosure filings, with 156,924. Arizona was third with 50,342 properties, and Nevada, with 47,925 properties, was fourth.

Rules to Protect Borrowers May Keep Many Out of the Market

As new rules to protect borrowers come into effect, some prospective homeowners may find themselves protected out of the market.

On October 1, new Federal Reserve rules went into effect, requiring greater diligence on the part of mortgage lenders and brokers who make high-cost loans – those at least 1.5 percentage points above the average prime mortgage rate – for borrowers with weak credit.

“We’re going to have some consumers who are not able to purchase a home because of this, since most lenders don’t want to do high-cost loans,” Jim Pair, the president of the National Association of Mortgage Brokers (NAMB), told the New York Times. “There’s too much potential liability for them.”

Pair told the newspaper he was concerned that the rules would greatly curtail loan alternatives, especially for those who might qualify only for subprime mortgages.

The regulations, which were adopted last year but are only now coming into effect, prohibit lenders from making a high-cost mortgage without verifying that a borrower could repay the loan, the Times reported.

During the boom from 2003 to 2006, subprime borrowers could get loans without proving that they could make the monthly payments. In stated-income loans – the famous “liar loans” – borrowers could just make up income figures.

Such lies were mortgage fraud, but brokers and lenders often overlooked them in the interest of generating loan fees, the newspaper said.

Stated-income loans continued into 2007, but the volume had tailed off sharply. After the onset of the subprime crisis, borrowers who could not document their income, such as waiters or others paid in cash, were largely rejected by lenders.

While states such as Connecticut and New York had enacted laws requiring more due diligence in subprime lending, these applied only to state-chartered institutions and not to the national banks doing most of the mortgage lending.

For this reason, Uriah King of the Center for Responsible Lending told the Times, the new federal rules are “important, and they are good.” But, said King, the new regulations are “five years too late” to prevent the damage done in the foreclosure crisis.

TARP Watchdogs Say Government's Not Doing Enough to Stop Foreclosures

The Congressional Oversight Panel, set up to police the U.S. $700 billion bailout of financial markets, said in a report last week that the federal government isn’t doing enough to help homeowners who face foreclosure.

A majority of the panel’s members signed on to the Oct. 9 report, titled “An Assessment of Foreclosure Mitigation Efforts after Six Months.” The panel’s two Republican members distanced themselves from the findings.

The report expressed doubts that the “scale, scope, and permanence” of the Treasury Department’s Making Home Affordable Modification Program would adequately protect U.S. homeowners. The Treasury had previously said HAMP would help prevent as many as 4 million foreclosures with loan modifications through approved servicers and lenders.

“Rising unemployment, weak home prices, and impending mortgage rate resets still threaten to cast millions of Americans out of their homes, with devastating effects on families, local communities, and the broader economy,” the report said, noting that one in eight U.S. mortgages was currently in foreclosure or default, ultimately producing “10 to 12 million foreclosures.”
But panel member Jeb Hensarling – a Republican Texas Congressman who calls himself a “lifelong conservative” on the COP Web site – disagreed with the report. “Instead of focusing its attention on taxpayer protection and oversight,” he wrote in his dissent, “the panel’s majority report implies that the administration should commit additional taxpayer funds in hopes of helping distressed homeowners — both deserving and undeserving — with a taxpayer subsidized rescue.”

The report was the latest in a series of monthly opinions issued by the panel, which is charged with finding ways to improve the $700 billion Troubled Asset Relief Program. Its blistering critique came this week on the heels of an Oct. 6 announcement by officials from the Treasury and the Department of Housing and Urban Development that HAMP had resulted in 500,000 trial modifications for home loans, a month ahead of its self-imposed target date.

The Treasury took that milestone moment as an opportunity to argue for HAMP’s effectiveness, noting that the pace of loan modifications was now greater that the pace of new foreclosures.
But Treasury Secretary Timothy Geithner still acknowledged “a large number of families” were still at risk of foreclosure.

Treasury Officials Deceived Public on TARP Bailout: Inspector General

An inspector general tasked with overseeing the government’s bank bailout program says the Treasury Department misled the public last year and raised doubts about the fairness of its payouts to the nation’s biggest banks.

In a report released Monday, Special Inspector General Neil M. Barofsky alleged that federal officials made bad statements about the health of major institutions that received the first round of massive funding under the government’s $700 billion Troubled Asset Relief Program, the New York Times reported.

The report singled out a statement last Oct. 14 by former Treasury Secretary Henry M. Paulson Jr., who said the big banks were “healthy” and accepted the bailout funds for “the good of the U.S. economy,” so they could continue to extend consumer and business lending even as credit markets tightened.

But the fact was that Paulson and his fellow regulators were gravely concerned that some of those banks would not survive the downturn, Barofsky wrote.

The Federal Reserve and the Treasury were given the opportunity to include their reactions to Barofsky’s conclusions in the report. While the Fed generally agreed with the inspector general’s concern over the public statements, the Treasury criticized his judgment. The official’s public pronouncements “must be considered in light of the unprecedented circumstances in which they were made,” the Treasury said.

The report also suggested that TARP regulators were inconsistent in how they distributed the money, especially in the already-controversial merger of Merrill Lynch and Bank of America.

Under the bailout rules, all institutions were eligible for a capital infusion of as much as $25billion. Yet Bank of America and Merrill were counted as a single institution – BoA was given only $15 billion initially, since Merrill was already set to receive $10 billion. That arrangement was set by regulators even before the companies’ boards and shareholders had approved a full merger.

BoA had to wait until the following January to receive Merrill’s more modest share of the bailout dollars.

Adding to the perceived inconsistency was the fact that when Wells Fargo merged with Wachovia, Wells received both banks’ combined funds at the outset.

But Barofsky reserved the lion’s share of his anger for the Treasury’s glossing statements about the bailout recipients’ health.

“Statements that are less than careful or forthright – like those made in this case – may ultimately undermine the public’s understanding and support,” his report said. “This loss of public support could damage the government’s credibility and have long-term unintended consequences that actually hamper the government’s ability to respond to crises.”

HOPE NOW Data Shows Increase in Workouts, Drop in Foreclosures

An industry report released by the HOPE NOW Alliance this week reveals more promising news for the housing sector. The organization says both foreclosure starts and foreclosure sales are waning, and at the same time, workouts for troubled home loans are rising. If such imbalanced stats continue, it could mean the industry is finally beginning to put a dent in the dark cloud of foreclosures hanging so heavily overhead.

Based on HOPE NOW’s market data, lenders initiated 224,000 foreclosures during the month of August, a drop of 21 percent compared to July’s numbers. Foreclosure sales – 75,000 recorded in August – also fell 16 percent from July.

Lenders and servicers completed 325,000 mortgage workouts during August, an overall increase from the month prior of 28 percent. Repayment plans rose 38 percent and loan modifications were up 7 percent.

The Treasury Department reported last month that 360,000 trial modifications had been started under the administration’s Making Home Affordable Program.

“Our data suggests a correlation between the drop in foreclosures and the increase in workout solutions to help at-risk borrowers,” said Faith Schwartz, executive director of HOPE NOW.
“This shift suggests progress is being made using all of the tools available, such as HAMP – the government backed modification program – and other workout solutions, to slow the pace of foreclosures.”

HOPE NOW’s survey data, though, shows a 6 percent increase in homeowners who are 60 or more days behind on their mortgage payments – bringing that number to 3.3 million borrowers in August. The alliance explained that this jump may include the significant number of trial modifications under the government’s mod program that are not yet permanent.

“Mortgage servicers and non-profit housing counselors are working hard to help homeowners who are facing hardship in these tough economic times,” said Schwartz. “We see firsthand the commitment to offer consumers the best solution that meets their individual needs.”

HOPE NOW and the mortgage industry have helped an estimated 2.1 million homeowners since January 2009. In August and September, alone, HOPE NOW and partners have brought together more than 4,000 homeowners with servicers and non-profit housing counselors through outreach forums that offer face-to-face counseling. Outreach events in southern California and Atlanta are scheduled for October.

Geithner, Holder and State Officials Vow to Crack Down on Mortgage Fraud

The heads of the Treasury, Justice Department, Department of Housing and Urban Development and Federal Trade Commission met with 12 state attorneys general and other authorities Thursday, vowing to crack down on mortgage fraud schemes that have proliferated since the start of the U.S. housing crisis.

“A clear lesson of this financial crisis is that American consumers need better protection against fraud,” said Treasury Secretary Tim Geithner, who along with Attorney General Eric Holder hosted the state and federal authorities. “While we will prosecute anyone who violated the law, going forward we will not wait for problems to peak before we respond. The Obama Administration is acting preemptively, across federal agencies and alongside state governments, to stop consumer fraud.”

The concerted move to target mortgage scams, especially illegal loan-modification and foreclosure swindles, came after Federal Bureau of Investigation Director Robert Mueller announced that mortgage fraud cases under investigation by the FBI had jumped 63 percent in the last year – and more than 300 percent since 2006.

“The schemes have evolved with the changing economy, targeting vulnerable individuals, victimizing them even as they are about to lose their homes,” Mueller said in testimony before the Senate Judiciary Committee Wednesday.

Officials are puzzling over just how to deal with a problem that they agreed was running rampant across the nation. Home foreclosure filings remained around their record highs last month, accounting for one of every 357 households in the U.S., the data provider RealtyTrac said.

The result: Many homeowners who are in arrears are falling for predatory scams online, in the mail and on the phone that promise to relieve them of their debt problems. But with luck and deft, the scammers can end up with borrowers’ personal and financial information, their money, and even their homes.

“These mortgage rescue scams raise false hopes and then cruelly exploit them, which is why my office is fighting them and welcomes the federal government as a strong ally,” said Attorney General Richard Blumenthal of Connecticut, which recently became the first state to ban up-front fees for mortgage repairs – a proposal that’s now being considered by other states.

The FTC also took the opportunity to announce it was initiating legal action against fraud perpetrators, bringing to 22 the number of such cases it has initiated this year.

The authorities also agreed they’d focus on preempting future violations by expanding consumer education programs and improving government efficiency to detect red flags.

“Consumer education is the new burglar alarm, and state-federal cooperative enforcement is the deadbolt that will protect homeowners from today’s crooks – fraudsters who claim to offer mortgage relief,” said Washington State Attorney General Rob McKenna.

New Housing Crash Looms as Shadow Inventory Climbs past 7 Million: Analysts

The housing crash is about to come back with a vengeance, as 7 million new foreclosure properties are about to hit the market, analysts at Amherst Securities Group LP said this week.
The New York-based mortgage-bond analysts called that number – which is about five-and-a-half times larger than 2005’s national tally of delinquencies and foreclosures – a “huge shadow inventory” that threatens to further destabilize a housing market that had shown signs of righting itself over the summer.

Despite some recent optimism, many market observers now agree on several factors that are expanding the nation’s shadow inventory. Loan modifications, legal wrangling, redefaults and bank practices have delayed foreclosures while actually worsening many homeowners’ positions.
As a result, the analysts say a so-far undisclosed glut of homes is about to come to light, and it’s likely to further depress values and sales.

“There’s going to be a flood [of bank-owned homes] listed for sale at some point,” John Burns, a real-estate consultant based in Irvine, California, told the Wall Street Journal this week. He expects prices to decline another 6 percent this year. The analysts at Amherst predicted an 8 percent drop, while a Sept. 11 report by Barclays forecasted a further 13 percent drop, saying the worst of the crash is “decidedly underway,” with increased foreclosures sapping “the strength of the recovery in all but the most optimistic of scenarios.”

One cause of the problem, the Journal says, is unintended fallout from “well-meaning efforts to keep families in their homes.” Foreclosures have been stalled by state moratoriums, as well as by lenders and servicers who are using the time to determine if troubled borrowers are eligible for loan modifications.

“We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running” for modifications or other alternatives to foreclosing, a Bank of America Corp. spokeswoman told the Journal, adding that government pressure to stem foreclosures had reduced their foreclosure sales to “abnormally low” levels.

But as many proposed modifications result in higher monthly payments or other terms the borrowers don’t like, more potential foreclosures are getting held up in court, too. That’s what happened to Debra and Arthur Scriven of Columbia, South Carolina, who told the Journal that Citigroup had attempted to foreclose on them 15 months ago. Since then, the lender offered a modification they felt was unfair, and their situation has stalled as they await a date for a hearing in foreclosure court.

But evidence is mounting that even when modifications are successfully written, the likelihood of a borrower defaulting again – and heading for foreclosure again – is alarmingly high. That’s because even a significant reduction in interest or principal can’t save a homeowner who’s underwater or overleveraged. Modifications have made “not much” of a difference in the shadow inventory, the Amherst analysts’ report said. “And many of these borrowers would default later, if they remain in a negative equity position,” they added.

Banks, too, are contributing to the shadow inventory problem. Fearful of the added costs of acquiring foreclosure properties and trying to sell them, many banks have simply declined to foreclose on some of their most non-performing borrowers. According to a report by LPS Applied Statistics, banks hadn’t even begun the foreclosure process on 1.2 million properties that are 90 days or more past due. In July, 217,000 mortgages that hadn’t seen a payment in a year still weren’t being foreclosed on – a number that’s more than doubled since last year.

Lenders have also scaled back their bidding at the public auctions and trustee sales that usually precede a bank foreclosure. That’s letting outside investors pick up the properties at a deep discount: According to the research firm ForeclosureRadar.com, 19 percent of homes sold in August in California trustee sales went to investors and not lenders – a 500 percent increase in the past year.

What this all means, the Amherst analysts say, is that the shadow inventory will soon eclipse the economy’s recent sunny outlook. “The favorable seasonal will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” they said.

Mortgage Demand Drops Even as Rates Decline

Despite a dip in long-term mortgage rates, the number of people applying for a mortgage fell 2.2 percent last week, according to a weekly survey released by the Mortgage Bankers Association (MBA) Wednesday.

Although week-to-week demand declined, mortgage application volume is still up 22.7 percent compared to this time last year.

For the week ending August 28, 2009, MBA’s refinance index decreased 3.1 percent from the previous week, while the purchase index fell 1.0 percent.

The only segment of the survey that posted an increase in activity was the government purchase index, which rose 0.5 percent — the seventh consecutive weekly gain.

For the month of August, the government-insured share of purchase applications was 40.4 percent for the month of August, up from 38.3 percent in July and 31.7 percent in August 2008. The distribution of government-backed home loans has reached its highest level since February 1991.

MBA reported the average rate for 30-year fixed-rate mortgages at 5.15 percent last week. That’s an improvement over the 5.24 percent average rate the week prior.

Rates for 15-year fixed-rate mortgages averaged 4.57 percent during the final full week of August, down slightly from 4.58 percent one week earlier.

Distressed Sales Prove to Be a Drag on Local Home Prices

With the deepening mortgage crisis came a flood of foreclosed homes repossessed by lenders. The longer these houses sit vacant, they become cesspools for blight and drive down neighboring property values. And evenwhen these homes are successfully sold off, the price reductions required to move them can drag down surrounding home prices with them.

Lender Processing Services, Inc. (LPS) released a nationwide study Thursday that reveals the impact of foreclosure sales on home prices.

According to Nima Nattagh, Ph.D., an SVP at LPS Applied Analytics, sales of foreclosed REO properties account for as much as 60 percent of housing activity in some states.

Based on LPS’ analysis, Michigan and Nevada are the highest ranking states in REO sales, with more than 60 percent of home buys being bank-owned properties in the first half of 2009. California and Arizona followed, with REO sales comprising 50 percent.

“Our study contains specific data to show [a spike in REO sales] is causing precipitous drops in home values,” Nattagh said.

In Michigan, where REO sales accounted for 64 percent of sales in the first six months of 2009, non-REO home prices have dropped by more than 26 percent since their peak in 2005. However, when REO sales are included, the decrease in home prices approaches 47 percent.

In contrast, in Massachusetts, where only 14 percent of homes sold during the first half of the year were REO sales, home prices, excluding REOs, have dropped by 15 percent. When REO sales are included the home price decrease climbs only slightly to 19 percent.

“This study clearly shows that when foreclosure levels are high and REO sales dominate the majority of transactions, their impact on the rest of the market should be taken into account accordingly,” said Nattagh.

In 2006, at the peak of the most recent housing boom, REO sales accounted for a little more than 3 percent of overall sales in California, the nation’s largest housing market. Today, LPS says REO sales account for more than 52 percent of all sales in California – and prices have plummeted.

LPS says in its report that the Northeast and Northwest regions of the country do not appear to have been as hard hit as the West and Midwest states, where a prevalence of subprime and exotic mortgage products, as well as general economic downturn, have elevated mortgage delinquencies to an all-time high.

“While REO sales activity has increased significantly across all regions in the country, there is clearly a dichotomy between states that have seen unprecedented levels of mortgage delinquency and those where the impact of the current housing crisis has been much more moderate,” Nattagh said.

Using a proprietary home price index (HPI) that gauges changes in the value of homes that have sold at least twice, LPS evaluated the influence of REO sales on regional housing markets. The company’s study demonstrates that in states with a relatively high share of REO sales, the impact of these sales on the rest of the market has been much more pronounced.

The Race is On: Regulators Race to Stave off Commercial Real Estate Downturn

Federal officials are struggling to manage an impending glut of commercial real-estate foreclosures that could quickly flip the recovering economy into another tailspin, the Wall Street Journal reported Monday.Regulators at the Treasury and the Federal Reserve are focusing on $700 billion in commercial mortgage-backed securities whose underlying loans are at risk for massive defaults. Delinquency levels on CMBS have already reached 3.14 percent – fully six times what they were last July, according to the credit ratings agency Realpoint LLC.

Worse still, even borrowers on commercial loans who can afford their interest and principal are finding it difficult to refinance or extend their credit as property values fall and oversight on the refinances increases. It’s a phenomenon that could trigger more losses in CMBS and the majorinvestors – banks, pensions, hedge funds – that buy them, the Journal said.

One problem regulators are mulling is how to permit loan servicers to contact lenders earlier in the process to discuss ideas for avoiding foreclosures and defaults. Developers in financial trouble have complained that they currently have no easy avenue of communications with the holders of their CMBS to review their options.

The result, in a Realpoint study commissioned by the Journal, is that 281 CMBS loans worth $6.3 billion couldn’t refinance when they matured this summer, even though 173 of the loans – worth $5.1 billion – had plenty of money on hand.

Those pressures, and the threat of more properties hitting the market, could force banks into a new round of write-downs, said Realpoint’s managing director, Frank Innaurato.

“What’s going on in the CMBS world is a precursor for what might be seen in banks’ books,” he said.

So far, regulators haven’t been able to come up with a comprehensive plan of attack for the commercial property market’s woes, the Journal said.

“What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more,” the Journal said. “So far, there are few signs this is happening.”

Western States Crowned "Riskiest" for Mortgage Fraud

Mortgage fraud risk over the last year seems to have migrated westward, with Nevada and California dominating the 10 riskiest metropolitan statistical areas (MSAs), according to a new study released by Interthinx this week. One of the study’s most telling findings – the states with the highest overall levels of mortgage fraud risk correspond to the states with the highest levels of foreclosure activity.

Here’s how the numbers stack up. Nevada – which claimed the highest state foreclosure rate in the latest RealtyTrac report – also has the highest mortgage fraud risk, with an Interthinx Fraud Index value of 245.

California, which contains eight of the 10 riskiest MSAs, has the next highest Interthinx Fraud Index value of 176. Guess where it ranked on RealtyTrac’s foreclosure report – No. 2.

As a reference point, Interthinx says the fraud index value for the whole United States is 130. Nationally, fraud risk in the second quarter declined 4 percent from the first quarter, but is up 7 percent over last year, due to the nature of mortgage fraud to flourish and capitalize on deteriorated economic conditions, Interthinx explained.

Mortgage fraud in the second quarter shifted to schemes that target distressed borrowers and the glut of bank-owned properties, Interthinx said.

“Federally funded economic stimulus and stabilization programs that target foreclosure prevention are also contributing to the current shift to schemes involving defaulted and foreclosed properties,” the company’s analysts said in their report.

The Property Valuation Fraud Index jumped 56 percent from the same period in 2008, reflecting fraudulent activity involving short sales, REO inventories, and refinancings. Valuation fraud is currently the most common type of fraud perpetrated against the industry.

The Occupancy Fraud Index, which is typically tied to schemes involving speculative investments, declined 25 percent. The decline was caused by the generally depressed market for residential investment and rental properties, Interthinx said.

So what makes Nevada and California such breeding grounds for fraudulent activity? Interthinx says fraud risk, particularly valuation fraud, occurs in any market with acute pricing volatility, whether home prices are rising or falling.

Even more foreboding for these two, the company says fraud risk is actually a leading indicator of foreclosure risk, which suggests that the nation’s hottest fraud spots today are likely to be the leading foreclosure MSAs within two years.

Interthinx analysts expect fraud indices will continue to rise over the next three years as a large number of adjustable-rate mortgage (ARM) loans – especially option ARMs with negative amortization – reset between now and the first quarter of 2012.

Delinquencies Are Still Climbing and Threatening More Foreclosures on the Horizon, MBA Says!

More than nine percent of all mortgages in the United States are now delinquent, according to figures released Thursday by the Mortgage Bankers Association (MBA). The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to 9.24 percent of all loans outstanding at the end of the second quarter, MBA reported. The new number breaks the record set in the first quarter of this year, when 9.12 percent of the nation’s homeowners were behind on their mortgage payments.

Important to note is that the biggest jump in delinquencies last quarter came from prime fixed-rate mortgages. These seemingly low-risk loans also accounted for one in three of the nation’s foreclosure starts in Q2. A year ago they were only one in five.

Like prime, Federal Housing Administration loans are generally thought to be “safe,” but foreclosure starts among government-insured mortgages jumped to 9.1 percent last quarter – a record-high for the agency.

The states of California, Florida, Arizona, and Nevada continue to drag down the national numbers. These four had 44 percent of all the nation’s new foreclosures in Q2. Rhode Island, Georgia, and Michigan also posted foreclosure start rates above the national average.

All other states in the country fell below the national benchmark, and roughly half even saw their new foreclosure numbers decline.

But then, there’s the not-so-sunny Sunshine State. Florida has cemented itself as the worst state in the union for mortgage performance. Twelve percent of all mortgages there were somewhere in the process of foreclosure at the end of June, and another 5 percent were more than 90 days past due and about to cross that threshold. Based on MBA’s numbers, Florida has the highest foreclosure and delinquency rates in the country, and MBA’s chief economist, Jay Brinkmann, says he doesn’t expect to see a turnaround in Florida’s housing market for a long, long time.

Some fortunate regional markets are faring better and offsetting Florida’s bad numbers because the nation’s total foreclosure starts during the second quarter actually dropped slightly.

Foreclosure actions were initiated on 1.36 percent of the nation’s outstanding mortgages, compared to 1.35 percent during the first three months of the year, MBA reported.

Despite the leveling off of foreclosure starts, the fact that loans 90 or more days past due continues to climb in all categories suggests an overhang of foreclosure activity and engorged inventories of repossessed homes may be looming in the coming months.

So, when is the foreclosure problem going to crest? Brinkmann, points out that unemployment is currently the primary driver behind missed mortgage payments.

The number of jobless Americans is forecast to peak in mid-2010, and Brinkmann says he expects delinquencies to top out at about the same time. But because of the lag time associated with foreclosure proceedings, he doesn’t see a break in the upward trend of foreclosures until six months later, at the close of next year.

Commercial-Mortgage Downturn has Started, Standard & Poors Says!

The economy is about to experience its second mega-wave of loan defaults, potentially triggering massive losses in securities backed by commercial mortgages, Standard & Poor’s said in a new report Monday.

“With almost 29,000 loans… now in the riskiest period of their lives with respect to default… Standard & Poor’s expects default levels to rise,” the ratings firm concluded in its default study.

The report comes just as rays of hope have appeared on the broader financial horizon. Residential housing prices and sales volumes have risen recently in many markets, and investor interest in residential mortgage-backed securities has risen with them. These factors have led many economists to predict modest growth – meaning an end to the recession – by mid-2010.
Still, Standard & Poor’s said, a number of factors in commercial-property lending serve as a reminder of the U.S. economy’s still-fragile state.

In particular, they forecast serious problems with rental properties that were at peak capacity near the height of the boom. Significant recent drops in the cost of buying and renting residential property, the firm said, means “three- and five-year leases coming due for lease rollover in 2009 could cause significant rental declines.”“We believe that the borrowers faced with possible property operating cash flow shortfalls and declining market values will be less likely to fund debt service shortfalls,”

New Foreclosure Numbers Eclipse Recent Optimism

RealtyTrac released its July Foreclosure Market Report Thursday, and the findings are a stark contrast to recent news of healthier markets and price bottoms. More than 360,000 homes received a foreclosure filing last month – a new record. Despite hints that housing markets are beginning to stabilize, foreclosure activity rose 7 percent for the month and is up 32 percent from last year. To put things into perspective, RealtyTrac reported that one in every 355 homeowners in the United States faced losing their home in July.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

Nevada, California, Arizona Post Highest Rates

For the 31st consecutive month Nevada documented the nation’s highest state foreclosure rate, with one in every 56 homes receiving a foreclosure filing in July — that’s more than six times the national average. Initial default notices in Nevada decreased 18 percent from the previous month, likely the result of a new state law requiring lenders to offer mediation to homeowners facing foreclosure. But scheduled auctions and bank repossessions in Nevada both increased more than 20 percent from the previous month, boosting overall foreclosure activity in the state by 4 percent.

Initial defaults in California spiked 15 percent from the previous month, pushing the Golden State into the No. 2 spot on RealtyTrac’s list for the third month in a row. One in every 123 California homes received a foreclosure filing in July. Scheduled auctions were down 1 percent from the previous month, but bank repossessions were up 4 percent.

In Arizona, one in every 135 housing units received a foreclosure filing in July, the nation’s third highest state foreclosure rate. Scheduled auctions, the first public record in the Arizona foreclosure process, jumped 25 percent from the previous month, while bank repossessions stayed flat.

Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Utah, Idaho, Georgia, Illinois, Colorado, and Oregon.

Usual Suspects Account for Half of Activity

Four states accounted for nearly 57 percent of the nation’s total foreclosure activity, according to RealtyTrac’s market data. California had 108,104 properties with foreclosure filings in July, Florida had 56,486, Arizona had 19,694, and Nevada 19,535.

Other states with total foreclosure filings ranking among the 10 highest in the country were Illinois (14,524); Texas (12,077); Georgia (11,136); Ohio (11,021); Michigan (8,257); and New Jersey (6,467).

Notably, foreclosure activity in Michigan dropped 39 percent from the previous month, mostly due to a 66 percent decrease in scheduled auctions. A state law that took effect July 6 requires lenders to provide delinquent borrowers with contact information for approved housing counselors before scheduling a foreclosure auction. The law freezes foreclosure proceedings an extra 90 days for homeowners who commit to work on a loan modification plan.

Report: California Foreclosure Prevention Act Fails To Slow Filings

Despite state lawmakers’ efforts to curtail home losses, a record number of California foreclosures are now scheduled for sale – that’s according to a report released Tuesday by ForeclosureRadar, a local company that tracks every foreclosure in the Golden State and provides daily auction updates.

High-level findings of ForeclosureRadar’s July California Foreclosure Report include:

· Filings of new Notices of Default were little changed from June. A total of 44,996 default notices were filed during July, a 1.5 percent decrease. However, year-over-year filings rose by 11.9 percent from July 2008.

· Notice of Trustee Sale filings bounced back to 39,294 in July after dropping the previous month. The California Foreclosure Prevention Act, which adds 90 days prior to the filing of the Notice of Trustee Sale for lenders that do not have a loan modification plan in place, had only a fleeting impact last month. Notice of Trustee Sale filings hit their second highest level on record in July, just two weeks after the law took effect.

· After increasing for three consecutive months, foreclosure auction sales dropped by 22.7 percent to a total of 17,239, with a combined loan value of $8.08 billion dollars. Opening bids set by lenders were an average of 39.1 percent lower than the loan balance, with nearly half of sales discounted by 50 percent or more.

· Sales to third-party bidders were flat from June, with 2,683 foreclosures sold to investors, or in increasingly rare instances, junior lenders. As a percentage of total sales, those to third parties continued to increase, though lenders still took back 84.4 percent of foreclosures at auction, representing 14,555 loans with a total of $6.93 billion dollars in loan value.

· Foreclosures scheduled for sale rose to 124,874, a 10.4 percent increase from the prior month, and a 93.3 percent increase over the same time last year. The year-over-year gain is significant given that foreclosure sales in July 2008 set a record that has not again been reached.

“Despite the failure of the California Foreclosure Prevention Act to slow Notice of Trustee Sale filings it is clear that lenders and servicers are delaying foreclosure” said Sean O’Toole, founder and CEO of ForeclosureRadar. “More homeowners are now sitting at the brink of foreclosure, just days away from the next scheduled auction date than ever before, yet we simply aren’t seeing the wave of foreclosures many predicted.”

Political pressure, financial incentives, and the postponement of sales awaiting the completion of loan modification trial periods are likely reasons for the delays. The vast majority of foreclosures, 72 percent, are being delayed at the lender’s request or as mutual agreement between the lender and borrower. Only 10 percent are being postponed due to bankruptcy.

According to ForeclosureRadar’s report, the average California foreclosure has a total loan balance of $425,134 on a home that is now worth $236,739. While negative equity is a prerequisite for the vast majority of foreclosures in California, the degree of negative equity varies a great deal by location.

Foreclosures in Santa Cruz County had loan balances just 110 percent of the current estimated value, while in Merced County loan balances average 283 percent higher than the estimated value. The Bay Area counties of Santa Cruz, San Francisco, Marin, and San Mateo were among the least underwater during the month of July. Inland counties including Merced, San Joaquin, Stanislaus, Solono, Sacramento, San Bernardino, and Riverside were the most underwater.

Countrywide Borrowers Begin Receiving Notices of Foreclosure Reimbursements

State officials have begun mailing letters to Countrywide customers who may be eligible for foreclosure relief payments. Countrywide’s parent company, Bank of America, said it will begin issuing checks to borrowers during the first quarter of 2010.

The reimbursements are part of the agreement reached last October between Bank of America, who acquired the once-subprime-leader in 2008, and state attorneys general from across the country to settle allegations of predatory lending brought against Countrywide.

Up to $150 million is allocated nationally to provide assistance for certain borrowers who experienced a foreclosure, short sale, or deed-in-lieu of foreclosure on their Countrywide mortgage. Forty states are participating in the program. Borrowers will be notified by letter from their state if they are eligible to receive a settlement payment.

Rust Consulting, a third-party administrator, will manage notifications and payment processing for eligible homeowners.

The foreclosure relief program is one of three components of Countrywide’s 2008 agreement with state attorneys general. The second part, the National Homeownership Retention Program, calls for the bank to modify loans and lower mortgage payments for up to 400,000 borrowers who financed their homes with subprime or payment option adjustable-rate mortgages serviced by Countrywide.

The third component of the agreement provides relocation assistance to borrowers who experience a foreclosure sale and agree to leave the property voluntarily. They are eligible for a cash payment to help them transition to a new place of residence.

Countrywide admitted no wrongdoing under the agreement reached with state prosecutors, and as a result of the unprecedented settlement totaling $8.4 billion, the individual states dropped their lawsuits against the lender.

Florida Attorney General Bill McCollum, though, has filed a separate suit against former Countrywide CEO Angelo Mozilo, alleging the subprime leader employed deceptive marketing and sales practices to lure borrowers into risky, high-cost mortgages and then knowingly resold those unsustainable loans to securities investors.

According to a report by the Miami Herald, Mozilo is seeking to have the case dismissed on grounds that the Broward Circuit Court in Florida has no jurisdiction over him as a California resident. The hearing on Mozilo’s dismissal motion, originally scheduled for Wednesday, has been postponed but no new date has yet been set.

Mozilo also faces civil charges of fraud and insider trading brought by the Securities and Exchange Commission (SEC) last month.

Foreclosures Comprise Half of Q1 Purchases

While most of the real estate world is still reeling from sunken property values and the effects of the housing bubble fallout, one type of property out there is in hot demand. New statistics released by Los Angeles-based Foreclosure-Support show that during the first quarter of 2009, one out of every two home sales in the nation was a foreclosure or short sale property. Experts with the company say that this data is indicative of a trend that has been growing among homebuyers for the past two years.

Steve Siefken, business analyst for Foreclosure-Support, said, “After the market crashed no one was buying anything. But once foreclosures started to come onto the market in bigger and bigger numbers, I think people began to take notice and thought, ‘Hey, there’s a potential for deals here.’”

Foreclosed homes often sell for extremely large discounts, especially in areas where there are a lot of foreclosures available. Foreclosure-Support says depending on the location and condition of the property, a foreclosure now goes for anywhere from 10 percent to 60 percent off the price it was selling for only a year ago. And even though property values across the country have plummeted, the company says investors are now snatching up distressed properties in anticipation of the eventual turn-around.

Siefken explained, “At first, it was mostly the professionals at foreclosure auction, just like always. Then we got reports of certain sales in the high-demand areas like Texas, California – they were seeing record turnouts at these sales. But the interesting thing was that even though there was high competition, these properties were still going for way less than what was originally paid for them, so the value’s still there.”

High-demand areas like Los Angeles, Miami, and Charlotte, North Carolina, all report significant increases in foreclosure sale attendance. Foreclosure-Support says more foreclosures actually signify smart investment opportunities for savvy buyers.

Foreclosure-Support specializes in providing daily updates of foreclosure listings and foreclosure information from across the nation. With over a decade of experience in the foreclosure marketplace, Foreclosure-Support says its team helps buyers and investors get a detailed perspective on the foreclosure marketplace so they can make informed and profitable purchases.

Prime Foreclosure Sales Outpace Subprime

Two-thirds of the 93,924 foreclosure sales in June were originally financed with prime mortgage loans, according to figures released this week by the HOPE NOW Alliance. It was the first time since HOPE NOW began collecting data that prime foreclosure sales outpaced subprime sales by two-to-one.

Foreclosures involving subprime mortgages have subsided over the past year. HOPE NOW’s survey data suggests the peak in subprime foreclosure sales occurred during the second quarter of 2008. The largest gain in foreclosure sales backed by prime loans occurred in the recently ended second quarter of 2009.

HOPE NOW’s report also showed a 25 percent surge in loan workouts during the month of June. The Alliance said mortgage lenders helped 310,000 homeowners avoid foreclosure – 96,000 loans were modified and 214,000 repayment plans were initiated.

June marked the second straight month that HOPE NOW’s participating servicers reported a drop in modifications (down 5.1 percent) and a significant increase in repayment plans (up 44.9 percent). The imbalance is primarily attributed to servicer participation in the Obama administration’s Home Affordable Modification Program (HAMP). Under the government’s guidelines, loans are subject to a three-month trial period and are reported as repayment plans until the modification becomes permanent after 90 days.

Faith Schwartz, executive director of the HOPE NOW Alliance, commented, “I am proud of the continued progress made by HOPE NOW servicers and am confident that they are aggressively and proactively using HAMP, as well as other successful foreclosure prevention programs, to help as many homeowners as possible. These efforts are in the best interest of consumers as well as the U.S. economy overall.”

Since January, 2009, HOPE NOW says more than 1.5 million homeowners have been helped through mortgage workout plans. However, the Alliance’s study shows that the number of distressed borrowers continues to grow. Those 60 or more days behind on their mortgage payments increased from 3 million to almost 3.1 million in June, HOPE NOW reported.

Last week, HOPE NOW and its partners hosted an outreach event with administration and local officials in foreclosure-ravaged Las Vegas, providing more than 1,500 at-risk homeowners in the area with the opportunity to meet directly with lenders and non-profit counselors. And today marks the start of a two-day event in Phoenix, another market struggling with high foreclosure rates and plummeting property values. Since the beginning of this year, HOPE NOW’s consumer outreach efforts have helped over 15,000 homeowners.

Foreclosures Continue to Burn Sun Belt's Biggest Metro Areas

Cities in the Sun Belt states, including California, Florida, Nevada, and Arizona, continued to dominate foreclosure rankings throughout the first half of 2009, accounting for 35 of the 50 highest foreclosure rates among metro areas with a population of 200,000 or more, RealtyTrac reported Thursday.

However, RealtyTrac says the foreclosure epidemic appears to be spreading to other areas of the country not previously considered foreclosure hot spots, such as Oregon, Idaho, Utah, Arkansas, Illinois and South Carolina. Increased activity in these states suggests much of the new foreclosure activity may be more directly related to growing unemployment than continuing fallout from subprime and adjustable rate loans.

James J. Saccacio, CEO of RealtyTrac, explained, “Foreclosure activity continued its upward trajectory nationwide and in the majority of metro areas in the first half of the year, but there are some significant differences beginning to show up in the data. While some of the markets that had the highest saturation of foreclosures over the past few years have seen declining rates, new markets like Provo, Utah, and Boise, Idaho, have seen large increases. As unemployment rates increase in different parts of the country, it’s very likely that we’ll see similar patterns develop elsewhere.”

Looking at RealtyTrac’s Midyear 2009 Metropolitan Foreclosure Market Report, Las Vegas posted the nation’s highest foreclosure rate, with 7.45 percent of its housing units receiving at least one filing in the first half of 2009 – that’s more than six times the national average and equates to one in every 13 homes. A total of 58,691 Las Vegas properties received a foreclosure filing during the first six months of the year.

The Cape Coral-Fort Myers metro area in Florida documented the second highest foreclosure rate. One in every 14 residential properties, or 7.20 percent of its housing units, have received at least one foreclosure filing this year.

Merced, California, claimed the No. 3 spot, with 6.89 percent – one in 15 – of its housing units receiving a foreclosure filing from January to June.

Both Cape Coral-Fort Myers and Merced reported a slight decrease in foreclosure activity from the previous six months but still experienced increasing foreclosure activity compared to the first half of 2008.

Five other metro areas in California made RealtyTrac’s top 10 list: Riverside-San Bernardino-Ontario (5.73 percent), Stockton (5.64 percent), Modesto (5.38 percent), Bakersfield (4.53 percent), and Vallejo-Fairfield (4.48 percent).

The Phoenix metro area (4.44 percent) and Orlando, Florida (4.28 percent) were also among the top 10.

All seven of these metro areas except for Stockton and Modesto reported increasing foreclosure activity from the previous six months and from the first six months of 2008.

Although Stockton, California, had the fifth highest metro foreclosure rate, activity actually decreased – down nearly 4 percent from the previous six months and nearly 13 percent compared to the first half of 2008.

Likewise, foreclosure activity in Modesto, which had the sixth highest foreclosure rate, decreased nearly 3 percent from the six months prior and is down more than 9 percent from the first half of last year.

Detroit continued to rank among the top 50 metro foreclosure rates, but activity there decreased 8 percent from the previous six months and 16 percent compared to the first half of 2008. Detroit’s foreclosure rate ranked highest in the nation in RealtyTrac’s 2006 and 2007 reports. During the first half of 2009, 1.86 percent of Detroit’s housing units received a foreclosure filing.

Foreclosure activity in Cleveland, which posted the nation’s sixth highest foreclosure rate in 2007, decreased 11 percent from the previous six months and 30 percent from the first half of 2008. With 1.36 percent of its housing units receiving at least one foreclosure filing, Cleveland’s foreclosure rate was still above the national average but was not among the top 50 metro foreclosure rates in the first half of 2009.

Other hard-hit Rust Belt cities posting year-over-year declines were Indianapolis and the Ohio cities of Toledo and Columbus.

Allison Testifies for More Foreclosure Aid

Herb Allison, the Treasury’s new assistant secretary for financial stability and former CEO of Fannie Mae, told lawmakers at a Senate Banking Committee hearing last week that the administration is considering another housing proposal that would require lenders to allow previous homeowners to stay in their foreclosed homes as renters.

Officials say that besides providing a residence option for former homeowners, the plan would also address the glut of vacant properties plaguing neighborhoods across the country and pulling down home values.

Sen. Charles Schumer (D-New York), said, "This could make sense as a last resort for troubled homeowners who would otherwise lose their homes and find themselves with nowhere to live."
William Apgar, HUD’s senior mortgage finance adviser, also testified that the administration is exploring foreclosure rentals as another mortgage relief option. However, he noted that in many instances, borrowers who have gone through the distress of the foreclosure process do not want to stay on as renters in the same property.

The idea is similar to a program launched by Freddie Mac in March, which gives homeowners the choice to rent their homes after foreclosure. Brad German, a spokesperson for the GSE, told the Washington Post, though, that the company’s rental program has not attracted many participants because most former owners instead choose to accept money to voluntarily vacate under its cash-for-keys program.

The administration is also considering an initiative that would provide mortgage assistance to the growing population of unemployed homeowners.

Apgar told lawmakers at the hearing, "The current very high level of unemployment is making the already difficult task of helping families struggling to meet their mortgage payments even harder."

New York Fed: Lax Lending Not to Blame

A recent study published by the New York Federal Reserve says that lax lending standards were not the air that inflated the market’s latest housing bubble and propelled the nation into an economic tailspin. Instead, the government bank argues that consumers’ misjudgments and swings in labor productivity played a significant role in the boom and bust of residential real estate.

James Kahn, author of the study and a professor of economics at Yeshiva University, explained, “What appears in retrospect to be relatively lax credit conditions in the early part of this decade may have emerged in part because of then-justifiable, although ultimately misplaced, optimism about income growth."

In the report, Kahn says a widely held view among market observers is that the rapid growth in home prices from the mid-1990s until the recent crash reflected a “bubble,” brought on by excessively lax lending standards and a belief that house prices would increase indefinitely. In this view, the bubble was destined to burst, triggering a dramatic decline in the housing sector.

Kahn contends it was consumer confidence that persuaded people they could afford more expensive homes. He says consumers believed they were working harder than the previous decade and expected their paychecks to likewise increase. Their optimism continued until 2007, Kahn says, when it became clear this was not the prevailing trend – a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.
These productivity swings helped determine the price of housing through their effects on income growth and long-term income expectations, Kahn says – both factors that directly influence what consumers are ready to pay for housing and what mortgage providers are willing to lend.

Using a recently developed model of housing prices, Kahn shows how a large share of price fluctuations over the last 45 years can be attributed to changes in productivity growth. Applied to the most recent housing cycle, the model suggests that the surge in home prices from the mid-1990s to 2007 was fueled at least in part by the belief that ongoing productivity advances would lead to continued strong growth in income.

Kahn explains that the relationship worked in reverse as evidence mounted in 2007 that productivity growth had slowed – at that time, expectations of further income growth declined, helping to quash the housing boom and jeopardizing mortgages and other investments.

Kahn’s argument attaches considerable importance to the perception of productivity shifts. He says housing market participants were slow to perceive the productivity decline because the data released through mid-2007 gave little indication of it. Subsequent data revisions, though, made it clear that productivity had in fact begun to decelerate in 2004.

According to Kahn, if productivity growth returns, then housing prices could bottom out and begin to move upward. But if productivity slows further or grows only modestly, he says property values will remain low or fall even further.

Report Says Investors Should Act Quickly

Despite recent negative information about the job market in the United States, a report issued last week shows the housing market is beginning to exhibit some signs of improvement. Because real estate investors can acquire distressed properties well below their actual market value – with savings ranging from 10 to 50 percent – the New York-based company says investors looking for large profit margins, particularly in some of the best investment markets, should act quickly.

Based on nationwide data, foreclosures in many of the top states for investors have dropped. For example, foreclosure rate in California is down by more than 3.5 percent and in Florida it’s fallen by nearly 2 percent. Arizona’s foreclosure rate slipped by almost 1.5 percent, while in Texas the rate dropped by just over 1 percent. In Georgia and Michigan, The largest drop recorded was in Nevada, which saw its foreclosure rate plummet by nearly 7.5 percent.

Many individual cities also saw notable decreases in their levels of foreclosures, including Salinas (-18 percent), Las Vegas (-9.5 percent), Chicago (-6 percent), Detroit (-4.3 percent), Atlanta (-3.2 percent), Phoenix (-1.6 percent), and Memphis (-1 percent).

Home prices in many states and some big cities have also started to creep upward, squeezing investors’ potential profit margins. There was an increase of less than a percentage point in the states of California, Georgia, and Texas, while prices rose by just over 1 percent in Florida and Michigan. Report found that housing prices are now averaging $64,000 in Ohio (the lowest in the country) and $343,000 in California (the nation’s highest average).

Price increases have been seen in several hot investment cities as well. The report shows in Miami and Orlando, property values are up 1.3 percent, and in Las Vegas they’ve risen 1 percent. In Phoenix, Atlanta, and San Diego, the company says prices have increased less than 1 percent, while in Denver they’ve jumped 2.3 percent. Foreclosurelistings.com reports the biggest leap in Ridgefield, Connecticut, where prices rose by more than 45 percent.

California Law Impacting Foreclosures

ForeclosureRadar, a company based in Discovery Bay, California that tracks every foreclosure in the Golden State, says it expected the new California Foreclosure Prevention Act to have little impact. But the company reported Tuesday that in fact, the day the law went into effect, it saw a significant decline in filings of Notice of Trustee Sale, which set the date and time of a foreclosure auction sale.

The law adds an additional 90 days to the waiting period between default notice and the filing of a Notice of Trustee Sale. However, lenders can avoid this requirement by putting in place a comprehensive loan modification program, and nearly all major lenders operating in the state had done so and were exempt as of June 16. But ForeclosureRadar reported that it actually documented a drop of nearly 50 percent in Notice of Trustee Sale filings among lenders who were exempt – an outcome for which the company says it is struggling to find an explanation.

Sean O’Toole, founder and CEO of ForeclosureRadar, said, “A number of lenders appear to have self-imposed California’s latest foreclosure moratorium on themselves, despite having received an exemption from it. Given the number of exempt lenders it was quite surprising to see Notice of Trustee Sale filings drop by nearly 50 percent the day the new law went into effect.”

Among the larger lenders who were exempt, ForeclosureRadar reported that Bank of America’s notice of sale filings declined by 48 percent from May to June, and Litton Loan Servicing’s dropped by 41 percent. At the same time, the company says a handful of lenders dramatically increased their filings in June, including CitiMortgage by 69 percent and Downey Savings by 45 percent.

ForeclosureRadar said California’s Notice of Trustee Sale filings began climbing during the later part of the month, so the company still contends it is unlikely the law will have a long-term impact on the state’s foreclosure activity.

Overall, ForeclosureRadar reported that Notices of Trustee Sale dropped by 28.7 percent in June and are down 14.8 percent compared to a year ago. However, the company’s California Foreclosure Report released Tuesday, showed all other foreclosure trends were up significantly in the state, with sales at auction rising for the third month in a row and default notices at near-peak levels.

Foreclosure sales jumped 24.7 percent in June –after a 31.9 percent rise in May, and a 35 percent April increase. However, the June figure is 8.2 percent lower than the prior year. A total of 22,291 California foreclosures were taken to sale at auction last month, according to ForeclosureRadar, representing loan value of $9.57 billion dollars.

The company said opening bids set by lenders were, on average, 39.3 percent lower than the loan balance. Forty-six percent of sales were discounted by 50 percent or more.

Sales to third-party bidders in June increased by 18.3 percent from May, to 2,687 foreclosures. ForeclosureRadar said the majority of foreclosures still continue to be taken back by the lender – 87.9 percent, or 19,604 sales, with a total loan value of $8.44 billion, were returned to the lender in June.

Notices of Default, the initial step in the foreclosure process, rose by 11.8 percent to the second highest level on record at 45,691 filings, after a 4.2 percent drop the prior month. Default notices were up 10 percent compared to June 2008.

A new statistic ForeclosureRadar says it is watching closely is the number of properties actively scheduled for sale – meaning that a Notice of Trustee Sale has been filed to set the auction date and time, but the foreclosure has not yet been sold or cancelled. Under California’s foreclosure code, a foreclosure sale can be postponed repeatedly for one year before a new Notice of Trustee Sale has to be filed. While postponements are quite common, they have reached record levels in recent months, ForeclosureRadar reported.

Congressman Proposes Home Loan Plan for Unemployed

Rep. Barney Frank (D-Massachusetts) wants to ensure the growing population of jobless Americans don’t fall victim to foreclosure. At a House Financial Services Committee hearing on Thursday – a committee which Frank chairs – he pushed for another $6.5 billion stimulus program he’s calling “TARP for Main Street.”

The proposal includes a $2 billion loan program for unemployed homeowners who do not qualify for other mortgage aid since they no longer have a steady income stream to claim. The initiative would essentially bring back a 1975 program that provides credit to Americans who’ve lost their jobs so they don’t also lose their home – however borrowers would have to secure the loan with their property.

One billion dollars would also be earmarked to build and maintain affordable housing, $1.5 billion to revitalize foreclosed and vacant homes, and $2 billion to help apartment tenants keep their residence if the management company defaults on the mortgage.

The program would reportedly be funded with the dividends banks are paying the Treasury for the taxpayer dollars they received as part of Congress’ $700 billion bailout.

Frank is also fast-tracking the White House’s proposed bill that would create a new federal regulatory office, the Consumer Financial Protection Agency. The agency would be the primary protector of consumers’ rights related to the purchase of financial products such as mortgages, credit cards, and other loans.

In a statement, Frank said, “Recent reports about the lack of mortgage modifications and increases in various fees only reinforce the need for this bill. I am confident that we will produce a bill that will provide greater consumer protections while in no way burdening the legitimate activities of responsible banking.”

Foreclosure Starts on the Rise!

Jacksonville, Florida-based Lender Processing Services (LPS) says foreclosure starts have increased to their second highest level since the company began keeping records in 1992. LPS released its June Mortgage Monitor Report last week, which provides mortgage industry performance indicators based on data collected as of May 31.

LPS' analysis shows that foreclosure starts in May increased 4.3 percent. Based on LPS' market data, rising foreclosures can be attributed to a larger number of states than the typical Sun Belt culprits. The company said Nevada, Florida, Arizona, California, Maryland, Michigan, Hawaii, Georgia, Rhode Island, and New Jersey all posted foreclosure starts above the national average, with the states of Washington, Illinois, and Maryland experiencing the largest percentage increases.

Total mortgage delinquencies also rose in May, to 8.49 percent, according to LPS' study. That figure represents a 5 percent increase over April and a 50 percent year-over-year climb. The LPS Mortgage Monitor also shows that the quality of loan originations has been improving, with 2009 delinquency curves well below prior years. With more attention focused on improved credit scores, lower LTV ratios, income, and documentation, LPS says overall loan vintage quality has escalated.

Based on LPS' research, the number of newly delinquent loans reached 637,822 last month. Roll volumes, which reflect loans moving to a more delinquent status (for example, moving from 30 days to 60 days delinquent), increased month-over-month, with the exception of loans moving from 60 to 90 days delinquent, perhaps signaling that more workouts are being completed for homeowners that are at the brink of foreclosure. But the April-to-May 2009 time period marks the first significant increase in loans rolling from current to 30-days delinquent in five years.

New Research Reveals One-Quarter of Mortgage Defaults Are Strategic

New research released last week by the University of Chicago Booth School of Business and the Kellogg School of Management at Northwestern University in Evanston, Illinois, suggests that a novel phenomenon is at hand in the fallout of today's housing crisis - strategic default on mortgage loans.

According to the researchers, given that homes in many markets have lost more than 30 to 40 percent of their value, a growing number of homeowners say they would simply walk away from their loans, without fear of repercussion. Based on data collected from surveys conducted within the last six months as part of the universities' Financial Trust Index, the researchers estimate that more than a quarter of defaults on mortgage loans are strategic, especially when home values have fallen by more than 15 percent.

The research project was led by Paola Sapienza, Kellogg School of Management at Northwestern University, and Luigi Zingales, University of Chicago Booth School of Business – both co-authors of the quarterly Chicago Booth/Kellogg School Financial Trust Index – as well as Luigi Guiso with the European University Institute. Their paper, entitled "Moral and Social Restraints to Strategic Default on Mortgages," finds that a disturbing number of American homeowners are inclined to purposely default when the value of their mortgage exceeds the value of their house, even if they can afford to make the mortgage payments.

The researchers say that the Obama administration's housing policy has been largely influenced by a study of the Boston housing market during the 1990-91 recession, in which homes devalued by approximately 10 percent. This study found that very few people who could afford their mortgage chose to walk away from their homes. The new research issued last week confirms this claim that homeowners refrain from defaulting as long as negative equity does not exceed the 10 percent mark.

After that level, however, it shows that homeowners start to default at an increasing pace, and walk away massively after decreases of 15 percent or more. In fact, the researcher say 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent.

Sapienza commented, "Housing policy under the current administration has focused on reducing households' cash flow problems in response to the housing crisis, but no one has addressed the negative equity issue as part of public policy regarding housing. We're in a completely different economic environment today, where for the first time since the Great Depression millions of Americans have mortgage loans that exceed the value of their home."

Sapienze and his colleagues say moral and social variables play a significant role in predicting strategic default. People surveyed who said it was immoral to default were 77 percent less likely to declare their intention to do so, while people who know someone who defaulted were 82 percent more likely to say they would default themselves.

According to Zingales, the social pressure not to default is weakened when homeowners live in areas of high foreclosures or know others who defaulted strategically. He said, “The predisposition to default increases with the number of foreclosures in the same ZIP code."

The researchers also noted that mortgage default is considered less morally wrong in the Northeast and Western regions of the country. They said that homeowners under the age of 35 and over the age of 65 were less likely to say it was morally wrong to default compared to middle-aged respondents, and respondents who supported government intervention to help homeowners were also less likely to say strategic default is immoral.

Sapienza added, "As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans. This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe."

Are We at the Bottom? A Simplified Guide to the Ups and Downs of Real Estate!

The value of real estate goes through cycles, which can be affected by many factors, including the basic rules of supply and demand. Below is a quick reference guide to some of the influencing factors and advice on how to spot a turning point in the market, brought to you by the Appraisal Institute, an industry association of real estate appraisers headquartered in Chicago.

1. A spike in local sales activity - A spike refers to a significant rise in the number of home sales (or values) in a local market area, but does not necessarily mean continued growth. It could be just a one month phenomenon.

2. Higher asking and selling prices vs. appraisal value opinions for residential properties - Appraisers study the markets, and when the data shows higher sale prices in comparable properties, market value opinions will increase proportionally. Appraisers seek evidence of value but do not create the value. In time periods with low activity, evidence of any kind is difficult to find.

3. More activity at open houses - Five to eight people is considered average, so a dozen or more people attending an open house means buyer interest is picking up. Also, the mood of the attendees is important. Buyers' interest alone does not always translate to effective purchasing power. If the number of buyers in the market increases but they do not have requisite down payments, the sales may still not occur.

4. Shorter marketing times - In some markets, houses have been up for sale for more than a year. In most balanced residential markets, properties that are priced competitively will typically sell in less than six months. If the days-on-market (DOM) is shortening, many practitioners will read an improvement in the market.

5. Reduced number of foreclosures and short sales - A reduction in these transactions commonly signals a more balanced market. However, if lenders are reluctant to foreclose because of an oversupply of inventory, they may choose to wait to repossess the properties, which could allow a spike in the number of foreclosures later despite a better market condition.

6. Stabilized employment - Stable or increasing employment rates provide the necessary confidence for potential buyers to invest in a home, since most buyers rely on borrowed funds to make real estate purchases and borrowing money requires a source of repayment, which usually means a job. An increase in this basic need, will enable more real estate sales.

7. Fewer buyer incentives and seller concessions - Seller-paid incentives or concessions are a sign of seller motivation. If there are fewer builders offering "free" upgrades and fewer sellers sweetening the deal with enticing add-ons, it may be a sign of lessening supply and therefore a better market.

8. New construction starts - Many builders are attune to their markets and will not build new homes without a corresponding contract for sale or a perceived increase in demand. An increase in the number of building permits usually indicates higher demand and higher prices. If residential properties are selling for 25 percent less than they cost to build, only a few new homes will be built.

9. "Move-up" buyers entering the market - More buyers willing to move to a larger or superior quality home indicates a healthy market. The lack of buyers at the lower end of the price range will have a chain reaction throughout the market. If a buyer for a high priced home has a lower priced home to sell first, the sale of the higher priced home may have to occur before the higher priced one can sell.

10. Apartments advertising renter specials - fewer renters in the market may indicate more people are moving into owner-occupied homes, or it could indicate a reduction in population. Lower population will cause an oversupply of housing which will oftentimes permeate throughout several markets.

The Appraisal Institute is a global membership association of professional real estate appraisers, with nearly 25,000 members and 92 chapters throughout the world. Organized in 1932, its mission is to support and advance its members as the choice for real estate solutions and uphold professional credentials, standards of professional practice, and ethics consistent with the public good.

Appraisal Institute Lashes Back at NAR

The National Association of Realtors' (NAR's) chief economist, Lawrence Yun, publicly stated earlier this week that “poor appraisals” are stalling home sales. In announcing NAR's numbers for home resales in May, Yun said, “Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

Yun's remarks have drawn the ire of appraisers. The Appraisal Institute immediately issued a statement in response to Yun's commentary on Tuesday, saying, “We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with. The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today.”

Bill Garber, director of government and external relations at the Appraisal Institute, said, “Appraisers provide lenders with objective information and value opinions that help protect them from making questionable loans and investments and help them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don't act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately help ensure that lenders loan the proper amount, buyers don't pay too much, and sellers get a fair price.

According to Yun, though, lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. He said, “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

The Appraisal Institute did say in its statement, "In these complex markets, it is particularly important that lenders use only the highest caliber of appraisers,” pointing out that members of its organization who holding an MAI, SPRA, or SRA designation have met extensive experience and education requirements and must comply with the Code of Professional Ethics and Standards of Professional Appraisal Practice.

Mortgage modifications are happening

NEW YORK (CNNMoney.com) -- Two months ago, Ivan Coleman was struggling, his mortgage payment having ballooned to $1,200 - more than half his income. Starting June 1, his monthly payment will fall to $725.

"My mortgage company was helpful, eager to have me stay in my home," said Coleman, who first fell behind on his payments after losing his job.

Coleman, who has owned his Maple Heights, Ohio, home for ten years, is among the first wave of homeowners to have their mortgages modified under President Obama's foreclosure-prevention program. As of last week, for example, Chase Mortgage, the servicing side of JP Morgan Chase (JPM, Fortune 500), had issued more than 15,000 modifications under the plan.

Bank of America (BAC, Fortune 500), which began reaching out to at-risk borrowers in early April, has sent out 100,000 letters to borrowers who could potentially benefit. It has issued some modifications, although it's not releasing data on just how many.

When the plan went into effect on March 4, Obama predicted it could help as many as 4 million people stay in their homes. It did this primarily by encouraging lenders to assist delinquent or at-risk mortgage borrowers by lowering interest rates to the point that total monthly housing payments would not exceed 31% of their gross monthly income.

How to apply
Becoming one of those 4 million takes five simple steps.

Step 1: Visit the Web site
Everything you need to get started is located here MakingHomeAffordable.gov

Step 2: Take the quiz
Click on "Find out if you are eligible" and then select the "Home Affordable Modification" option. (The "Refinancing" option is just for those who are current on their loans.) Take the five-question quiz. Based on your answers the site will tell you if you likely qualify for a modification under the Obama plan.

If you do - meaning you bought your house before Jan. 1, 2009, and owe less than $729,750; it is your primary residence; you are delinquent on your payments; and your payment is more than 31% of your monthly gross income - the site will present an eight-item checklist of paperwork you'll need to submit to your lenders.

Step 3: Compile the paperwork
The site recommends that you have: household-income documentation, such as pay stubs; tax returns; savings account records; mortgage statements; second mortgage info, such as home-equity loans statements; credit card bills; and information on other debt, including student and car loans.

You will also be asked to write a letter describing why you need assistance. Your reasons could include medical expenses, job or income loss, or even divorce.

A well-done hardship letter can make a difference in whether a loan wins modification, according to foreclosure-prevention counselors. These letters can point out factors that led to the delinquency but that may not be evident from your other paperwork.

"Don't say, 'I never could have afforded it in the first place,'" advised Tom Kelly, a spokesman for Chase Mortgage. "That isn't the ideal answer."

Instead, explain that illness prevented you from working for a time, that you've recovered and are back at work and paying bills again. Or a temporary job loss cause the problem, etc. Without that context, lenders may think you were just careless - or worse.

Step 4: Call your lender or servicer
Once your information packet is complete, call your lender or servicer - the company you write your monthly mortgage check to. To see if your lender is participating in this plan - or to get the phone number - click on "Contact Your Mortgage Servicer" on the Making Home Affordable site. After you've talked to one of their modification specialists, you'll be instructed to fill out an application and submit your documents.

There should be no need for face-to-face meetings with servicers, according to Jumana Bauwens, a spokeswoman for Bank of America. She said borrowers will be able to do everything over the phone and through the mail.

Step 5: Wait
During this phase, the lender will decide the approach it wants to take to reducing your debt: lowering your interest rate, extending the life of your loan, or reducing your debt balance.

The lender's first step will be to get your payment down to 38% of your monthly gross income. Once the debt is reduced that far, the government will pay the lender to lower it to 31% of income.

At that point, the loan will be rewritten, you will get the new paperwork to sign and the new payment will go into effect on your next bill.

This process has been taking several weeks to a month, so be patient. Although the banks expect it will get quicker as their personnel become more familiar with the modification plan.

"The 31% is now an industry standard and that's much more easily calculated," said Chase's Kelly.

One thing to remember: These are trial modifications that only become permanent once you make on-time payments for three consecutive months.