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.