HousingWatch

Mortgage Interest Rates: Lowest Since 1971!

Bendix Anderson — 2010-08-23T13:40:00 00:00

Interest rates keep breaking records, dropping lower and lower, week after week.

Fear of deflation and a double-dip recession pushed the average interest rate for a 30-year, fixed-rate home loan down to 4.42 percent, with an average origination fee of 0.7 percent. That's the lowest average rate since Freddie Mac began keeping track in 1971, according to Freddie Mac's latest Primary Mortgage Market Survey. This is the ninth week in a row the survey has set a new, historic low.

Impossibly low interest rates seem to have become the new normal -- just like high unemployment. And because of economic forces including new recession fears, federal actions, and the stagnating economy, they're likely to stay very, very low for the next year, according Frank Northaft, chief economist for Freddie Mac.
For more than a year now, Northaft and other economists have been predicting that interest rates will "gradually" rise. The increase keeps getting delayed as rates inch downward. And the "gradual" part of the prediction keeps getting more gradual as the economic recovery weakens.

At the beginning of this year, economists like Northaft figured rates would rise from the high 4 percent range to 6 percent by the end of 2010. Northaft now expects rates to rise "maybe to 5 percent by mid-2011."

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Here's a closer look at some of the forces keeping interest rates low:

No one (on Wall Street) cares about the deficit.

One day, if the U.S. Government keeps on spending more money than it has, investors will stop buying so many U.S. Treasury bonds. The yield on the bonds will rise, along with interest rates for everyone else.

But that day is still a long way off. For now, Treasury bonds seem like a safer place to invest money than practically anywhere else. The yield on 10-year Treasury bonds is at a rock bottom 2.6 percent.

For now, federal policy is to increase inflation.

At some point, in order to prevent high rates of inflation, the Federal Reserve will raise its benchmark interest rates from close to zero, raising interest rates throughout the economy.

But that day is also a long way off. Federal officials now worry more about economy-crushing deflation. To be safe from falling prices, falling wages and even fewer jobs, the Feds aims to keep inflation at a "target" rate of 2 percent a year. That means officials will try to push inflation up from where it is now, which is dangerously close to the tipping point of zero percent. You read that right: The Fed is trying to increase inflation, largely by keeping interest rates low.

No big news

For the last 12 months, compared with the wild chaos of 2008, there's been a depressing sameness to the economic news. Europe wobbled but righted itself. GM is going to be a private company again. Banks are also making money, but we try not to think about the bailouts. Meanwhile, high rates of unemployment and foreclosure continue, month after month with little change.

There's an upside to the depressing sameness of the news -- low interest rates. In the crisis days, mortgage lenders added extra cost to interest rates to compensate for the unpredictability of the time. As the economy stabilizes, lenders are more likely to pass their low cost of capital on to borrowers.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Pending Home Sales Decline Points to Weak Recovery, Not Crash

Bendix Anderson — 2010-08-05T10:30:00 00:00

Filed under: News, Economy

Pundits warn of a new housing crash after a tiny number of people signed contracts to buy homes in June, according to the Pending Home Sales Index kept by the National Association of Realtors.

The seasonally-adjusted Index sank to 75.7 in June. That's down slightly from May, and down steeply from April and March, when buyers rushed to take advantage of the federal homebuyer tax credit.

"Hell has broken loose all over again in real estate. Don't buy a home. Sell one," said commentator Michael David White at HousingStory.net.

However, if you look closely at the numbers, the Pending Home Sales report seems less like a sign of impending doom and more like all the other economic headlines you've been reading, pointing to continued weakness and a wimpy recovery.
The Pending Home Sales numbers have a big problem: The index is adjusted downward by U.S. Census officials to account for the usual summertime rush to buy homes -- but economists at Standard & Poor's point out that extremes of the last three years have made a mess of the math behind seasonal adjustments.

To really see what is going on, ignore the seasonal adjustment and focus on comparing this year's unadjusted index with last year's. This year, without the seasonal adjustment, the Pending Home Sales Index peaked just before the tax credit deadline at a stunning 133.4 in April, up 24 percent from the year before. In June, without the adjustment, the index crashed back to 92.9, down 20 percent from the year before. Taking together, the springtime boom and and the summertime bust add up to a very slight overall improvement.

Hardly a crash -- but hardly great news. Of course, to crash an object generally needs to be moving. For example, it's hard to crash a parked car. Our housing market has been stalled for the last year. Sure, home prices have risen slightly over the past 12 months. But the increase is small -- 4.6 percent as of May, according to the latest Case-Shiller 20-City Index.

That increase only looks steep to people who expected values to drop. And most of the increase happened last summer, when it still seemed slightly possible that the economy might come roaring back to life. Home prices have been more or less flat for the last seven months, according to Case-Shiller.

Pessimists like White say foreclosures will strike our stalled housing market and force prices down so steeply that you should sell your home right now -- before it's too late.

But foreclosure actions already have been striking continuously for the last year, at record rates of roughly a third of a million a month, according to research firm RealtyTrac. That's so high that it begins to strain credibility and common sense to claim that the rate can get tremendously worse. For the rate to double, there would have to be well over 600,000 foreclosure actions a month. Barring some unexpected new economic apocalypse -- in addition to all the bad news we've already suffered through -- that's not going to happen.

Instead, the consensus among economists is that the housing market will continue more or less as it has been, as record-high foreclosures and a weak-but-stabilizing job market square off against historically low interest rates, to keep home prices treading water.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Mortgage Modifications: Why a Third Are Canceled

Bendix Anderson — 2010-06-29T13:13:00 00:00

Filed under: News, Economy

The federal government says foreclosure prevention has helped millions of people. But sometimes it seems hard to find a pundit or news story that mentions foreclosure prevention program without using the word "failed," often in the headline.

Whom should you believe?

Government officials say 2.8 million homeowners at risk of foreclosure have had their home mortgages modified, lowering monthly payment by an average of about $500 since April 2009. But critics point out that not all of those modifications have lasted.

For example, of the 1.2 million trial modification started so far through the Home Affordable Modification Program (HAMP), about a third, or 429,696, have been canceled, according to the latest reports. Many skeptics worry that foreclosure prevention has merely delayed foreclosure for millions of homeowners who are still likely to eventually lose their homes.
First, let's look at the big number: the 2.8 million modifications claimed by the government. That includes the 1.2 million HAMP trial modifications, 400,000 modifications through the Federal Housing Administration, and another 1.2 million loan modifications negotiated by HOPE NOW, a national coalition including government-approved loan counselors, mortgage companies and investors.

Based partly on these modifications, officials are taking credit for stabilizing a collapsing housing market. "We already know that due to the Obama administration's efforts, the housing market is significantly better than anyone predicted a year ago," said Housing and Urban Development Secretary Shaun Donovan.

But that still leaves the question of the what happened to the close to half-a-million people who had their trial modifications canceled. They were kicked out of the program for a range of reasons: Some had mortgage payments already less than 31 percent of their income, missed trial payments or had incomplete or unverifiable documentation, according to Treasury officials.

According to a January statement by JPMorgan Chase, for every 100 trial modifications begun through the fall of 2009, a quarter had not paid as agreed. Another 29 borrowers did not submit all the required documents. "Many borrowers return forms missing key information (signatures, Social Security numbers, etc.) or do not return one of four required documents," according to a statement from Chase. Another 13 out of a 100 borrowers are not eligible for HAMP but will qualify for another type of loan modification and 33 out of 100 borrowers are able to be underwritten for permanent HAMP modifications.

What happened to these people? How were they "helped?"

It now appears that about half of the borrowers that didn't qualify for HAMP had their loans permanently modified anyway by their loan servicers under alternative programs, according to a survey of the eight biggest loan companies in the HAMP program. Another quarter of the canceled modifications were still awaiting action by the lenders, according to the survey. The remaining quarter of the canceled modifications ended in a variety of ways, ranging from a payment plan, a loan payoff, a bankruptcy filing to knock out heavy credit card debts, or a short sale. Only 7 percent had gone to foreclosure by the end of May.

And here's another unexpected thing -- 10 percent of the loans that had their modifications canceled are now current. The borrowers got out of foreclosure and kept their homes without any help from the program. It's not clear from the report where these borrowers got the money to get up to date on their loans. Some may have had the money all along. Others borrowers who had lost income may have found new employment.

The survey results are a surprise for all the pundits, myself included, who thought loans that had their trial modifications canceled would be headed straight to foreclosure.

Of course, the future is still unclear for many borrowers who entered foreclosure-prevention programs. More than 400,000 borrowers still have unresolved HAMP trial modifications. Researchers and officials have also begun to track the hundreds of thousands of borrowers with permanent modifications, to see how many slip back into foreclosure, according The Associated Press.

Whatever you think of the federal plan to stop foreclosures, the last page of the latest government-issued Housing Scorecard report has some important numbers. In addition to the tally of temporary and permanent modifications, there's the number of borrowers who are "underwater," meaning they owe a larger balance on their home mortgage than the home is now worth: 11.3 million, according to First American CoreLogic. These people might not all give up their homes to foreclosure, but they are vulnerable to new economic shocks. The report also counts 2.4 million seriously delinquent loans, according to LPS-McDash and HUD. Finally, officials count 3.6 million vacant homes held off the market, according to the Census Bureau. Those homes will eventually have to be sold.

So, no matter what you think federal foreclosure prevention effort -- and I think the feds are doing better than anyone gives them credit for -- the housing market still faces huge challenges that won't go away soon.

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Lowest Interest Rates Ever, Thanks to You

Bendix Anderson — 2010-06-24T14:13:00 00:00

Filed under: News, Economy

Interest rates for home loans are the lowest on record, despite months of predictions that they would rise. That's great news for the housing market.

To whom do we owe thanks? Take a look in the mirror.

American investors, from individuals to institutions, are helping to push down interest rates by buying up bonds, starting with U.S. Treasury bonds. Mortgage interest rates tend to follow the yield on Treasury bonds very closely, and U.S. investors are now the second largest group of investors in Treasuries, pushing the price up and the yield on the bonds down.

The large stake that Americans own in our own national debt may help calm fears that a decision made by investors in some faraway country -- such as a change in Chinese monetary policy -- could hurt American borrowing power.
We've gotten used to thinking of China as the loan shark who gives us the cash our federal government needs to fund deficit spending. And it's true that Chinese investors hold $895 billion in Treasury bonds, according to a March 31 report from the Treasury Department.

China's central bank said last weekend that it would allow the Chinese currency, the renminbi, to trade more freely within a controlled range against foreign currencies, including the dollar. That means that China might no longer force down the value of its own currency by buying so many U.S. dollars, usually in the form of Treasury bonds. (Why would China want to weaken its own currency compared to the dollar? To make Chinese exports cheaper and more competitive in American stores.) The change could leave a huge hole in the market for Treasury bonds and potentially higher interest rates for borrowers.

But China isn't the only holder of U.S. debt. U.S. households own $796 billion in Treasury bonds, according to the Treasury.

Stop and think about that for a minute. U.S. citizens now own almost as much of the U.S. debt as China does. Japan is not far behind with $785 billion, followed by long list of investors from other countries. The diversity of investors gives interest rates some of their relative stability.

These investors put their money into U.S. bonds because, despite our own budget deficit, the U.S. looks more stable than many other countries. Since late April, the price that investors pay for 10-year U.S. Treasury bonds has spiked, driving the yield on the bonds from 3.9 percent in late April down to below 3.2 percent, where the yield has been for most of June.

Bonds backed by home loans have done the same, leading to lower interest rates. The average interest rate for a 30-year fixed-rate mortgage averaged 4.69 percent, with an origination fee of 0.7 percent, in the week ending June 24, according to the latest Freddie Mac Primary Mortgage Market Survey. That's the lowest ever recorded since Freddie Mac started keeping track in 1963.

Rates should stay low for at least the next week or so, according to more than half the experts polled by Bankrate.com.

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Home Tax Credit Expiration to Lead to Second Housing Slump?

Bendix Anderson — 2010-06-22T10:43:00 00:00

Filed under: News, Economy

We had a few months of good news for the housing markets, as homebuyers rushed to take advantage of the $8,000 federal homebuyer tax credit. But leading indicators for the housing market -- from the number of mortgage applications, to housing start, to builder confidence -- have tanked since the homebuyer tax credit hit its deadline April 30.

It's like the hangover after a wild party, leading to the usual question: Was it worth it?
First, we might still scrape a few more months of good news out of the homebuyer tax credit. The May and June reports for new and existing home sales should both stay high, as homebuyers who signed contracts back in April make it to the closing table. But expect those sales figures to drop soon after.

In early June, the Senate voted to give homebuyers who made the April 30 deadline to sign a contract a full five months, until September 30, to close the deal and claim the credit. Experts have been concerned that the current deadline to close, by June 30, wouldn't be enough time as banks struggle to handle the flood of loan applications. If the change becomes law, no hopeful homebuyers should be forced to break contracts because they can't arrange a mortgage and close the deal in time.

However, once these sales are finished demand for housing will drop. Experts now say that the tax credit motivated hundreds of thousands of people who would normally have bought homes later in the summer to hurry up and sign contracts this spring. That inflated the housing activity, creating a mini housing bubble that will deflate this summer.

Move these sales forward in time was the biggest effect of the tax credit, according to experts like Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association (MBA).

That's the same thing that happened last year, when demand for housing built up before an earlier deadline for a $7,500 homebuyer tax credit and collapsed in the months after the deadline. For example, existing home sale rose from a seasonally-adjusted annual rate of less than 5 million a year to nearly 6.5 million in November, only to fall to a little over 5 million in January and February, according to reports from the National Association of Realtors.

The good news is that an existing sales rate of more than 5 million is still an improvement. "Sales remained well above the levels exhibited in early 2009, boosted by an improving job market, rising confidence and continued low interest rates," said Frank Nothaft, chief economist for Freddie Mac.

After the dust settled, experts like MBA's Frantantoni say that between 100,000 and 300,000 people who wouldn't have bought homes at all in 2009, made purchases because of the tax credit. This year's tax credit should achieve a similar result, he said. So even at the low end of the estimates, Frantantoni believe that the two home buyer tax credits will take a net 200,000 unsold homes out of the inventory of homes for sale. On the upper end of the estimate, the tax credits helped sell more than half-a-million unsold homes.

Freddie Mac's Nothaft believes that this year's tax credit will also be a net win, once the fast spring and the slow summer are added together. "We project home sales up about 10 percent for the year, relative to 2009's annual volume," he said, crediting the increase to the tax credit, continued low interest rates, and a slowly healing national economy.

So was the tax credit worth it?

It's the same dilemma faced by any business that puts a product on sale - demand spikes up during the sale then falls back down after the sale is finished. The real benefit to the business is that the store has a chance to clear away some of its excess inventory.

Since an excess inventory of unsold, foreclosure houses is that dead weight holding down the housing markets, anything that cuts into that inventory is good news for housing.

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Fannie and Freddie Delisted From Stock Exchange: Does It Matter?

Bendix Anderson — 2010-06-18T10:00:00 00:00

Filed under: News, Economy

It's the end of an era: Mortgage giants Fannie Mae and Freddie Mac no longer will be traded on the New York Stock Exchange. The Federal Housing Finance Agency made the request. From now on, both government-controlled companies will be traded only on the much-smaller Over-the-Counter Bulletin Board.

But will borrowers affected by the change?

Wall Street insiders call it delisting. It's what happens to companies whose worth, in terms of their stock price, has collapsed with little hope of ever recovering. It's another way of saying a company is just about dead. The FHFA claims this is not the case in this instance.

Indeed, Fannie and Freddie may be dead to the New York Stock Exchange, but they are very much alive in the home loan business -- the vast majority all new home loans now receive a guarantee from Fannie or Freddie that pushes down the mortgage interest rate. So Fannie Mae and Freddie Mac are dead -- long live Fannie Mae and Freddie Mac.

What's really going on?
The answer is central to understanding what might happen to Fannie and Freddie once Congress finally gets around to reforming them, probably sometime next year. For better or for worse, reform may change for years to come the kind of home loans borrowers can get.

The government has seized Fannie Mae and Freddie Mac, and officials are now running the mortgage giants almost like government agencies. That makes Fannie and Freddie different from all the companies that received government handouts during the bailout season of 2008. Fannie and Freddie's owners are among only a few that lost their companies. Rather than being bailed out, these owners were thrown out of the boat.

This difference -- between a bailout and a seizure -- explains why so many of the bailout banks have returned their bailout funds to the Troubled Asset Recovery Program, or TARP, but not Fannie Mae and Freddie Mac. Many bailout banks gave the government preferred stock in exchange for bailout cash. Now that these banks have recovered, the government is selling its bank stocks, often at a big profit. But with Fannie and Freddie stock delisted, it's not clear what the government plans to do with the preferred stock it holds in them.

Meanwhile, Fannie and Freddie actively are encouraging servicers to modify home loans that are guaranteed by Fannie and Freddie; that's in order to prevent foreclosures, often at a loss. Those come on top of losses already suffered by Fannie and Freddie because of delinquent loans, foreclosures, and bond speculation back in the boom years. The government already has put $145 million into Fannie and Freddie to cover losses at the two companies, reports the Wall Street Journal.

It's possible that "reform" of Fannie Mae and Freddie Mac simply will make it official, turning the companies into permanent parts of the federal government like the Federal Housing Administration or the Federal Home Loan Banks. Fannie Mae actually started as a government agency and operated for decades without problems until it was sold to private investors in the 1960s.

Reform also could put Fannie and Freddie largely out of business. One government official recently speculated that without Fannie and Freddie, interest rates would be higher and loan terms shorter -- but in exchange, he felt the housing markets would be more stable. However, that stability is not a sure thing. Most commercial real estate loans weren't guaranteed by Fannie and Freddie, but that didn't stop the commercial real estate finance system from collapsing in the crash.

However, there is a third, more dangerous option. Fannie and Freddie could go back to being giant private companies owned by investors but under the protection of the federal government. That's exactly what they were before the crash. Congress will be strongly tempted to do this because a sale of the cleaned-up companies would raise billions in the short term, helping to repay the taxpayers investment. But in the long term a sale would leave the companies vulnerable to repeating the past.

Once again Fannie and Freddie's profits would go to investors while the risk would likely hang over the heads of taxpayers. Once again Fannie and Freddie could be tempted stretch their housing mission and their ability to borrow nearly unlimited amounts of money into highly lucrative, highly dangerous territory, such as buying hundreds of billions of dollars in bonds using borrowed cash, as they did during the boom years.

For right now, however, the delisting is largely symbolic. In the boom years, the idea of a quasi-public company both helping borrowers and profiting from them seemed like a winning idea. But like so many other bubble-headed notions of the era, when this one popped, it vanished into thin air.

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Foreclosures Fall as Banks Streamline Process

Bendix Anderson — 2010-06-11T16:30:00 00:00

Filed under: News, Economy

Foreclosures dropped again in May -- the second month in a row that the number of foreclosure actions fell, according to research company RealtyTrac.

The news will make for some positive headlines -- but we've seen fluctuations like this before. The rate of foreclosure is still absurdly high.

The genuine good news is buried a little deeper in the RealtyTrac report. Banks are cutting far into the backlog of properties in the foreclosure process, while fewer new properties are getting into trouble as the job market begins to stabilize.

"Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed," said James J. Saccacio, chief executive officer of RealtyTrac. "Overall foreclosure activity [is] leveling off while lenders work through the backlog of distressed properties that have built up over the past 20 months."

The question is whether this lull is an early sign of upward momentum in the housing market or rather a quick torpor before another round of recessionary catastrophe.
Banks took foreclosure actions against 322,920 properties in May. That's down 3 percent from the month before, including default notices, bank seizures, and foreclosure auctions. But whether that's improvement depends on how you look at the information. True, banks took foreclosure actions against fewer properties in May compared to March and April. But the number of foreclosure actions in May was up compared to January and February. And it is almost exactly the same as it was a year ago.

In reality, the number of foreclosures has barely changed at all: Give or take 20,000 or 30,000, we've had a third of a million foreclosure actions a month for the last year. That's an incredibly unhealthy level, at least four times the rate of foreclosure actions in a healthy housing market.

Still, fewer properties are getting into trouble. Since job losses have slowed, it makes sense that the number new delinquencies would start to decline eventually. The most common reason borrowers sought help from a foreclosure-prevention process like the federal Home Affordable Modification Program is "loss of income," according to officials.

About 96,000 new properties received default notices in May. That's the lowest number of properties to begin the first stage of the official foreclosure procedure since November 2008, and about a third less than the peak in April 2009. The rules are different from state to state, though banks typically issue default notices after a mortgage is more than 90 days late.

In contrast, the number of properties to reach the last stage in the foreclosure process was at a record high: 94,000 U.S. properties were repossessed by lenders in May. Not every default notice ends in foreclosure, though: There are also short sales and even successful loan modifications, in addition to the occasional borrower who emerges from their financial difficulties. So this means that even though fewer are entering the process, the great majority of those distressed properties, finally, are going all the way through foreclosure.

It will take a long time to work through that backlog. In the first quarter, 14.01 percent of people with home mortgages were 30 days or more late in their payments or in the foreclosure process. That works out to about 7.3 million borrowers in trouble, according to the National Delinquency Survey from the Mortgage Bankers Association. That's hundreds of thousands of fewer borrowers behind in their payments than MBA counted in the third and fourth quarters of last year.

Faster processing by lenders; fewer borrowers in trouble. Sounds at least a little like a recovery, no?

Foreclosure Filings by Month

May, 2010: 322,920
April, 2010: 333,837
March, 2010: 367,056
February, 2010: 308,524
January, 2010: 315,716
December, 2009: 349,519
November, 2009: 306,627
October, 2009: 332,292
September, 2009: 343,638
August, 2009: 358,471
July, 2009: 360,149
June, 2009: 336,173
May, 2009: 321,480

(Information from RealtyTrac.)

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Homebuyer Tax Credit Helped Home Sales -- Really!

Bendix Anderson — 2010-06-09T14:00:00 00:00

Filed under: News, Economy

Yesterday a provocative headline about the housing market appeared online: "Many March, April Pending Home Sales May Never Close."

That's terrible news, or is it?

The trouble is that the economist quoted in the story is wrong. He makes a basic, quite understandable goof about the date of a deadline and then appears to base his entire dire prediction on that mistake.

The interesting thing about this story is that it may show how the bias among economists and journalists has shifted: It's now relatively easy to get published if you say something depressing about housing, even if you're wrong.

What is the reason for this bias?
First, I should prove my claim that the economist made a mistake. The HousingWire story quotes Mark Rogers, an economist with the research firm Econoday, saying that the recent boom in the demand for housing is likely to end with the expiration of a big government program, the $8,000 homebuyer tax credit.

Okay, we knew that.

But Rogers goes further. He says many of the homes that went under contract this spring "may not have closed by the required [tax credit] deadline and will never close." Pending sales in February and March spiked with what Econoday considered "last minute" buyers "hoping to leave enough time to close before May 1."

Thousands of broken contracts to buy homes would be a big blow to the housing markets. There would probably be confusion, the loss of a total of millions of dollars in down payments, and a scramble to put the homes back on the market.

These broken contracts, if they actually happened, would be grim evidence that a big government program that tried to help the housing markets, the federal homebuyer tax credit, was actually hurting people and damaging the housing markets. Economists and organizations like the Mortgage Bankers Association say the tax credit should take hundreds of thousands of homes off the market that would not have otherwise sold this year. Roger's broken contracts would have made a mockery of that.

But here's the problem: the economist got the date wrong. Most homebuyers can claim the $8,000 tax credit if they "enter into a binding contract to buy the home before May 1, 2010." But then the homebuyers have two full months to find a mortgage and close the deal -- they can still claim the tax credit if they "close before July 1, 2010," according to the Internal Revenue Service.

So even buyers who signed contracts just before May 1 will probably have time to get to the closing table by the deadline.

On Tuesday, HousingWire updated the story. The closing deadline of "before May 1" has been cut out. The rest of the story, including the frightening headline, remains the same.

We can't be sure what process produced the story, since neither the journalist nor Econoday were available for comment. However, this story reminds me of something I've found to be true over the past 10 years: Once journalists get used to saying something, we tend to keep on saying it, even after it's no longer true.

Back in the golden days of the housing boom, journalists (myself included) tended to nod seriously at any mention of the "value of homeownership." Now, in the housing crash, we all tend to frown and shake our heads over "housing hype" and the possibility of a "double-dip" in housing prices.

In reality, the housing markets have been moving sideways for almost a year. Home prices might sink a little more, but the dramatic drops of past few years seem to have eased. We seem to be scraping along the bottom of the housing crash.

But let me be the first to admit the sordid truth: Every morning I go through the news looking for the signs of some new catastrophe coming for the housing markets, just to make sure that I'll have something to write about for the day.

Judging by this story, I don't think I'm alone.

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Homebuyers Hit by Commercial Real Estate Slide

Bendix Anderson — 2010-06-08T08:30:00 00:00

Filed under: News, Economy

Maybe you've considered refinancing your mortgage with a loan from a smaller bank. Well the next time you go to visit, the sign on the bank window may say "closed." That's because many small and regional banks are under serious pressure from the growing troubles in commercial real estate.

Three more banks failed this week alone: TierOne Bank of Lincoln, Neb.; Arcola Homestead Savings Bank of Arcola, Ill.; and First National Bank of Rosedale, Miss. So far, close to 200 banks have gone under since the start of the financial crisis, nearly all of them smaller "community" banks, according to a list kept by the Federal Deposit Insurance Corp.

More than 700 more banks are on the FDIC's confidential "Troubled Bank" list, according to The Associated Press. That's close to one in 10 insured depository institutions, up from fewer than 50 troubled banks just a few years ago.

What's going on? Blame the commercial real estate market.
First, not every small or community bank is in trouble -- 80 percent of community banks have strong ratings from government regulators. But of the banks in trouble, "the reasons cited for these failures have become depressingly similar in an exceptionally large proportion of cases," said John Dugan, the U.S. Treasury's comptroller of the currency.

Reason Number One: "Excessive concentrations in commercial real estate lending, especially construction and
development lending, which produced very large losses," said Dugan. Also, banks raised money in risky ways "to fund rapid growth, especially in commercial real estate lending."

Most of the smaller regional banks didn't have the scale or the cash to play the billion-dollar games played by the largest "money center" banks, such as issuing bonds, or trading in derivatives such as credit default swaps. Instead, many small and regional banks invested heavily in commercial real estate. In particular, commercial banks used to dominate the business of making construction loans to commercial real estate properties and kept most of these loans on their own books.

Commercial real estate is now "bouncing along the bottom" of its long slide, according to the analysts at research company Real Capital Analytics. The default rate for commercial real estate mortgages held by the nation's FDIC-insured depository institutions grew to 4.17 percent in the first quarter of 2010. That's the highest default rate reported since 1992.

About half of these defaulting commercial real estate loans were held by smaller banks with assets of between $100 million to $10 billion. The bad news for these smaller banks is that commercial real estate loans make up a large percentage -- 33.4 percent -- of all the loans on their books, according to Real Capital.

The good news is that, as Real Capital says, commercial real estate seems to be scraping along the bottom. Hopefully commercial real estate -- and local banks -- will recover some of their strength soon.

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Home Prices to Rise Average of 5 Percent Annually (If We're Lucky)

Bendix Anderson — 2010-06-07T16:00:00 00:00

Filed under: News, Economy

Home prices are likely to rise. Maybe not today, maybe not tomorrow, but soon and, on average, for the rest of our lives, according to one reading of a common sense report from the Citizens Housing Planning Council (CHPC).

Is this news? For a lot of people, the answer is yes.

The report reminds us of an old rule of thumb in real estate, one that seems to have been forgotten in the real estate boom -- and the bust that followed.

For several decades, between the end of World War II and the start of the most recent housing boom, home prices increased slightly faster than inflation, at an average rate of about 5 percent a year. So by historic standards, it's acceptable to call 5 percent a "normal" rate of home price appreciation, according to the economists at Freddie Mac.

Home prices grew much faster during the housing bubble and collapsed during the housing crash. But once the boom and crash are finally behind us, it's possible to imagine prices returning to their "normal" range.
"While any year or period has its own demographics, regulatory, or inflationary factors that would alter the "normal" line, the Freddie Mac study notes that 5 percent has been the historical post war average increase," writes Harold Shultz, senior fellow with CHPC. "Even in this bubble it's noteworthy that the prices seem to fall back to this basic 5 percent per year increase."

CHPC's chart shows that several major cities in the Case Shiller Index, along with the Case Shiller 10-City Index, have already begun to follow the steady red line that CPHC calls the "Projected 'Normal' Increase." The notable exception is the yellow line that marks foreclosure-plagued Las Vegas, which continues to dive far below "normal."

I believe Harold Shultz's "normal" increase is helpful, because it can help us get back to an understanding of the real value of real estate. Somewhere, beyond the hype and terror of the real estate bubble, homes have value as places to live. It makes sense that the value of a home would grow along with inflation and average incomes. Add a little extra -- about 1.5 percent -- because America's population continues to grow overall as it did through the post-World War II decades, and you get an average growth to home prices of about 5 percent a year.

Of course, I'm not advising anyone to run out and "invest" in the next housing boom. As an investment, a 5 percent annual yield is nothing. I mean "nothing" literally, since most homeowners have a big mortgage that covers much of the value of the home. If the homeowner just refinanced, that mortgage probably now has an interest rate of -- let's round up -- 5 percent.

But a home is supposed to be a place to live, not a scheme to get rich quick.

Harold Shultz's report harks back to an almost-forgotten era when the value of a home was predictable, even boring, rising just a little bit each year, barely beating inflation, like a big savings account with aluminum siding.

Note how I said a savings account -- not a checking account, or a credit card. Once homeowners get back to the business of savings for the long term, there's a reasonable chance home values will revert to their predictable but steady pattern of rising slightly but steadily over a period of decades. Just don't count on your house making you rich.

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Housing Demand Crashes as Effects of Tax Credit Wane

Bendix Anderson — 2010-06-04T13:00:00 00:00

Filed under: News, Economy

Maybe you had an open house last weekend and nobody came. You weren't alone. The number of people buying homes fell steeply in May, according to one of the first reports to describe home buying activity for the month, an index of mortgages applications to buy homes.

The Purchase Index for May from the Mortgage Bankers Association, hit its lowest level in more than a year. This marks a huge turnaround from earlier this spring, when demand for housing went through a mini-boom ignited by the expanded $8,000 homebuyer tax credit.

That mini-housing boom is over now, and we're just beginning to see how deep the mini-housing crash that follows is likely to be.
To take advantage of the homebuyer tax credit, most buyers needed to sign a contract by April 30, and they'll need to close the purchase of their home by the end of June. So it makes sense that reports such as Pending Homes Sales, which records the volume of contracts signed, showed big numbers for April, just before the April 30 deadline. Pending Home Sales also showed almost the same big numbers last fall, when the homebuyer tax credit got close to its first expiration date.

After the deadline passed for the tax credit last fall, home sales crashed. Now it's happening again.

The Purchase Index from the Mortgage Bankers Association is one of the first measures of activity after the April tax credit deadline. It fell every week in May with an average seasonally adjusted index number of 205 for the month, down nearly 20 percent from April.

So, how bad is this news?

Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, is not panicked by the falling demand in May, any more than he celebrated the rising demand in April.

"It's roughly the same magnitude as the decline we saw last fall," Fratantoni told HousingWatch. He expects the number of mortgage applications toward home purchases to rebound in June, to match what the Mortgage Bankers Association reported in February and March, after adjusting for the season.

"The largest effect of the tax credit was to move some sales forward in time," he says. Home sales that would have happened in the summer were pushed into this spring, as homebuyers rushed to get the tax credit.

That will mean a summer of mixed messages for housing watchers. Expect the May pending homes sales report to crash after the April tax credit deadline to sign a contract; that report will come out July 1.

The May and June reports for new and existing home sales should both stay high, as home sales in contract make it to the closing table. But expect those sales figures to drop in the July report, since they come right after the tax credit deadline to close a sale by the end of June.

Despite the mixed messages, Fratantoni still thinks the homebuyer tax credit was worth it. Economists including Fratantoni say 100,000 to 300,000 people bought homes because of the first tax credit last fall who would not have bought otherwise. The tax credit this spring should have a similar net positive effect.

The backlog of unsold properties is the biggest thing holding back the housing market, according to economists like Fratantoni. Banks seized a record 92,400 properties in foreclosure last April, according to RealtyTrac. If each homebuyer tax credit took at least 100,000 homes off the market, that's at least 200,000 additional homes sold -- the equivalent to absorbing more than two months of foreclosures.

Taken all together, from continued high foreclosures to the beginning recovery in the rest of the economy, Fratantoni expects a a recovery for housing to take a long time.

"It's going to be a slow, uphill climb," he says. " Not a robust recovery."

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Mortgage Rates Down? Greece, Portugal Might Explain Why

Bendix Anderson — 2010-06-02T12:15:00 00:00

Filed under: News, Economy

Interest rates dropped again last week as economists argued about the financial crisis in Europe and how bad it might get. As HousingWatch reported, Greece and Portugal's bad news could be the American homebuyers' gain.

But how does such faraway news directly affect the U.S.?

Average interest rates for 30-year, fixed-rate home loans flew to 4.78 percent for the week ending May 27, according to the Freddie Mac Primary Mortgage Market Survey.

Since December, writers like me have said over and over again that interest rates would rise. But here we are half-a-year later and interest rates are barely higher than the record 4.71 percent interest rate recorded last December - the lowest average interest rate recorded by Freddie Mac since it started keeping track in 1971.

What's going on?
Remember early 2009, when half your friends said the massive federal government bailout of the U.S. financial system wouldn't work and that banks like Citigroup and JPMorgan Chase would collapse anyway, taking our $700 billion with them?

Well that's where Europe is right now. The financial crisis that started in Greece and threatened to spread to Spain and Portugal (and then Italy, Ireland and everywhere else) has been quieted by a trillion-euro bailout from the stronger nations of the European Community.

But economists and pundits are split. The loudest proclaim Europe's bailout won't work, while the optimists sit more or less quietly with their fingers crossed. It will be months before we know who is right.

Meantime, investors around the world have taken their money out of short-term investments like the stock market, because, well, frankly they just don't know what's going to happen in the short term. The Dow Jones Industrial Average has dropped a thousand points -- from over 11,000 in late April, when the Greek financial crisis began to make headlines -- to a little above 10,000 in the beginning of June.

Long-term investments, such as bonds issued by stable governments, have done better. Despite our own budget deficit, the U.S. looks more stable than many other countries. Since late April, the price investors pay for 10-year U.S. Treasury bonds has spiked, driving the yield on the bonds from 3.9 percent in late April down below 3.2 percent in the beginning of June.

Bonds backed by home loans have done the same. Most of those bonds are guaranteed by Fannie Mae or Freddie Mac, which are both supported by the federal government. So the price of the bonds has gone up, while the yield to investors has gone down. Banks use money from the sale of those bonds to make more home mortgages, so the lower yield for bond investors, has turned into lower interest rates for borrowers.

Analysts are split about what will happen next to mortgage rates. Roughly half of the economists and experts polled by Bankrate.com think rates will stay the same for at least another week. Roughly a third think rates will inch up. About one-in-six think rates will creep down, according to Bankrate.com's Mortgage Rate Trend Index.

However, interest rates will rise eventually.

"Mortgage interest rates are once again at their all-time low levels, and now is an incredible time to take advantage of them, as we will likely never see rates at this level again in our lifetime," said David Kuiper, mortgage planner for First Place Bank.

Whatever you decide, keep one thing in mind: Local economies are now more global than ever -- get used to it.

Find home finance tools at AOL Real Estate.

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Home Price Recovery Will Take Three Years, Morgan Stanley Says

Bendix Anderson — 2010-06-01T12:00:00 00:00

There's more pain ahead for the housing markets, according to a recent report from Morgan Stanley.

How likely is this nightmare, and what can you do with this information?

"We see potential for another 5-10% decline in nominal prices over the next year," said the authors of "U.S. Housing Strategy: The Long Road Home," an analysis out this month from Morgan Stanley.

Even after home prices hit bottom, Morgan Stanley's experts think home prices will stay low "for another three to four years, during which annual appreciation may reach only as high as inflation or income growth."

Only a few economists still expect a big drop to home prices this year, though most expect prices to sag.
Morgan Stanley is on the pessimistic end of housing forecasts with its prediction of a potential drop of 5 to 10 percent. A decline like that would drag down the closely watched Case Shiller Home Price Index to between 136 and 129.

Other housing economists have softened their forecasts. In December, Mark Zandi, chief economist of Moody's Analytics, predicted that home prices had a long way to fall before hitting bottom this autumn -- down more than a third from its housing boom peak. His prediction back then, in an interview with Reuters, would have sunk the 20-city Case Shiller Index to about 128 -- more than 10 percent down from its current level.

Zandi now predicts that, "Home prices nationally may still fall somewhat lower," according to a recent interview with the Los Angeles Times. That's a big change from the painful drop he predicted before.

Freddie Mac's May Housing Market Outlook, also relatively optimistic, predicts the Case Shiller Home Price Index will fall just 2.8 percent this year. After that prices will flatten out with an overall increase or decrease of zero in 2011. That would drag Case Shiller to about 142 by the end of the year.

With the index softening over the past few months, we're already halfway there.

The sunniest of 100 housing watchers surveyed by MacroMarkets predicted housing values would increase this year by 7 percent -- the average called for a very slight decline, so small it rounds to zero.

Why should prices fall at all? With the economy supposedly in recovery, why wouldn't home prices spike upward instead? Economists lay most of the blame on the aftereffects of the financial crisis -- including the high rate of mortgage defaults and the inventory of loans in foreclosure.

According to Morgan Stanley, the shadow inventory includes all the properties that eventually will need to be liquidated through foreclosures or short sales. They consider most of the 7.5 million properties whose borrowers are more than 30 days late in their payments as likely to be liquidated, eventually. Of those 7.5 million, over 5 million properties have loans that are more than 90 days late.

Several recent reports, including ones from TransUnion, Fitch Ratings, and the Mortgage Bankers Association of America, show that the number of loans with late payments might finally be leveling off, or even decreasing, after rising relentlessly for years. That might be the biggest reason some economists are slightly less pessimistic.

Still, no one is expecting good times to return anytime soon.

So if you are planning to buy a home, make sure to gather recent comps -- and then bid slightly lower.

Find home values and homes for sale at AOL Real Estate.

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HAMP Offers New Hope for Borrowers

Bendix Anderson — 2010-05-28T14:30:00 00:00

Filed under: News, Economy

Are you considering applying for help from a foreclosure prevention program? Here's some good news. Recent changes to the largest foreclosure prevention program, the federal Home Affordable Modification Program (HAMP), should help the program work much more smoothly.

Over the last year, the press about HAMP has been overwhelmingly negative. Recent stories like this one in the Wall Street Journal point out that one-in-every-four borrowers who entered the program with trial modifications to their home loans have since been thrown out of the program.

Hundreds of thousands more borrowers have waited with trial modifications that went for six months or even longer, often racking up heavy fines and fees in the process according to the story, even though the trial period is only supposed to last three months.

Why were so many people kicked out? And how can the program be made to work?

It turns out different banks took different approaches to working with the HAMP program. The crucial difference between these groups shows how the HAMP program might be able to turn itself around and do a better job helping homeowners.

Some lenders let borrowers into the HAMP program by first verifying their incomes. Others put borrowers into the HAMP program with unverified, "stated" income, according to HAMP officials. Only after the trial modification process had begun did these banks begin the process of verifying a borrower's income.

That simple difference, whether a borrower's income was verified or not before starting a HAMP trial, has made a huge difference for the program. According to the Treasury, each of the top loan servicers that verified borrower incomes has turned more than half of its trial modifications into permanent modifications. Each of the top banks that did not verify borrower incomes has turned fewer than half of its trial modifications into permanent modifications.

Banks that did not verify incomes have also taken longer to process trial modifications. The Treasury ranked loan servicers by how likely their active trial modifications were to be more than six months old. Trial modifications are supposed to end after just three months. Of the top seven banks with the oldest trial modifications, six did not verify incomes before beginning HAMP trial modifications.

But some banks say borrowers must shoulder a portion of the blame. According to a January statement by JPMorgan Chase, for every 100 trial modifications begun through the fall of 2009, a quarter had not paid as agreed. Another 29 borrowers did not submit all the required documents. "Many borrowers return forms missing key information (signatures, Social Security numbers, etc.) or do not return one of four required documents," according to a statement from Chase. Another 13 out of a 100 borrowers are not eligible for HAMP but will qualify for another type of loan modification and 33 out of 100 borrowers are able to be underwritten for permanent HAMP modifications.

Chase says that it has moved mountains to get needed information and documentation from borrowers with trial modifications. Each trial borrower with missing documents gets 35 letters, 12 phone calls, and two visits to their homes from Chase employees trying to get the documents.

However, some borrowers with trial modifications continue to claim that loan servicers often lose the documentation that they send, according to the Wall Street Journal story and more than 300 comments to this HousingWatch story by AOL readers sharing their personal experiences with loan servicers in HAMP.

So why did any banks let people into the HAMP program using just stated income? "We were using stated income to get people into trial modifications as quickly as possible," a spokesperson for JPMorgan Chase told HousingWatch.

At least there is some good news for the future. Starting June 1, lenders and loan servicers will be required to verify the income of borrowers before they start a temporary loan modification. And once a temporary modification starts, it will automatically turn into a permanent modification if the borrower makes three months of payments on time. Government officials already have clarified that the $1,000-per-borrower HAMP offers to participating banks will only be paid if the borrower's loan modifications become permanent.

Also, in July, the HAMP program will also start to publicly report on more aspects of the performance of loans servicers in the HAMP program, from customer complaints, to hang-up rates, to compliance with the rules of the program.

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New Home Sales Boom, Foreclosures Loom

Bendix Anderson — 2010-05-27T16:00:00 00:00

The headlines are full of the great news about new home sales. And some of them are warranted.

New sales of single-family houses soared 14.8 percent to a seasonally adjusted annual rate of 504,000 units. The April gain followed a 29.8 percent surge in March, the biggest monthly increase in 47 years, according to the Commerce Dept.

This is good news -- but not for the reason you might think.
The boom in new home sales does not show a healthy housing market that's ready to leap forward. After all, there are still roughly 6 million properties out there teetering on the brink of foreclosure, according to a recent report about the Home Affordable Modification Program.

Instead, the high number of new home sales shows that our sick housing economy is responding to the shock treatment the federal government gave it: the $8,000 homebuyer tax credit.

First, the bad news. If you're trying to sell a house, it's too late to catch the demand for the federal homebuyer tax credit. To claim the $8,000 tax credit, most homebuyers had to sign a contract by April and they'll have to close the sale by June. So the people coming to your open house this weekend probably no longer qualify. (The exception: Some members of the military or other U.S. employees who have been overseas.)

But we're probably going to be reading about the high demand for housing most of this summer, as homebuyers who signed contracts this spring close the deals to buy their homes in May and June. The monthly new home sales reports will come out a month later. Those reports will likely make banner news headlines through the end of July.

Next, some more bad news. Even though the number of home sales is high, home prices are weak. The Case Shiller Home Price Index for March is flat or falling, depending upon whether you include the standard adjustment for the season -- but it certainly isn't going up.

Home prices are weak largely because of the huge number of distressed properties for sale that have been through foreclosure. Distressed home sales made up nearly a third of all home sales in the U.S. early this year, according to a report from First American CoreLogic. Properties that go through a foreclosure auction or a short sale usually sell for much less than the usual price. A large number of distressed sales will bring down property values for everyone in a housing market.

Foreclosure actions are expected to stay high all year "as lenders systematically work through the backlog of distressed properties," said James J. Saccacio, chief executive officer of RealtyTrac.

Finally, here's the good news: We are dealing with our problems. And as banks work through that backlog, many of those homes are finding buyers, even if the prices are low.

What could possibly be worse that a flood of foreclosed homes that sell at cut-rate prices, dragging down prices for new homes and existing homes alike?

Easy: A flood of foreclosed homes that don't sell at all.

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Obama's Foreclosure Program Speeds Up Rescue Efforts -- Really!

Bendix Anderson — 2010-05-21T15:15:00 00:00

Filed under: News, Economy

More foreclosures are coming! That's the warning we've been getting for months from pundits and economists.

The primary culprit? Big government intervention, according to these commentators. Federal foreclosure programs have slowed the foreclosure process without necessarily stopping it. That's created a huge pileup of homes on the road to foreclosure that haven't gotten there yet.

"Loan modifications... may simply have delayed the inevitable," according to an analysis back in February from Standard & Poor's.

Well, put on your seat belts. For hundreds of thousands of borrowers who faced foreclosure, the delays are over.
In April, banks canceled more than 100,000 temporary modifications to home loans made through the Home Affordable Modification Program (HAMP), the biggest federal foreclosure prevention initiative. That makes a total of 278,000 borrowers who once had temporary modifications to their home loans but who have since left or been thrown out of the program, according to the latest report from the Treasury department and HUD. Many of these borrowers are likely to lose their homes, if they haven't already.

However, not all the news is bad. At the same time, hundreds of thousands more borrowers found happy endings to their mortgage problems through the Obama Administration program -- at least for now. More than 295,000 borrowers received permanent modifications to their loans through HAMP by the end of April. They now are making their new reduced mortgage payments, which will last at least five years. That's 295,000 people who were on the brink of foreclosure who now have a much better chance of keeping their homes.

So the HAMP program is batting about .500. More than a half-million people have now gone through the HAMP trial modification process -- split about evenly between people who received permanent loan modifications and those who were thrown out of the program.

But here's the important news for the housing market: After more than a year of delays, the program is moving.

As last year came to a close, the program seemed incapable of helping anyone. Close to a million borrowers had received temporary HAMP modifications of their mortgages through the program, but only a few thousand had those modifications become permanent.

The rest hung in limbo. Many banks seem determined to drive homeowners out of the HAMP program and into foreclosure.

For a few hundred examples, browse through the comments to a HousingWatch story from earlier this year. Readers shared their personal horror stories about dealing with banks like JPMorgan Chase that seemed willing to do anything to avoid giving borrowers permanent loan modifications: sending borrowers constant requests for more information, "losing" paperwork that borrowers had faxed or sent via FedEx, and putting homes into foreclosure without properly informing residents who have applied for loan modifications.

"I just fight another day every day with Chase," said one commenter named Linda.

The more than 500,000 borrowers who reached the HAMP finish line have cut deeply into HAMP's backlog of loans. The number of people with active temporary HAMP modifications dropped to 637,000 at the end April. That's down from a backlog of close to a million at the beginning of the year.

As more of these borrowers reach the HAMP finish line, for better or worse, that will represent the resolution of a threat that has hung over the head of the housing markets for the last year. This resolution, sometimes painful, sometimes positive, is expected to keep foreclosure rates at roughly their current high level throughout the year, according to James J. Saccacio, chief executive officer of foreclosure research firm RealtyTrac, "as lenders systematically work through the backlog of distressed properties."

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Housing Recovery Is All Hype (Shock!)

Bendix Anderson — 2010-05-19T16:00:00 00:00

Filed under: News, Economy

It seems like the news is a constant boxing match between housing-market boosters and housing-market bashers.

In this corner, Richard Lee, a Las Vegas homebuilder quoted in The New York Times. He thinks a new housing boom is coming. "We're going to come back like you've never seen us before," he says.

And in this corner, Mike "Mish" Shedlock, a commentator who says talk of a "second boom" housing recovery is just hype. Millions of empty, existing homes for sale will "keep a lid on resale prices for a long time to come, possibly a decade."

What's really going on?

The U.S. housing market is slowly recovering from its worst crash in many decades. Recovery takes time, but there are a growing number of signs that the housing market is becoming less chaotic as the months pass.

For example, housing developers are becoming less depressed as they see increases in home sales, in interest from potential homebuyers, and in their prospects for the future. That comes according to the latest National Association of Home Builders/Wells Fargo Housing Market Index, a poll of housing developers that charts their feelings about the housing markets.

The journalists at Reuters responded to that Index with the headline : "Homebuilder confidence at 2-1/2 year high in May." However, "confidence" seems like the wrong word to describe the latest index, considering it only rose three points to reach a score of 22. Anything less than 50 on the 100-point Index counts as "poor" or "not very confident."

Shedlock used the latest index to prove his conclusion that the bad times for housing are just beginning -- and might last for 10 years. That also seems like a stretch. The index's numbers might be low, but it still shows improvement.

Shedlock also points to The New York Times story on Las Vegas. Though a close reading of that story also reveals a more complicated picture.

Yes, the piece quotes home builders like Richard Lee saying ridiculous things. However, there is also evidence in the article that foreclosed homes are selling quickly in Las Vegas -- so quickly that potential home-buyers interviewed for the story gave up trying to buy a foreclosed home after they were outbid one too many times.

Las Vegas is a complicated market with serious problems. But with prices already down so deep, it's hard to argue with this evidence that the worst is yet to come -- for Vegas or for the rest of the country.

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Mortgage Rates at This Year's Low, Thanks to Greek Chaos

Bendix Anderson — 2010-05-14T16:56:00 00:00

Riots in Greece kill three bankers, and the threat of chaos pushes down interest rates for U.S. home loans.

The average interest rate for 30-year home loans dropped to 4.93 percent (with an average 0.7 percent origination fee) for the week ending May 13. That's close to the lowest-ever rate of 4.81 percent recorded last December, according to the Freddie Mac Primary Mortgage Market Survey.

So how does that work?
Apparently globalization still makes a difference.

For several days in the beginning of May, it seemed as if Greece might default on its sovereign debt. That could have led to defaults for Spain and Portugal, which also face serious budget problems, which could have led to ... who knows?

The stock market was nervous enough for the Dow Jones Industrial Average to drop 1,000 points for 15 minutes on May 6, only to roar back 700 points minutes later. It now seems possible that the 15-minute crash started with a trade large enough to spook a few institutional investors into selling. And that spurred a stampede of traders rushing to get out early if, for example, it turned out that a Euro-economic apocalypse had begun.

If that theory turns out to be true, it shows that even though the U.S. financial system is now supposedly in recovery, Wall Street was so frightened last week of another financial panic that a glitch or a rumor could trigger a massive 15-minute sell-off.

Why so nervous?

The return of randomness and uncertainty to our financial markets has pushed down home loan interest rates. In uncertain times, investors take their money out of risky, short-term investments like the stock market and park their cash in longterm investments like Treasury bonds instead.

Average mortgage rates tend to float a point or two higher than the yield on 10-year Treasury bonds. That's because bonds backed by home loans and guaranteed by Fannie Mae or Freddie Mac are only slightly riskier than Treasuries, so the yield demanded by investors for housing bonds -- and the interest rates banks charge to mortgage borrowers -- is only slightly higher than the yield on Treasury bonds.

Investors have been buying a ton of Treasury bonds since mid-April, when the Greek financial crisis began to make headlines. The yield on 10-year Treasuries has dropped from a high near 4 percent in mid April down to a low of 3.3 percent on May 7, just before the European Union announced its $900 billion bailout of Greece, Spain and Portugal.

Bond yields have been rising since the Euro-bailout, and hit 3.6 percent by May 13. Investors still seem cautious, however, as they size up each other and how frightened they all seemed to be a few days ago.

Provided there is no new catastrophe (a fine old Greek word), bond yields and interest rates will creep back up over the next few weeks, according to a panel of experts polled by BankRate.com.

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Foreclosures Down, but Housing Pain Isn't Over

Bendix Anderson — 2010-05-14T11:00:00 00:00

Filed under: News, Economy

Roughly a third of a million properties had some kind of foreclosure action taken against them in April -- from a default notice to a bank repossession to a foreclosure auction.

That comes according to the latest data from RealtyTrac, an Internet marketplace specializing in foreclosures.

Commentators are writing positive headlines about the news because the exact number of foreclosure filings, 333,837, is less than the record-busting 367,056 recorded in March. It's also less than the 342,038 recorded in April a year ago.

But the news does nothing to change the basic trend in foreclosures.

Let me put it this way: Give or take 20,000 or 30,000, we've had a third of a million foreclosure actions a month for the last year -- at least four times the rate of foreclosures in a healthy housing market.

So the news on foreclosures seems to be consistently bad, even though I keep reading (and sometimes writing) that the economy is slowly getting better. What's going on?
While the rest of the economy struggles to move on from the Great Recession, the housing market is still clogged with a huge backlog of properties that have already entered the foreclosure process.

Many of the foreclosure actions that happened in April have been a long time coming. The biggest part of April's approximately 334,000 foreclosure actions came from about 138,000 foreclosure auctions. An auction is the end of a process that usually takes at least two months, but now can take as long as a year.

Banks are taking their time to sell foreclosed properties because they don't want to flood the market any more than they have to. Local foreclosure moratoriums and the federal Home Affordable foreclosure prevention program have also slowed down the foreclosure process.

That's created a huge backlog of properties at risk. More than 6 million homeowners are more than 60 days late in paying their mortgages, according to the Treasury. Even if only a fraction of those properties are eventually seized, it will still mean high foreclosure rates for at least the next year.

"Foreclosure activity has begun to plateau -- but at a very high level that will not drop off in the near future," said James J. Saccacio, chief executive officer of RealtyTrac. He says foreclosures will continue "as lenders systematically work through the backlog of distressed properties."

And as long as homes continue to be sold in foreclosure fire sales, prices for the rest of the housing market will continue to be depressed, especially in the biggest foreclosure states like Nevada, Arizona, California, and Florida.

That's the bad news -- but there's some good news, too.

We are working through the backlog. There were 138,000 foreclosure auctions in April, but there were only 104,000 new default notices. The same trend continued throughout the first quarter, according to RealtyTrac, with a total of 369,000 foreclosure auctions but just 342,000 new default notices,

Since not every borrower who falls behind in his payments loses his house, here's what that says about properties now entering the foreclosure process: The number of those that eventually will be seized is significantly smaller than the number emerging from foreclosure with new owners.

So there's light at the end of the tunnel -- but it's a very long tunnel.

Foreclosure Filings by Month

April, 2010: 333,837
March, 2010: 367,056
February, 2010: 308,524
January, 2010: 315,716
December, 2009: 349,519
November, 2009: 306,627
October, 2009: 332,292
September, 2009: 343,638
August, 2009: 358,471
July, 2009: 360,149
June, 2009: 336,173
May, 2009: 321,480
April, 2009: 342,038

(Information from RealtyTrac.)

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Pending Home Sales Rise: The Tax Credit Effect?

Bendix Anderson — 2010-05-05T16:00:00 00:00

Potential homebuyers rushed to sign contracts in March, pushing the Pending Home Sales Index to its highest level since last fall, according to the latest from the National Association of Realtors.

We expected that -- the surge in pending home sales is part of a mini housing boom created by a massive federal program -- the $8,000 federal home-buyer tax credit that expires this spring.

But this mini housing boom might be over already. Demand for housing tanked the last time the home-buyer tax credit expired last fall. To take advantage of the latest tax credit, home buyers had to sign their contracts by April 30.

So if you had an open house to sell a home May 1 and nobody showed up, this might explain why....
The Pending Home Sales Index rose to 102.9 in March, up from 97.7 in February. The index measures contracts signed to buy homes -- not closing, which typically happen one or two months later. That means that even though the boomlet sparked by the tax credit may already be over (from the standpoint of someone now hoping to buy or sell), economists and pundits will still be writing about it for months.

Here's how the tax credit boosted the demand for housing last fall: The pending home sales index rose all summer from 85 in March 2009. In September, the month before the peak, the index was at 107.8. It peaked in October at 112.4. That's because homebuyers had to close on the purchase of their new home by Nov. 30 to claim the tax credit. In November, the pending home sales index crashed to 97.

All the other housing indicators, such as new and existing home sales, followed the same arc.

This time, pending home sales have been rising from their January low of 90.2. The index hit 102.9 in March and will probably peak in April, since to claim the new homebuyer tax credit homebuyers had to sign a contract by April 30 and close on the purchase by the end of June.

In May, the index is almost certain to tank again. Hopefully the high demand that comes with warm weather, along with our slowly strengthening economy, will soften the blow.

"In the months immediately following the expiration of the tax credit, we expect measurably lower sales," said Lawrence Yun, NAR chief economist. "Later in the second half of the year, and into 2011, home sales will likely become self-sustaining if the economy can add jobs at a respectable pace."

The pending home sales index for May won't come out till July, but we'll watch advance indicators, like the number of mortgage applications, to see how this potential mini housing bust develops.

In the meantime, if you're trying to buy or sell a home, how has the home-buyer tax credit affected your purchase? Add your comment below.

Pending Home Sales Index, with no Seasonal Adjustment

March 2010 - 102.9
February 2010 - 97.7
January 2010 - 90.2
December 2009 - 97.8
November 2009 - 97.0
October 2009 - 112.4
September 2009 - 107.8
August 2009 - 103.0
July 2009 - 98.1
June 2009 - 93.0
May 2009 - 92.3
April 2009 - 90.6
March 2009 - 85.0

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