No one is sure what the exact number of people there are with upside down mortgages, but a study by First American Core Logic, a real estate data analysis firm, estimates that 11% of homes purchased between 2004 and 2006 are there.  There has been dropping valuation, mortgages resetting and people simply walking away because of this situation.  The downside for lenders is that they are stuck with a piece of property subject to vandalism and neighborhood blight, and they are faced with the prospect of having someone maintain and market them to potential buyers as well.  It is a no win situation for everyone involved.

Clearly, the best answer to this is for banks to deal with homeowners who are struggling.  I don’t know anyone that wants to own and pay for something that is worth less than it is worth, yet I think that people are overall responsible and honest in dealing with their mortgages woes.   The website Smart Money reports that lenders are now becoming more willing to help struggling homeowners.  The caveat here is that you must be behind on your mortgage payments, not just struggling to make the monthly mortgage payment.  Todd Mark, a vice president of education at Consumer Credit Counseling Service of Greater Dallas, a HUD-approved housing counseling organization, says that “You’ll see more and more lenders helping people stay in their homes over the long run”, and Brian Tracz, a New York-based real estate attorney who specializes in foreclosures adds “Lenders want to know the hardship is there.  They view this almost as a partnership in misery.”    This is a bit of a turnaround for lenders, who have typically dragged their feet in offering help.  It is obvious that there is too much money being lost because of this stance.  Clear indication of this is in the Moody’s report, which stated lenders modified less than 1% of the loans that reset during the months of January, April and July 2007.

There are parameters that will need to be followed.  You must be willing and able to continue to live in the home in question if you seek a lender’s help.  You will be asked for specific financial information and questioned on ability to pay.  Lenders may request a letter explaining your financial hardship.  They will want to see a budget, and your action plan to stay in the home that you can stick to.  To my way of thinking, it only makes good business sense to have done this in the first place, not after the fact.  It amazes me how quickly things turn around when business begins to feel the crunch.  I am not so sure that the government has a whole lot of influence over lenders and the banking industry in general.  Whatever the case, it is time to do something, and it appears lenders are now a bit more willing to take that plunge.

It is amazing to watch the continuing fallout from the mortgage market.  Banks are going down. Freddie and Fannie are in the soup, and we see the government making attempts to set things right.  It seems like everything is tied to this crisis, and there is undoubtedly a lot we do not know.  I spent some time on the Mortgage Fraud Blog tonight looking for content, and was amazed at the number of people that are being prosecuted for wrongdoing - mostly wire fraud and mortgage fraud.   It sometimes seems to me that there are some things I just do not wish to know.

Which brings me to tonight’s subject - the number of people selling real estate at a loss.  The market is correcting, yet we are a very long way from bottom.  California and Florida are especially hard hit, where real estate has climb in value way disproportional to other areas of the country.  I have seen homes listed in California that are in price ranges that are unbelievable for the amount of space available.  2 bedroom/1 bath homes with less than 1,000 square feet go for 600-700 thousand dollars.

While on vacation, I took a look at real estate in Anderson Indiana, and found that large homes with a nice lot will go for 65-75,000 dollars.  No, they don’t have an ocean view, but they are in nice neighborhoods and are well taken care of.

According to Zillow.com, a real estate site, nearly 25% of all homes sold nationwide fetched less than sellers originally paid in the past 12 month ending in June.  Stan Humphries, Zillow’s vice president of data and analytics, had this to say: “It’s stunning what’s happening out there.  The numbers are the worst we’ve seen and it’s not just the magnitude of the problem but the scope - so many markets are affected.”  California takes the hardest hit, with 63% of homes sold during the past 12 months in Merced taking a loss.   Prices currently have fallen 40% over the past twelve months, and are down an astounding 56% since 2006 - 2 short years ago.  Other figures include 63% of sellers in Stockton, Calif., who lost money during the same period, 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.

These numbers don’t lie.  They show that the market is far from seeing bottom yet.  Billions of dollars are being lost, and the only solution seems to be a short sale.  Right now, a third of homeowners nationwide owe more on their homes than they are worth.  Until this sees correction, the market is going to be doom and gloom.

Since I read a lot of web content, blogs and news, I see a lot of things in the course of my work that most people don’t.  I subscribe to several RSS feeds that cover the mortgage market, and I am especially fond of Dr. Housing Bubble, who gives me a big head’s up on certain areas of the country, but especially California.  Housing prices there are ridiculous, and the median value of homes in 6 of the counties flirts with $1 million.  If you could see some of these homes, you would put yourself in the hospital, laughing so hard your sides would split.  Seriously, folks, these homes are little cracker boxes that often run less than 1,000 square feet, yet command very high prices.  A home featured, in Toluca Lake, Los Angeles County, has a going price of $6,650,000. The home has been on the market for 450 days and has seen a reduction in price by $2.1 million in one year.  Before you decide that his is a bargain, realize that the home sold in 1991 for $1,200,000.  A $5 million gain in those few years since is more than superb, it is absolutely ridiculous. This, however, is just typical of California real estate.  Dream on.

In Florida, things are not a lot better.  One of the troubles facing Bank of America is their book in that state. As of June 30th, $463 million was listed with BOA as noncurrent.  Of the $15.17 billion in residential mortgages, this ratio of 3.05 percent is bound to put BOA in a world of hurt.  Yet Florida, like California, remains a state where the price of property has skyrocketed to a very lofty height. And you can’t blame it on the snow birds.

I think that until these markets become more reasonable, there will be troubles in the mortgage market.  Ask Ed McMahon.  The Donald has bailed him out to the tune of beau coup bucks.  And that was after Ed dropped the price from $7.7 million to $4.6 million.  No one knows yet what the final price will be, but rest assured, it will be huge.  And that, I think, pretty much sums up a lot of what is currently wrong.  Home prices are way higher than they have been in these areas, and people have refi’ed to the point where the mortgage is upside down.  Some say the general consensus is to just walk away…

Because I subscribe to numerous services, I often get content from overseas. I have not yet reported on any overseas viewpoints, but thought that the article in the Economic Times - Gurgaon, Haryana, India, was noteworthy. Mortgages and securities are, after all, world wide. So for a change I thought I would share their viewpoint.

Quoting the article, they say: “Despite the fact that Freddie and Fannie are government sponsored enterprises, they are privately owned and enjoy special privileges like not having to register their securities with the government, not being liable to pay state and local income taxes, being conferred special treatment for investment purposes by bank regulators, etc.” It is funny what we learn by studying others – I was not aware that they did not pay state and local taxes. I was aware of their seemingly special status, being coddled by the government while they go about their daily business, opaque to those that should have the need to know.

India questions the practice of a private enterprise that is backed by a governmental entity. They see no equity in firms that are a privately owned entity subject to the discipline of the market place yet exude the aura of a government backed business, not subject to the laws of the marketplace. Indeed, if they truly were a private enterprise, a lot of this would not have happened. Wall Street watchdogs and analysts would have foreseen what was happening in a transparent business. One noteworthy thing here is that several foreign governments invested their foreign exchange reserves, and when the bottom fell out, the US government had to step in and lend a hand.

We can’t see a time when Freddie and Fannie will be up front and transparent, at least not under its current status. What we can do is watch as they over leverage their reserves and bring about a government bailout. And the thing that bothers me most is the foreign view of how we handle our money. They see private investors making money hand over fist from their dealings with the dynamic duo, and doing so because of the special privileges they enjoy because of our government backing. And in the final analysis, Mr. Average Joe down there on Main Street is going to have to pick up the tab. Show me the equity in that.

We all know that it is not a very good time to buy a home right now, especially if our credit is less than stellar. To be honest, there are some really good deals to be had right now, and taking advantage of that is a good thing if conditions are right for you. Banks are obviously a bit anxious today due to the way things have been going this past year, but if you are on the up and up, pay your bills on time, then chances for securing a mortgage are in your favor.

The banks want to see this:

1. A good FICO score. This is one number you should always be concerned about, and work towards improving. If you are like so many other people who have had to use a credit card, be aware that the CC companies can make things extremely tough on you. Don’t let these lag to stay on top of the mortgage payment if you possibly can. Right now, the FICO score is a big number.

2. Have a good down payment. Many people have made the mistake of not only borrowing for the mortgage, but have also borrowed for both down payment and closing costs. Not a good idea. If you can’t save up a down payment of at least 10%, you can’t afford the home anyway.

3. Take a VERY good look at your budget. Be honest with yourself. Your mortgage payment should never be more than 26% of your income. If you make $4,000 a month, then your mortgage payment should never be more than $1,000. Often, people don’t take into consideration the “incidentals” of daily living. That $3.50 latte on the way to work each day and the need for the latest Stephen King novel are often never figured into the monthly budget. If you spend it, budget for it. Figure your “play money” into your budget, and stick to it.

We hear a lot of scare tactics in the media about buying a home these days. Although banks are a bit antsy, they also recognize a good deal when they see it. If you try to gloss over anything about your finances and are vague about income, don’t waste the banker’s time. They will very quickly show you the door. The Fed is looking at the banking industry right now with a very eagle eye, and for good reason. Buying a home today is no different than it was in our parent’s day. The rules are the same. Follow them for success.

Even though Freddie and Fannie were aware of the market crisis, the pair kept revving the security engine full bore, even though Wall Street knew better, and backed away from it.  To someone like me, that is criminal intent.  Yet we are still hearing all the gushing news from Washington how good old Freddie and Fannie are gonna be okay, and Uncle will keep them afloat.  (Read that taxpayers.)

We are talking trillions of dollars here.  The pair hold nearly half of the mortgages - around 5.3 trillion the last time I looked, and to see them fall would mean sure diaster in the mortgage market and the economy.  Now, they have been given carte blanc with no statutory limits on their gigantic $5.3 trillion book of business.  Lehman Brothers the two have another $3.3 trillion in hedge funds, along with other items, off the balance sheet, so it is evident that we have no real idea of where they are at.

Things at the pair grow worse and worse by the day, as we seen failure after failure, and we hear the same old song and dance about business as usual.  Freddie and Fannie have reported more than $11 billion in pre-tax losses over the last three quarters.  I don’t look for that to improve until well into 2009.  Now the government has passed legislation that will provide bailout for the pair.  A lot of people, including myself, take issue with that.

I have no problem with trying to improve the economy, nor do I resent the government trying to keep things afloat.  What I do resent, however, is publicly traded companies that are in the basement on Wall Street, are guilty of mishandling accounts and accounting practices, and that have continually forged ahead even though the market was bleak.  I am curious to see how this will all play out…

No one state has been hit harder in the mortgage market crisis than California.  Research today shows why there is so much trouble there.  In certain areas, ridiculously small homes are going for enormous prices, depending on area.  These little cracker boxes in any other part of the country would go for 50-65K, yet they are selling in CA for upwards of a half million.  And I am talking 2 bedrooms, 1 bath, maybe 925 square feet.  No McMansions, but priced like one.  Sad.

In California, homes reached a peak median price of $597,640in April 2007.  By June of 2008, the median price in California is hovering at $368,250, a drop of 38.38%.  I do not think that this has reached bottom yet, either.   There is a budget crisis on in CA now, with the Governator cutting state jobs back to the minimum wage and erasing part timers from the state payrolls.  This alone will drive more people into foreclosure.

California is also seeing $300 billion in pay option ARM’s to reset in the later part of the year.  The Pay Option ARM is one of the most poorly put together mortgage products ever to face this planet.  It has several options, but the most widely used option is to pay the minimum payment on the property.  Your payment is set for 12 months at an introductory rate. Then payment changes are made annually and a payment cap limits how much it can increase or decrease each year.  Explaining the pay option ARM is another whole post, but the sad news here is that up to 80% of the people who have these loans make the minimum.  When things go sour down the road, they find themselves with a loan that is not paying down, but paying up.  All for a piece of the American dream, which lending institutions have been more than happy to push.

When the market levels out, we will see a lot more difficulties in CA than anywhere else in the nation.  Analysts do not feel that it will correct until May of 2011, and homes will then be valued at prices from May of 2003.  When all is said and done, we will see CA in a lot more hurt than the rest of the country, where mostly home values are more realistic.  Until then, hold on to your hats.  It is going to be a tough ride.

For some reason, it does not surprise me that Fannie and Freddie are once again in the news.  Reports say that the two mortgages giants may show less than stellar results for second quarter, writing down once again.  The two have already warned investors that credit-related losses, such as payouts on loans they guarantee, would likely rise through 2008.  If you follow them as much as I do, this comes as no big surprise.  Even though they are government backed, they are still private enterprises, and it is thought by many that the two seriously underestimated the real troubles in the mortgage market.   The market is seeing this as Freddie and Fannie not having enough capital to offset their losses, adding further turmoil to an already unstable marketplace.

Both companies had already ratcheted up predictions of losses, with Freddie to 16 basis points or 0.16 percent of total mortgage book in 208, and Fannie reporting a credit loss ratio to 13 to 17 basis points, at least double its historical range.   Although this may not sound like a big deal, consider that Fannie and Freddie own or guarantee nearly half of the $12 trillion mortgage market.  Vivek Tawadey, head of credit strategy at BNP Paribas in London, had this to say: “Turbulent market conditions lie ahead, would probably be an understatement considering the early impact from Merrill Lynch & Co and other institutions that have taken “painful steps.”   Painful steps indeed.  I am reminded of IndyMac and Bear Stearns.  Can Freddie and Fannie be very far behind?  Fannie Mae has about $70 billion in subprime and Alt-A securities in its portfolio. Freddie Mac is more at risk, with nearly $150 billion in the same securities.  Many are just waiting for the other shoe to drop.

I read with interest of a California based company that is investing funds in to 200 Massachusetts homeowners’ subprime mortgages.   The company, WMD Capital Markets LLC, deserves kudos for taking on these 200 loans, and for slashing interest rates and forgiving thousands of dollars in late charges, legal fees and past-due interest.  The loans, purchased from  Fremont Investment & Loan, are a sign of what can be done if the banking industry shows a little concern beyond business as usual.  Fremont has a reputation of pushing aggressively the subprime loan mortgage.  Another 290 mortgages were sold to Carrington Mortgage Services. Attorney General Martha Coakley had sued Fremont last year, denying its right to foreclose on the 2,200 Massachusetts mortgages it held.

There is a long list of what WMD has promised to do.  They agree to permanently switch borrowers’ interest levels back to the 5 percent to 8 percent that was the original teaser rate for these subprimes.  They will also forgive roughly $7,000 to $10,000 per mortgage of loan-origination charges, late fees, past-due interest and foreclosure-related legal expenses.  And even if the home owner cannot swing the mortgage even after this help, WMD will pay a relocation fee of $10,000 to $25,000, as long as the owner leaves without a fuss.

I have to applaud WMD and Carrington for what they are doing, even if only for a small segment of people in Massachusetts.  It shows us what can be done if the banking industry shows a little compassion for those on Main Street that deserve a bailout, too.  Even though their actions is applaudable, the downside is this - the pact does nothing to address the fact that many subprime borrowers are “under water” - owning homes worth less than their unpaid mortgage balances.  The best advice given?  Take the money and run.  If this is truly the case, then perhaps it can be viewed by some as a win-win situation.  I would have to think that at the very least, people could take the relocation fee, find affordable housing for the interim, and perhaps salvage a bit of their credit rating.  Only time will tell how effective this will be.

The Senate took a weekend session to fruition this week and passed the new housing bill, which Bush has agreed to sign.  Although I see this as a sign that at least the government is recognizing the pickle homeowners are in, I have to ask myself who benefits the most from this legislation.  Supposedly, the government is willing to help 400,000 households pull out of the financial crisis they are in.  Well and good, but the last time I noticed, it was more like 1.5 million that were needy.   Current estimates tell us that 5.5 million borrowers will default on loans by the end of 2009.  Half of these will lose their homes.  Maybe my arithmetic is a bit rusty, but I am thinking that 5.5 million is a bit of a stretch from 400,000.  And that won’t take into consideration the qualifications that must be met for help, nor assures us that lending institutions will cooperate. 

Both Freddie and Fannie are looking more like they are going to need bolstering up, with the Congressional Budget Office assuring us that here is probably a better than 50% chance that this won’t happen.  However, if the Fed is looking into the huge pay packages of top execs in both these institutions, and with the pair holding upwards of $5 trillion in mortgage paper, I have to think we are not hearing all that is going on with them.  Remember, the two, although backed by the government, is still privately owned, and heavily invested in by investors and speculators.  These people don’t have to open their books to the Fed, and we have no real idea of who is holding what.  And it is for certain we will never have a clue.  The risk to taxpayers is a matter of public record – the profits made by others is outside the public view.

We, as taxpayers, bailed out the S&L’s in the late 80’s.  We are now looking at tremendous debt to bail out irresponsible homeowners and failing private institutions.  Billions will go to communities to buy up foreclosed properties to avoid “blight.”  Sen. Christopher Bond, R-Mo., has pretty much said it all.  He says that “This bill is fraught with too much risk and too little protection to the taxpayer,”  stating further that it would allow lenders to “dump their worst subprime mortgages” on the Federal Housing Administration.  Read that as you will, but the bottom line is more bad news for the people holding the bag – the American taxpayer.