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Report is Grim, Hope on the Way? June 6, 2008

Posted by Reginald Johnson in African-American, Business, Elections, Housing-Market, Life, Minority Issues.

If you haven’t noticed, over one million homes are now in foreclosure. The Mortgage Bankers Association’s (MBA) first quarter report of 2008, gives a 2.5% showing of all loans being serviced by its members, are now in foreclosure. It comes out to roughly 1.1 million homes in America. That’s 1.1 million people (at least) that have lost that part of the American Dream.

This is important because it’s the highest rate ever recorded. The MBA says, “Unfortunately, the number will continue to climb.” Almost all housing strategists believe this to be true.

The numbers are up from the 2% of loans. It comes out to about 938,000 homes, that were in foreclosure at the end of 2007.

448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That’s up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007.

Another high comes from the seasonally-adjusted rate of homeowners behind on their mortgage payments (you may have heard about Ed McMahon and Evander Holyfield and their recent developments). Nearly 3 million home loans, or 6.4%, have missed at least one payment, while about 737,000 are at least three months past due, but not yet in foreclosure.

“The figures aren’t surprising, but they’re pretty ugly nonetheless. We’re talking higher delinquencies and foreclosures pretty much across the board,” said an expert close to the home financing situation.

It’s hard to find someone who thinks the foreclosure crisis will get better this year. Many believe it might not get better until midyear next year – at the least. It could be a couple of years or more before foreclosure rates go back to more normal historical averages.

The main problem with the housing market can be directly linked with the subprime terrors. Banks and other lenders gave loans to people with poor to bad credit. These people were dumped into adjustable loans.

There were also loans that were offered that didn’t require income verification for buyers with good credit. Eventhough their credit was good, their consistent income verification was not sought. Lenders were concerned about giving the loan, they made money from the interest and the rate. Real Estate agents wanted to get homes sold.

AND there wasn’t really any monitoring of the industry. It was like the Wild Wild West!

Prime fixed-rate loans, which are considered very low risk, have also seen sharp increases in their delinquency and foreclosure rates, although they are performing far better than the riskier loans on the market.

There are 431,000 prime loans in foreclosure, a seasonally adjusted rate of 1.2% that is more than double the 0.5% rate a year ago.

The report showed about 1.2 million prime mortgages are now a month or more past due, a seasonably adjusted rate of 3.7% of those loans. That’s up from a rate of 2.6% a year ago.

The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans.

Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns.

States that have been hit hard are: Nevada, California, Arizona, and Florida. These state had a home building boom in the middle of the decade. The tragedy in these states was fueled by rising home prices, and also investors snatching up real estate using risky mortgages.

Those four states have nearly 400,000 homes in foreclosure. This represents a third of the nationwide total. According to the MBA, roughly 3.6% of all of the loans in these states are now in foreclosure.

The rate of homes going into foreclosure continued to climb sharply higher in California and Florida.

Ohio and Michigan are the other two states that are suffering. What sets these two apart from the previous four is that these two Midwest states have been hit by the more traditional economic woes (rising job losses, specifically in the automotive sector).

Michigan has about 54,000 homes in foreclosure. Ohio has about 61,000 homes suffering the same fate. The rate in those two states is 3.9%.

Real estate agents are hoping the crisis is at or near a bottom.

The good news is the foreclosure prevention efforts have started to have an effect. Keep in mind a slight improvement in one quarter doesn’t necessarily mean the end is near.

A new proposal to combat foreclosures was unveiled yesterday here in Washington.

The nonprofit, National Community Reinvestment Coalition (NCRC), has released a proposal called, “Help Now.” The advocacy group says the plan calls for the government to buy up at-risk loans, restructure the terms to make them affordable and sell the reworked loans back into the secondary market.

Under this proposal, the government would allocate as much as $20 billion up front. It would use those funds to buy up mortgages from investors in a reverse-auction process, at prices below the face value of the loans. In a reverse auction, sellers compete against one another, slashing prices until a buyer – in this case the government – says yes to a deal.

Since the government would buy the mortgages at a discount, it can pass the savings on to the borrowers by reducing the mortgage balances by the same percentage as the discount.

The new, reworked mortgages will be underwritten conservatively, with loan-to-value ratios of no more than 90%, said Taylor. And no loans would be made unless borrowers were judged capable of keeping up payments based on their credit score, income and other underwriting criteria. Default rates should be reasonably low.

There would undoubtedly still be some at-risk borrowers who cannot afford even the discounted mortgages.

In those cases, the loan balances would be reduced even more, to $50,000 perhaps, from $70,000. In return, the government would obtain a second lien, said Taylor, representing the difference between what the government paid for the loan and what it further reduced the balance to. These liens would only be repaid to the government when the home is sold or the borrower refinances the mortgage.

The good thing about the plan is it doesn’t let home owners walk away from their mess.

NCRC says:

Help Now aims to improve upon the efforts of Hope Now, the alliance of lenders, mortgage servicers, non-profit community advocacy groups and investors led by the Bush administration to help troubled borrowers stay in their homes.

NCRC CEO John Taylor, says, “Help Now will be more effective because it will make it easier for lenders to rework the terms of troubled mortgages.”

One of the benefits of the proposal is the work done with several agencies, such as: Bank of America, Wells Fargo, Washington Mutual and J.P. Morgan.

Some servicers are doing something like Hope Now – unsurprisingly, they are afraid to rework loans.  Some have noted their fear is due to possible violations of contracts the lenders have with the investors.  These lenders remain reluctant to offer workouts despite the fact that the American Securitization Forum (ASF) recently authorized lenders to do so, as long as it is in the best interests of the investors.

Supporters of Help Now will have a tough time trying to get policy makers behind them.  Many of the Help Now supporters believe the Department of the Treasury Secretary Hank Paulson should supporter the plan.

Secretary Paulson adamantly opposes spending government money on any “bail-out” plans.

High-cost mortgages just got cheaper


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