Maryland Mortgage Blog

High foreclosure, jobless rates offset boost from tax credits...

The housing market is in the midst of a rocky recovery, but it’s too soon to declare an end to the worst real estate slide since the Great Depression.

That became clear Wednesday, when the government reported that sales of new homes dropped a sharp 11.3 percent, surprising and disappointing forecasters who had expected an increase.

The report dashed cold water on recovery hopes that had been raised Tuesday by news that sales of existing homes picked up sharply last month. But sales of existing homes got a big boost from a tax credit program for first-time home buyers that was scheduled to expire Nov. 30, before it was extended and expanded by Congress.

For technical reasons, the tax break didn’t give new sales the same boost as existing homes in November. That’s because new sales are recorded when contracts are signed, while existing sales are logged when the sale closes. To get the original $8,000 tax credit, buyers had to close by Nov. 30, so new homes purchased in November likely wouldn't have closed in time to qualify.

Although the tax break was extended through April, it remains to be seen whether the housing momentum will carry over into the new year. The uncertainty surrounding the program in the fall could result in some distortion in the monthly numbers, analysts said.

“Existing-home sales are likely to plunge in December,” said Patrick Newport, U.S. economist at IHS Global Insight.

The outlook is further clouded by a big wave of foreclosures that’s expected to break in the next two years.

“We have a tsunami of foreclosures — 3.5 million people who are 60 days delinquent, seriously delinquent, and probably another 3 million after that who are going to reach that stage,” said Yale University economics professor John Geanakoplos. “All six million of those will probably be kicked out of their houses.”

Under the new housing tax credit program approved by Congress and signed into law by President Barack Obama, buyers who have lived in their current homes for at least five years can claim a credit of up to $6,500 on a new home if they sign a purchase agreement by April 30.

Unlike the first program, the new effort could boost the market's midrange and upper end. Because it targeted first-time buyers, the impact of the original tax credit was felt most heavily at the low end of the market. More than 70 percent of November sales involved houses priced under $250,000.

The hope is that by next spring, the housing market and economy will begin showing sustainable growth without the help of the government. The risk is that the tax credit simply moves up future sales without creating new demand.

Although new-home sales account for less than 10 percent of the overall market, they are important because they represent construction and new economic activity.

November's decline, reported by the Commerce Department, was the biggest monthly drop since January, to a 355,000 unit annual rate. Still, there were some bright spots. The median sale price for a new home rose 3.8 percent from October to $217,400, the highest level since May.

A sustained housing recovery will depend on several factors, including a recovery in the labor market. Most economists expect the unemployment rate, currently at 10 percent, to remain close to that level for through next year. Without a paycheck, those jobless workers can’t get a mortgage.

The housing market also faces a stiff headwind from the continuing high rate of foreclosures, which drives down prices and adds to the backlog of unsold homes as lenders put those properties back on the market. Foreclosure filings in the U.S. will hit another record this year, with an estimated 3.9 million notices sent to homeowners in default, according to RealtyTrac. A record 14 percent of homeowners with mortgages are either behind on payments or in foreclosure.

“It looks like builders are having a real problem trying to compete with the depressed prices in the existing-home market,” said Joel Naroff, president of Naroff Economic Advisors.

Despite three government relief programs since the housing market collapsed in 2007, millions of families are expected to lose their homes over the next two years. Under the latest program launched in March, some 760,000 eligible borrowers have been offered modified loans, but only 31,000 of those trial plans had been made permanent as of last month, according to a report this week from bank regulators.

Treasury Moves to Improve the Loan Modification Process

Obama mortgage modification push

By Lynn Sweet

 

WASHINGTON--The Obama White House latest mortgage help plan, released Monday, Nov. 30, 2009.

Obama administration Kicks off Mortgage Modification Conversion Drive

WASHINGTON - The U.S. Department of the Treasury and Department of Housing and Urban Development (HUD) today kick off a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration's Home Affordable Modification Program (HAMP) convert to permanent modifications. The modification program, which has helped over 650,000 borrowers, is part of the Administration's broader commitment to stabilize housing markets and to provide relief to struggling homeowners and is a primary focus of financial stability efforts moving forward. Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year. Through the efforts being announced today, Treasury and HUD will implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones.

"We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners," said the new Chief of Treasury's Homeownership Preservation Office (HPO), Phyllis Caldwell. "We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones." In her new role, Caldwell will lead HPO's conversion drive efforts.

"Encouraging borrowers to move through the process of converting trial modifications to permanent modifications remains a top priority for HUD," said HUD Assistant Secretary for Housing and FHA Commissioner David Stevens. "As a part of our continuing efforts to improve the execution of the HAMP program, HUD is committed to working with servicers, borrowers, housing counselors and others dedicated to homeownership preservation to improve the transition of distressed homeowners into affordable and sustainable mortgages."

With tens of thousands of trial modifications being made each week, the Administration is now working to ensure that eligible borrowers have the information and the assistance needed to move from the trial to the permanent modification phase. (All mortgage modifications begin with a trial phase to allow borrowers to submit the necessary documentation and determine whether the modified monthly payment is sustainable for them.) As the first round of modifications convert from the trial to permanent phase, the Administration has identified several strategies for addressing the challenges that borrowers confront in receiving permanent modifications.

In addition to the conversion drive that kicks off today, the Obama Administration has already taken several steps to make the transition from trial to permanent modification easier and more transparent by:

* Extending the period for trial modifications started on or before September 1st to give homeowners more time to submit required information;
* Streamlining the application process to minimize paperwork and simplify the submission process; meeting regularly with servicers to identify necessary improvement to borrower outreach and responsiveness;
* Developing operational metrics to hold servicers accountable for their performance, which will soon be reported publicly;
* Enhancing borrower resources on the MakingHomeAffordable.gov website and the Homeowner's HOPETM Hotline (888-995-HOPE) to provide direct access to tools and housing counselors.

The Mortgage Modification Conversion Drive will include the following:

* Servicer Accountability. As part of the Administration's ongoing efforts to hold servicers accountable for their commitment to the program and responsibility to borrowers, the following measures will be added:
*
o Top servicers will be required to submit a schedule demonstrating their plans to reach a decision on each loan for which they have documentation and to communicate either a modification agreement or denial letter to those borrowers. Treasury/Fannie Mae "account liaisons" are being assigned to these servicers and will follow up daily as necessary to monitor progress against the servicer's plan. Daily progress will be aggregated by the end of each business day and reported to the Administration.
o Servicers failing to meet performance obligations under the Servicer Participation Agreement will be subject to consequences which could include monetary penalties and sanctions.
o The December MHA Servicer Performance Report will include the data on permanent modifications as well as the number of active trial period modifications that may convert by the end of the year if all borrower documents are successfully submitted, sorted by servicer and date.
o Servicers will be required to report to the Administration the status of each modification to provide additional transparency about situations where borrowers face obstacles to moving to the permanent phase.
* Web tools for borrowers. Because the document submission process can be a challenge for many borrowers, the Administration has created new resources on www.MakingHomeAffordable.gov to simplify and streamline this step. New resources include:
*
o Links to all of the required documents and an income verification checklist to help borrowers request a modification in four easy steps;
o Comprehensive information about how the trial phase works, what borrower responsibilities are to convert to a permanent modification, and a new instructional video which provides step by step instruction for borrowers;
o A toolkit for partner organizations to directly assist their constituents;
o New web banners and tools for outreach partners to drive more borrowers to the site and Homeowner's HOPETM Hotline (888-995-HOPE).
* Engagement of state, local and community stakeholders. Through the conversion drive, the Administration is engaging all levels of government - state, local and county - to both increase awareness of the program and expand the resources available to borrowers as they navigate the modification process.
*
o HUD will engage staff in its 81 field offices to distribute outreach tools. HUD will also encourage its 2700 HUD-Approved Counseling Organizations to distribute outreach information to participating borrowers.
o By engaging the National Governors Association (NGA), National League of Cities (NLC) and National Association of Counties (NACo) the Administration is connecting with the thousands of state, local, and county offices on the frontlines in large and small communities across the country who are hardest hit by the foreclosure crisis. These offices will now have the tools to increase awareness of the program, connect with and educate borrowers and grassroots organizations on how to request a modification and take the additional steps to ensure they are converted to permanent status; and serve as an additional trusted resource for borrowers who are facing challenges with the program.
o In partnering with the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, state regulators will now have enhanced tools to assist borrowers who are facing challenges in converting to a permanent modification and to report to the Administration on the progress and challenges borrowers and servicers are facing on the ground. Regulators will also be empowered to work directly with escalation and compliance teams to ensure that HAMP guidelines are consistently applied.

More information about the Obama Administration's mortgage modification program can be found at www.MakingHomeAffordable.gov.

Nov. 20 (Bloomberg) -- A recovery in U.S. housing will have to wait at least until next year.

The outlook for the home market dimmed this week as residential construction and mortgage applications fell and loan delinquencies reached a record.

“I don’t think the housing crisis is over,” Mark Zandi, chief economist with Moody’s Economy.com, said in a telephone interview. “I think we’re going to see another leg down.”

New home sales may begin to pick up by the start of the so-called spring selling season, said Toll Brothers Inc., the largest U.S. luxury homebuilder. Existing house sales may take longer. Residential construction and property sales led the way out of the previous seven recessions going back to 1960, said David Berson, chief economist of PMI Group, the mortgage insurer in Walnut Creek, California.

Mortgage applications for home purchases fell to a 12-year low last week and foreclosures rose to record highs in the third quarter, according to reports from the Mortgage Bankers Association.

An index measuring November homebuilder confidence came in lower than the median forecast of 45 economists this week. The Commerce Department on Nov. 18 said residential building dropped 11 percent in October to the lowest level since April’s all-time bottom.

Tax Credit

The $8,000 federal tax credit for first-time buyers, extended by President Barack Obama on Nov. 6, drove existing home sales to a two-year high in September. At the same time, a 26-year high in unemployment is keeping many buyers out of the market and pushing existing owners into foreclosure.

Late Payments

The share of all types of home loans with one or more payments overdue climbed to a record seasonally adjusted 9.64 percent in the third quarter, the Washington-based trade group said in a report yesterday.

There are signs that parts of the U.S. are rebounding. California, among the states where the housing bust started, is one of the few areas that’s beginning to recover.

October home prices in Orange County, San Diego and the San Francisco Bay Area increased from a year earlier, MDA DataQuick, a San Diego property information service, said this week. The number of sales also increased in the Bay Area and Southern California.

“We have to be aware that the stabilization that we’ve seen so far is tenuous at best,” Lennar Corp. Chief Executive Stuart A. Miller said Nov. 17 at a conference in New York sponsored by UBS AG.

Homebuilders and investors will get a better gauge of whether housing demand is stabilizing in 2010’s first quarter, said Robert Toll, chairman and chief executive officer of Toll Brothers, the largest builder of luxury houses.

Seasonal Recovery

The spring selling season for homebuilders typically begins in February, earlier than the resale market because families with children want to be able to move into a home before September’s start of school. It can take up to six months to build a home, and up to 9 months to build the larger houses sold by Toll Brothers.

“My prediction is we’ll probably recover on a seasonal basis,” Toll said yesterday at a conference in New York sponsored by Citigroup Inc. “It’s generally accepted that the homebuilding industry is off the mat and on the road to recovery.”

The U.S. median existing home price tumbled 28 percent over three years to $164,800 in January, the lowest in more than seven years, according to the National Association of Realtors. A month later, Congress passed the American Recovery and Reinvestment Act of 2009 giving a tax credit to first-time buyers.

‘Juiced Sales’

Existing home prices probably will fall 12 percent this year to a median of $173,800, while the new-home median likely will tumble 8.7 percent to $212,000, according to a forecast on Fannie Mae’s Web site. Combined sales of new and existing properties probably will drop 0.7 percent to 5.36 million, even with the federal tax credit, after plunging 16 percent last year.

“The first-time homebuyer tax credit juiced up sales,” said Moody’s Zandi. “The stimulus was helpful. It augurs, at the very least, that policy makers can’t pull life support from housing.”

“The bouncing along the bottom is distorted by government policies,” he said in an interview yesterday.

Foreclosures will also have limited impact on driving down real estate prices as long as banks are slow to put properties on the market and the government encourages loan modification programs, he said.

“It’s clear the government and banks don’t want to flood the market with foreclosed homes and it’s clear it’s going to be dragged out" .

Nov. 18 (Bloomberg) -- The Federal Housing Administration, the agency that insures home purchases made with down payments as small as 3.5 percent, may create another lending crisis, Toll Brothers Inc. Chief Executive Officer Robert Toll said.

“Yesterday’s subprime is today’s FHA,” Toll said today at a New York conference for builders sponsored by UBS AG. “It’s a definite train wreck and the flag will go up in the next couple of months: Bail us out. Give us more money.” Toll Brothers is largest U.S. luxury homes builder.

The FHA’s insurance reserve ratio fell to 0.53 percent, the lowest level in history, and more steps are needed to shore up the agency that guarantees one of every five single family loans, Housing and Urban Development Secretary Shaun Donovan said Nov. 12.

While the insurance fund’s capital ratio is at an all-time low, Donovan said those who say FHA is the next subprime- mortgage crisis are “dead wrong.” The quality of the loans FHA insures is “actually very good,” Donovan said.

FHA’s total reserves are more than $31 billion, giving it an overall capital resource ratio of 4.5 percent, according to statement by FHA Commissioner David Stevens.

The 0.53 percent net capital loan insurance ratio takes into account projected losses and is the yardstick Congress uses to determine the health of the fund. Congress requires the FHA to maintain a loan reserve ratio of at least 2 percent to protect the insurance fund from default.

Record Defaults

The FHA said 456,000 of its loans, or 8.2 percent, were in default as of September. That was up from 5.6 percent in September 2008.

The default rate for loans tracked by the Mortgage Bankers Association was a record 9.24 percent for the three months through June, the most recent period for which data is available. That was up from 6.41 percent a year earlier.

FHA loans accounted for about 8 percent of the mortgages Toll Brothers closed in the past quarter, Robert Toll said. About 80 percent of the company’s financing is loans guaranteed by Fannie Mae or Freddie Mac, he said. Those government- supported agencies require larger down payments and better credit than loans insured by the FHA.

Toll Brothers has seen strong sales at its urban high-rise developments in New York City, Jersey City and Philadelphia, Toll said.

“We started doing over $1 million product even in Hoboken and Jersey City,” he said. “We expect to expand to Washington, D.C., and perhaps some other strong markets.”

Horsham, Pennsylvania-based Toll Brothers fel1 18 cents to $20.65 at 4:09 p.m. in New York Stock Exchange composite trading. The shares are down 3.6 percent this year.

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.