4% get mortgage help
Treasury officials, in the first comprehensive tally of permanent modifications made, say that loan servicers have converted 31,382 people from trial adjustments to long-term assistance as of Nov. 30, but 30,650 people in trial modifications have been denied. That means that only about 4% of troubled borrowers have received long-term help under the Obama administration’s foreclosure prevention program. A nearly equal number of trial modifications have been denied permanent assistance, the report showed. The reasons include not making monthly payments on time, not submitting all the necessary paperwork and not qualifying for reasons such as insufficient income.
Homeowners claim that banks keep losing paperwork, but banks claim they often don’t get it in the first place. Around 375,000 people should be eligible to receive long-term relief by year’s end, but only one-third of homeowners who have made at least three trial payments have submitted all the needed forms, Treasury officials say, and some 20% have not submitted any paperwork at all. Banks and government agencies have hired outside companies to knock on borrowers’ doors to assist them with completing the paperwork. None of this addresses the real problems, of course: a lot of people are underwater and don’t see the point of making payments, and quite a few know they won’t qualify once their real income comes to light.
Short sales may be the answer
According to Hope Now, a private sector alliance of mortgage servicers, investors, insurers, and non-profit counselors, total 316,557 foreclosure sales and starts outnumbered modifications more than 4 to 1 and repayment plans about 1.6 to 1. The mortgage servicing industry completed198,373 repayment plans and 73,190 modifications. At the same time, the industry completed 94,450 foreclosure sales and initiated another 222,107 foreclosure starts. Hope Now attributes some of the slow-down in modifications to the Home Affordable Modification Program (HAMP) sponsored by the US Treasury Department. Servicers are pursuing HAMP modifications before repayment plans — slowing down reported repayment plans — and have to wait through HAMP trials before reporting permanent modifications — slowing reported modifications.
“Our number one priority is to convert HAMP modifications, but also do our best to help borrowers with all solutions available,” said executive director Faith Schwartz in a statement. “This sometimes means a graceful exit via short sale or deed in lieu if a borrower has no other options.” Short sales might become more prevalent among servicers, now that Treasury will offer incentives through the Home Affordable Forelclosure Alternatives (HAFA) program. HAFA will complement HAMP by providing financial incentives to servicers, borrowers, and investors that go forward with short sales or deeds-in-lieu of foreclosure, according to a Treasury announcement late Monday.
1 in 4 mortgages underwater
Research firm First American CoreLogic says 23% of Americans with mortgages owe more than their home is worth. That’s 10.7 million U.S. mortgages, or almost 1 in 4, and another 2.3 million homeowners are within 5% of negative territory. Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don’t have any mortgage, according to the Census Bureau. The majority of underwater mortgages are heavily concentrated in five states that have particularly suffered from the housing bust: Nevada, at 65%; Arizona, at 48%; Florida, at 45%; Michigan, at 37%; and California, at 35%. Negative equity, also called an “underwater” or “upside down” mortgage, has become more common as home values plumme
t, and the numbers are closely watched because borrowers who are underwater are more likely to be foreclosed.
These five states have been hit especially hard because of a high rate of prime loans that went bad. Some of those loans were option-adjustable rate mortgages, and when the accumulated debt reaches a certain point — usually 10% to 25% more than the original principal — the option-ARMs loans are recast into fixed-rate mortgages. When that happens, many borrowers cannot afford the new payments. But mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay — more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. “The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that,” the study said.
Credit avilability; the big question in Commercial Real Estate
According to the National Association of Realtors (NAR), credit availability is the big unknown that will determine how soon commercial markets recover. The Commercial Leading Indicator for Brokerage Activity rose 0.9% to an index of 102.4 in the third quarter from 101.5 in the second quarter, but is 11.1% below a reading of 115.3 in the third quarter of 2008. The index in the second quarter was at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990. Lawrence Yun, NAR chief economist, said some initial movements earlier this week in commercial mortgage-backed securities are encouraging. “The first commercial mortgage bond deal in over a year shows the Federal Reserve’s efforts to sell securities through the TALF program can be fruitful, but the level of activity is well below what is required to resuscitate the commercial market. Credit availability needs to significantly rebound for any hope of a meaningful commercial recovery in 2010.” Yun said the modest index recovery follows steep declines in the past several quarters. “Gains in industrial production, durable goods shipments and retail sales; a rebound in the NAREIT price index; and improving figures on first-time unemployment claims were stabilizing factors,” he said. “Negative impacts include falling private sector income and fewer jobs involving commercial real estate. The office and industrial markets are the sectors most negatively impacted by the economic downturn.”
The real jobless rate
The real number dwarfs the statistic most people pay attention to—the U-3 rate—which most recently showed unemployment at 10.2% for October. According to the government’s broadest measure of unemployment, some 17.5% are either without a job entirely or underemployed. The so-called U-6 number is at the highest rate since becoming an official labor statistic in 1994, and means that 1 in 5 Americans is either out of work or under-employed. With such a large portion of Americans experiencing employment struggles, economists worry that an extended period of slow or flat growth lies ahead. “To me there’s no easy solution here,” says Michael Pento, chief economist at Delta Global Advisors. “Unless you create another bubble in which the economy can create jobs, then you’re not going to have growth. That’s the sad truth.” Pento warns that forecasts of a double-dip (“W”) or a straight up (“V”) recovery both could be too optimistic given the jobs situation. Instead, he believes
the economy could flatline (or “L”) for an extended period as small businesses struggle to grow and consequently rehire the workers that have been furloughed as the U-3 unemployment rate has doubled since March 2008. As that trend has happened, the U-6 rate has expanded at an even more dramatic pace. Economists cite several reasons for the phenomenon, including the collapse of real estate and associated jobs, and expanded unemployment benefits (which make it easier to be unemployed). “If full employment is 4 percent, people are wondering how we’re going to get from 10 (percent) to 4. Well, try getting from 17 to 4. We may not get back to full employment for a decade,” Mahn says. “As an investor, that causes me to look for different places now. Maybe you can’t just put money in US large caps and ride out this recovery.”
Foreclosures hit record highs
According to the Mortgage Bankers Association’s (MBA) National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.64% of all loans outstanding as of the end of the third quarter of 2009, up 40 basis points from the second quarter of 2009, and up 265 basis points from one year ago. The non-seasonally adjusted delinquency rate increased 108 basis points from 8.86% in the second quarter of 2009 to 9.94% this quarter. The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the third quarter was 4.47%, an increase of 17 basis points from the second quarter of 2009 and 150 basis points from one year ago. The combined percentage of loans in foreclosure or at least one payment past due was 14.41% on a non-seasonally adjusted basis, the hi
ghest ever recorded in the MBA delinquency survey. The percentage of loans on which foreclosure actions were started during the third quarter was 1.42%, up six basis points from last quarter and up 35 basis points from one year ago. The percentages of loans 90 days or more past due, loans in foreclosure, and foreclosures started all set new record highs. The percentage of loans 30 days past due is still below the record set in the second quarter of 1985.
Why are foreclosures up?
Jay Brinkmann, MBA’s Chief Economist, says it’s jobs. “Despite the recession ending in mid-summer, the decline in mortgage performance continues. Job losses continue to increase and drive up delinquencies and foreclosures because mortgages are paid with paychecks, not percentage point increases in GDP. Over the last year, we have seen the ranks of the unemployed increase by about 5.5 million people, increasing the number of seriously delinquent loans by almost 2 million loans and increasing the rate of new foreclosures from 1.07% to 1.42%.” Brinkmann says it’s prime and FHA mortgages that are taking the worst beating. “Prime fixed-rate loans continue to represent the largest share of foreclosures started and the biggest driver of the increase in foreclosures. 33% of foreclosures started in the third quarter were on prime fixed-rate and loans and those loans were 44% of the quarterly increase in foreclosures. The foreclosure numbers for prime fixed-rate loans wi
ll get worse because those loans represented 54% of the quarterly increase in loans 90 days or more past due but not yet in foreclosure. The performance of prime adjustable rate loans, which include pay-option ARMs in the MBA survey, continue to deteriorate with the foreclosure rate on those loans for the first time exceeding the rate for subprime fixed-rate loans. In contrast, both subprime fixed-rate and subprime adjustable rate loans saw decreases in foreclosures.”
Taxes anyone?
More than half of the $9 trillion in debt that Uncle Sam is expected to build up over the next decade will be interest. Charles Konigsberg, chief budget counsel of the Concord Coalition, a deficit watchdog group, puts it another way: in 2015 alone, the estimated interest due – $533 billion – is equal to a third of the federal income taxes expected to be paid that year. The money was borrowed at very low rates, but interest rates will rise when the economy improves, and at that point the country’s interest payments could jack up very fast. “When interest rates rise even a small amount, the interest payments go up a lot because of the size of the debt,” Konigsberg said. To help mitigate the potential risk of rising rates, the Treasury has said it would start increasing the average maturity of the new debt it issues so the debt it refinances in the next couple of years will be locked in at lower rates for longer periods of time. And the Obama administration has promised to
produce a deficit-reduction plan that would aim to bring down annual deficits to roughly 3% of GDP over the next several years, below the 4% to 5% currently projected. If that happens, the $4.8 trillion in interest payments that CBO estimates for the next decade could go down if interest rates don’t increase as much as CBO expects. The trouble is that this administration and Congress are showing no signs of slowing down the spending…shoveling billions into the maw of increasingly unpopular healthcare “reform.” That could mean the president’s 2011 budget proposals would have to make a lot of unpopular changes like tax hikes to get closer to the 3% goal.