The Reality Is Altogether Different

While the self-serving and delusional real estate industry keeps talking about a rebound in the property market -- see "A Nascent Recovery" for just one example -- the reality is altogether different.

Aside from the fact that inventories remain near historic highs, the crumbling economy is reducing the pool of eligible buyers by the day, and banks are loaded to the gunwales with foreclosures that they need to get off their books, there are also other storm clouds brewing.

For a start, as the Wall Street Journal notes in "Rate Rise Clouds Recovery," the demand side of the equation is being further undermined by a dramatic change in the financing environment:

Rising interest rates threaten to dim prospects for a housing recovery and choke off a refinance wave that was a major plank of the Obama administration's economic-stimulus efforts.

On Wednesday, rates on 30-year fixed-rate mortgages climbed to 5.79%, up from 5% two weeks ago, according to HSH Associates. That jump will cut roughly in half the number of borrowers with an incentive to refinance, according to FTN Financial.

Refinance activity at J.P. Morgan Chase & Co. is already "really down" since rates began rising, a spokesman says. A rate of 4.75% "seemed to be the switch" that turned on refinance activity, he says. Now, rates are a full percentage point higher.

"Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

Investors have been anxiously watching bond yields climb over the past few weeks, pushing up mortgage rates, which normally track 10-year Treasury notes. The yield on the those briefly hit 4% on Wednesday afternoon for the first time since mid-October before ending the day at 3.937%.

Many policy makers see the rise in Treasury yields as a sign that investors are optimistic that the economy is on the mend. But many market participants say higher long-term bond yields indicate investors are increasingly worried about inflation.

The Federal Reserve stepped into the market Wednesday to buy Treasurys and announced it will make another round of purchases in a week or so. But the moves seemed to have little effect on rates.

Higher mortgage rates are a blow to borrowers who were looking to refinance and reduce their monthly mortgage payments. Earlier this spring, mortgage rates had fallen below 5%, the lowest in 50 years, unleashing a wave of refinancing activity and spurring housing sales.

The rise in rates represents a setback for the Obama administration's program to help borrowers refinance their mortgages. In March, the government rolled out the Home Affordable Refinance Program, or HARP, to allow certain homeowners who owe between 80% and 105% of their home's current value to take advantage of the low rates. The administration estimated that the program could help four million to five million borrowers refinance.

Underwhelming Response

But Wall Street analysts say refinancing activity under the program was underwhelming, even before rates began to rise. Payoffs were flat last month on loans that would have seen the biggest benefit from the program, including loans originated in 2006 and 2007 with high loan-to-value ratios and high rates, according to Barclays Capital.

The HARP program is limited to loans owned or guaranteed by Fannie Mae or Freddie Mac, the housing-finance giants now controlled by the federal government. So far, some 12,710 refinancings have been completed through the program, according to the Treasury Department. Those figures don't include refinancings that have been completed by banks but not yet delivered to Fannie or Freddie. Bank of America Corp., for instance, says that it has completed 17,000 refinancings. By refinancing, borrowers on average have been able to reduce their mortgage rates by 1.3 to 1.5 percentage points, saving around $2,500 annually on a $200,000 loan, according to Freddie Mac.

 The program was designed to help borrowers like Mike Gallante who weren't late on their payments but couldn't benefit from lower rates because they didn't have enough equity to refinance. Mr. Gallante, a 45-year-old who works in law enforcement, has a 6.5% rate on his $400,000 mortgage, which is owned by Fannie Mae. But his five-bedroom home in Glendale, Ariz., was appraised at $325,000, putting him above the 105% loan-to-value limit. He paid $530,000 for the home in August 2007.

"It's horrible," he says. "They have a paying customer, and they're not going to do anything to help unless I stop paying." Mr. Gallante, who says he's never missed a payment, says he's so frustrated he's considering buying a new home and walking away from his current one.

A Treasury Department official said the administration is considering a range of tweaks to the program, including extending the program to borrowers with loan-to-value ratios as high as 125%. Freddie Mac on Friday announced changes designed to make its program easier to use.

Leif Thomsen, chief executive of Mortgage Master, a mortgage banker, says higher mortgage rates are putting a damper on applications. "We have seen the daily volume go from approximately $45 million...to about $20 million," he says.

His firm typically handles about 150 loans per day. Usually, no more than about seven of those applications have been from borrowers seeking to refinance under the Obama program. "I think the intentions of the government were really good," he says. "But it just hasn't worked that well."

Jill Richardson, a mortgage broker in Atlanta, says her office has tried to put at least 30 loans through the program, but hasn't been able to refinance a single one. Among the reasons, she says, are appraisals that have come in too low, second mortgages on the properties, and extra charges levied by Fannie Mae on borrowers who have little equity, low credit scores, or who live in markets where home prices have been falling.

Slow Going

Some lenders have been slow to implement the program or have been backed-up with other refinance applications. They may be picking the best loans to do first, some analysts say.

Chriz Dally, a freelance grant writer, tried to refinance the $340,000 mortgage on her two-bedroom home in Martinez, Calif., which is backed by Freddie Mac. Ms. Dally says a loan officer at J.P. Morgan Chase, her mortgage-servicing company, agreed that her loan was backed by Freddie Mac and that she met other criteria for the program. But after making several calls, Ms. Dally says, the loan officer told her that J.P. Morgan at the time was not doing these refinances for Freddie Mac mortgages.

A J.P. Morgan spokesman says the bank refinances loans backed by both Fannie Mae and Freddie Mac that qualify under the program. There may have been "a misunderstanding by the customer, or [the customer was] talking to an employee who was confused," he says.

Richard Bernotas, a respiratory therapist in Winchester, Calif., says he has been trying to refinance his $240,000 mortgage with Bank of America for about three months. "One of the issues is that I have mortgage insurance," says Mr. Bernotas, whose current interest rate is 6.75%. Bank of America has told him he needs to wait for "phase two" of the refinance program, which will address loans such as his.

"We are not yet up and running to serve customers with mortgage insurance," a Bank of America spokesman says. "We believe we are a few weeks away."

In addition, as Bloomberg reports in "Option ARMs Threaten U.S. Housing Rebound as 2011 Resets Peak," the available supply is set to mushroom as a wave of current mortgage-holders finds that their once affordable mortgages have become a ticket to the poorhouse:

Shirley Breitmaier’s mortgage payment started out at $98 when she refinanced her three-bedroom home in Galt, California, in 2007. The 73-year-old widow may see it jump to $3,500 a month in two years.

Breitmaier took out a payment-option adjustable rate mortgage, a loan popular during the housing boom for its low minimum payments before resetting at higher costs later.

About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.

Option ARM borrowers hit with unaffordable monthly payments are another threat to the housing recovery and the economy, said Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia. Owners who surrender properties to the bank rather than make higher payments for homes that have plummeted in value will further depress real estate prices and add to the inventory of properties on the market, she said.

“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” Wachter said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”

Option ARM recasts will mean more pain for California, the state with the most foreclosures in the U.S.

$750 Billion Problem

More than $750 billion of option ARMs were originated in the U.S. between 2004 and 2008, according to data from First American and Inside Mortgage Finance of Bethesda, Maryland. California accounted for 58 percent of option ARMs, according to a report by T2 Partners LLC, citing data from Amherst Securities and Loan Performance.

Shirley Breitmaier took out a $315,000 option ARM to refinance a previous loan on her house.

Her payments started at 3/8 of 1 percent, or less than $100 a month, according to Cameron Pannabecker, the owner of Cal-Pro Mortgage and the Mortgage Modification Center in Stockton, California, who is working with Breitmaier. The loan allowed her to forgo higher payments by adding the unpaid balance to the principal. She’ll be required to start paying principal and interest to amortize the debt when the loan reaches 145 percent of the original amount borrowed.

Hoping for Help

Breitmaier, who has been in the home for 45 years and lives with her daughter, now fears she will lose the off-white stucco house that’s a hub for her family.

“I wish the government would bail us out like the banks and the car businesses,” she said. “I’d like to go from here to the grave next to my husband.”

Paul Financial LLC originated the loan and it was sold to GMAC, Pannabecker said.

“This loan is a perfect example front to back, bottom to top, of everything that has gone wrong over the last five to seven years,” Pannabecker said. “The consumer had a product pushed on them that they had no hope of understanding.”

GMAC is working with Breitmaier and will review all of her options, said Jeannine Bruin, a spokeswoman for the company. Bruin declined to be more specific, citing the firm’s customer confidentiality policy.

Inexpensive Payments

Peter Paul of Paul Financial, based in San Rafael, California, said he wasn’t familiar with Breitmaier’s loan agreement but disagreed with Pannabecker’s characterization.

“The problem is, real estate values went down,” Paul said. Paul said he’s winding down the company and hasn’t made any loans since the fall of 2007.

Option ARMs typically recast after five years and the lower payments can end before that time if the loan balance increases to 110 percent or 125 percent of the original mortgage, according to a Federal Reserve brochure on its Web site.

These home loans were primarily marketed to people with good credit scores, said Dirk van Dijk, director of research at Zacks Investment Research in Chicago. They were also sold to the elderly and immigrants who were lured by inexpensive payments, said Maeve Elise Brown, executive director of Housing and Economic Rights Advocates in Oakland, California.

Refinancing is impossible in many states given the nationwide drop in prices. In California, the median existing single-family home price dropped 37 percent in April to $256,700 from a year earlier, according to the state Association of Realtors.

Late Payments Soar

“Once you start amortizing that loan, the payment is going to shoot up,” said David Watts, a London-based strategist with research firm CreditSights.

The delinquency rate for payment-option ARMs originated in 2006 and bundled into securities is soaring, according to a May 5 report from Deutsche Bank AG. Over the past year, payments 60 days late or more on option ARMs originated in 2006 have almost doubled to 42.44 percent from 23.26 percent, Deutsche Bank said. For 2007 loans, the rate has climbed from 10.1 percent to 35.25 percent.

“We’re already seeing much higher levels of delinquencies of these option ARM loans even before you reach the point of the recast,” said Paul Leonard, the California director of the non- profit Center for Responsible Lending.

The threat of soaring payments has counselors at Housing and Economic Rights Advocates busy.

“There’s a level of hopelessness to the phone calls now,” said Brown.

Comments

[Henry]

I think perhaps there is actually a housing recovery in some of the areas that got hit first and hardest.

I live in San Diego. We got clobbered early; starting in late 2006 it was clear there was a slowdown. 2007 and 2008 were brutal for the housing market here.

But, starting in early 2009, the market changed. Inventory shrank, we were back to multiple bids on any decently priced property, brokers were wearing smiles again. And now prices are creeping back up. This might get derailed by the rising mortgage interest rates, but I've anecdotally noticed a definite rise in prices, and there is statistical evidence of this also.

Is this the start of anything meaningful, or just a blip, I don't know. The consumer is still drowning in debt, and now so are the various levels of government. Unemployment is still rising. And oil prices and interest rates are rising. Not a pretty picture. But just as the business cycle turns down, it also turns up, and those who stay consistently bearish get often end up getting crushed.

Just my two cents.

Cheers!

Henry

[Fu]

Inventory is shrinking around DC. So inventory is not getting worse (at least over the last few months) in that area. But a sales bottom is very different than a price bottom. It's usually for prices to bottom up to 5 years after sales start increasing. And increasing mortgage rates are only going to help reduce prices.

Another thing to note is that because most households are dependent on dual incomes now, foreclosures go up with the square of unemployment changes: If unemployment doubles, foreclosures will quadruple. That's a simplification, but it's basically true.

[Chris]

Over here in England, things are still exactly the same. Only problem is now, a lot of us can't afford our bills: http://money.sky.com/mp/features/news/2009/06/12/25-expect-housing-costs-struggle.html

[Jayne]

I sold my house in mid 2005 and by the time I was moving out, I saw the first obvious signs that the bubble was deflating, and I live in an area that to this day claims it was not affected by the housing bust/bubble. I've seen many articles from various locations claiming their area was not hit. The wording is so similar it sounds as if ALL these articles were written by the same hand, like maybe the NAR? They always seem to be quoted in it, and there's frequently a plug to "buy now" either by the NAR or NAHB. Or both.

Early signs I saw were not in the news, they were online on blogs, or in obscure documents the public doesn't go looking for. I was reading as early as 2003 maybe, that we were in a serious price inflation that if unchecked would burst and damage the economy, because our economy was stupidly depending on housing. Then in 2005 when I sold and moved, I saw that builders' model homes were reduced in price, then when they didn't sell, were for rent. Houses that had been sold only months before were for sale again, often never having been occupied. In the early 2000's I was reading about how mortgage fraud was out of control and being done mostly by the industry, (FBI words, not mine). Certainly I saw that the crazy loans and ridiculous prices were going to cause problems.

I didn't buy again, and still haven't. I don't think prices have stopped falling. Don't want to be tied to real estate when our jobs are unstable due to all the layoffs. And then factor in all the loan fraud and forget it. I just don't want to try and figure out if I'm getting ripped off, I'll just wait until I can afford to buy a house for cash, and/or the prices have come down so far it really doesn't matter if they do keep going down. We're not there yet. On NBC's morning show they keep having their real estate shill say how great a deal these houses are at "under $400,000," etc. What a joke! So few people make 200K a yr or more that that's still not a good deal, and no where near affordable. If the median income is about $50K then a house isn't a "steal" until it's below at least $150K, even below $100K. And when we were making $50K a yr we could not comfortably afford anything over 100K and we're not spendtrifts. The prices are way out of line. The real estate shills should NOT be getting air time on TV, they should be investigated for taking out the economy. And the media and govt should be under investigation too for taking part in it. But I'm dreaming, there will be no investigation, just a fake attempt at one to placate people, but the real perps will get air time on TV to push their "buy now" campaigns.