In the Tri-Valley of Northern California, the area that Loan Mitigation Advocates has our headquarters, default and distress properties have been waning. The last few months have seen less foreclosure and short sale properties come on to the market.  Six months to over a year ago, these default and distressed homes where primarily found in the lower to middle price ranges. Many of the homeowners in this price range had secured subprime mortgages which later resulted in big problems and consequently led to foreclosures and short sales. Now, things are beginning to shift away from the lower to middle priced homes.  More homes at the middle to upper price ranges are expected to become default and distress sales according to a recent New York Times article.  “Plenty of pain yet to come,” said Joseph Shapiro, chief United States economist for MFR.

At Loan Mitigation Advocates, we are always trying to stay abreast of current market trends.  In talking to homeowners, we have identified that some homeowners at the higher price points have been more equipped financially to survive the downturn in the market.  Despite job losses or reduction in income, they have been able to live off savings or the liquidation of stock for a longer period of time.  Some have been able to adjust their lifestyle while others have found jobs to replace lost income. However, for those who have not been able to overcome their hardship, they are faced with the grim reality that their life savings is being wiped out.  They may be left with no choice but to consider giving up their home to short sale or foreclosure.

On top of the potential for more default and distressed sales, another factor that could weigh in on home sales is a rise in interest rates.  Rates have been maintained at an artificial level for some time due to the Federal Reserves purchase of mortgage-backed securities.  Once this halts, interest rates could float higher which could limit a buyer’s purchase power and in some cases remove them as a candidate to purchase a home.  Less demand results in fewer transactions.  Less transactions results in home sellers’ inability to move their product.  And, if you can’t sell your home, then lowering your price may be the only option.

A third item for consideration is the tax credit for new home buyers. As of this article, the tax credit is vigorously being debated. However, there are signs that the tax credit may be extended for first-time homebuyers and also expanded for existing homeowners who are looking to purchase. If this bill passes, it may be just what the doctor ordered to counteract the items mentioned above and prevent a downward slide for home sales in the future.

Here are a few recent reasons in support of a market recovery:

New Home Builds

• Based on a government report, new home building increased in August.  The Census Bureau reported that builders broke ground for 598,000 new homes during August, up 1.5% from a revised 589,000 in July.
• Building permits rose 2.7% to 579,000.
• The National Association of Home Builders reported their index of homebuilder confidence had risen a point to 19, its highest level since May 2008.

Resale Homes

At Loan Mitigation Advocates, part of our job is to stay abreast of trends in the real estate market.  We pay particular attention to inventory numbers and the ratio of normal sales to REO/short sale transactions.  In our local area of Northern California, inventory numbers are reaching staggering low numbers in some areas.  There have been cases of multiple offers and homes selling for more than their asking price.  We have also noticed less foreclosures and short sales coming on to the real estate market over the past few months.

On the flip side, there are some potential pitfalls in the near future that could put a damper on the recovery:

Recasting Loans, Foreclosures and Short Sales

According to CNNMoney.com, a large number of non-conventional mortgage loans, including interest-only mortgages and option ARMS, will reset over the next year or so. These resets will lead to increases in the monthly mortgage payments for homeowners. Many people will not be able to afford the increases.

The interest-only loans specifically pose a large threat.  These are homeowners who are paying only the interest payment for a fixed number of months.  Once the number of fixed months is up, the payment is based on principal and a new interest rate, resulting in a much higher payment in most cases.  There were a number of these type of loans created back in 2005 that are set to recast in 2010.

Besides the threat of interest-only loans, option ARMs could create problems as well.  The option ARM loan has provided a borrower the ability to make minimum payments every month.  Sometimes these payments are less than their monthly interest charges which tack on the difference between the lower payment and the interest-only payment onto the mortgage balance.  The problem occurs when the balance reaches between 110% and 125% of the original loan balance.  The loan will reset into a fully amortizing mortgage where monthly payments considerably rise and present a huge problem for the borrower to make the new payment.

If these borrowers do not pursue loan modifications, they could be left with no choice but to short sale their house or eventually foreclosure. All of these foreclosed and short sale homes will flood the market and increase inventory and further drive down prices.

As I thought more about this possibility, I jotted down reasons for why people are considering this to be the bottom.  Here is what I came up with:

• Inventory numbers are decreasing
• Open houses are bustling with more potential buyers
• Properties are spending less time on the market
• Interest rates are at historical lows

These are all good signs.  Unfortunately, there are two things that are holding us back from becoming a true believer – foreclosures and short sales.  There appears to be some misleading information out there that the number of short sales and foreclosures coming on the market have slowed considerably.

One site, Trulia offers to explain this information. Trulia recently reported that despite the large volume of foreclosures (see the list below), there has been a significant drop in the number of foreclosure properties coming on the market in some states.

1.  Las Vegas, NV (31,983)
2. Phoenix, AZ (19,075)
3. Chicago, IL (16,038)
4. Los Angeles, CA (9,913)
5. Sacramento, CA (9,346)
6. San Diego, CA (7,668)
7. North Las Vegas, NV (6,852)
8. Bakersfield, CA (6,744)
9. Miami, FL (6,699)
10. Tampa, FL (6,487)
11. Indianapolis, IN (6,377)
12. Stockton, CA (5,924)
13. Atlanta, GA (5,859)
14. Orlando, FL (5,855)
15. San Jose, CA (5,802)

 What is the central cause of the drop?

According to the Trulia article, a number of states are in the process of or have already implemented a change that impacts the length of time to complete the foreclosure process.

Previously, states had an established time period for the foreclosure process.  Now, some states are setting a minimum number of days before a foreclosure sale can occur.  In fact, according to the Trulia article, the state of Maryland includes a mandated time period after default before a lender can file a foreclosure action and also a set amount of time is required to pass after notifying the homeowner about impending foreclosure actions prior to filing the action.  These changed state rules allow more people to “buy time” to save their homes whether it is through refinancing, loan modification, or some other means.

Even though foreclosure filings have reduced in many states across the nation, the news seems more misleading than a clear sign of justified optimism or sustained recovery.  The foreclosure process has been delayed; however without meaningful reductions in loan payments via loan modifications or other means and/or without a persistent increase in home sales, nasty results for affected homeowners and lenders could be inevitable down the road.

This reminds me of a time when I was a kid growing up in Phoenix, Arizona. I had my fair share of dry, disgusting heat.  During one of those pounding hot days, I remember playing outside my house and looking down the street.  It appeared that there was a huge wet pool of water right in the middle of the street.  As I walked closer and closer, the water seemed to disappear.  It was my first time experiencing a mirage. 

So it seems, many years later, there’s another kind of mirage in the midst.  And this mirage is taking place in our housing market.  Not down the street, but at the front door.

Well, it looks like we have some answers.  We recently read a blog from Jay Thompson, a Phoenix Real Estate Broker, who has been following the action closely.  Here is a link to his site for those of you who are interested in getting some more insight.  Also, Jay provided a synopsis on the breakdown for the first-time homebuyer tax credit.

The bottom line is that the $15,000 tax credit for home buyers has been reduced to $8,000 and is now only specific for first-time home buyers.

For a chart that breakdowns the first-time home buyer tax credit

FIRST-TIME HOMEBUYER TAX CREDIT
As Modified in the American Recovery and Reinvestment Act
Major Modifications Bolded
February 2009

Note:  Please consult your tax accountant or attorney to get a better understanding on how the tax credit will impact you.

Here are some of the proposed highlights:

• The money would not have to be repaid to the government
• An income restriction on who can claim the credit does not exist
• The credit is nonrefundable and can be claimed over two years
• The tax credit would be limited to primary residences
• When the credit goes into effect is still unknown

Keep in mind, this is just a PROPOSED bill and the contents of the bill are subject to change.  Both the Senate and the House need to work out any differences in each of their individual versions.  The reconciled bill will go back to voting and must be passed by both groups.  President Obama is putting pressure for a quick resolution and is pushing to have the bill signed within the next few weeks.

Unfortunately, the sentiment out on the street is that 2008 may have been only an appetizer for 2009. The Wall Street Journal recently put together an article that sheds light on what might be coming down the pipeline for both residential and commercial real estate.  Here are some of the highlights:

Residential

• Some experts predict that trouble in the residential real estate sector is expected to continue.
• Many are urging the Obama administration to push for broad programs to limit foreclosures, stimulate demand for homes, and stop the slide in prices.
• The Treasury Department is considering a plan that would push down rates on home mortgages to 4.5%.
• House prices fell 23% from their July 2006 peak to October 2008 (according to the S&P/Case-Shiller Home Price index).
• One in 10 homeowners with a mortgage is either in foreclosure or delinquent on payments (according to the Mortgage Bankers Association).
• Residential-mortgage originations fell to $300 billion in the third quarter. This represents a 50% drop from a year earlier (according to Inside Mortgage Finance).

Commercial

• Some experts predict that problems for the commercial real estate market are just beginning –office buildings, hotels, shopping malls and other commercial properties will be impacted.
• Commercial developers are hoping for a lifeline from Washington.  They are hoping that new commercial mortgages will be guaranteed.
• A lack of credit has made it very difficult to purchase large buildings. In the office market, for instance, only $1 billion of deals on fewer than 50 properties closed across the U.S. in November. That represents a 90% drop from November 2007 (according to research firm Real Capital Analytics).

In December of 2008, the Fed performed two moves.  They dropped its target rate to close to zero and committed to buying quantities of bad mortgage securities. These two moves are starting to have positive signs to the functionality of the market. The most obvious over the last month has been the impact to mortgage interest rates. 

Mortgage interest rates have fallen sharply.  Fixed rates have dropped over a percentage point since mid-November. This has unleashed a refinancing wave. Many of the people taking advantage of the lower rates are those individuals with at least 20% equity in their home.  In addition to all the refinancing, the lower interest rates are pushing buyers to get more serious about purchasing new and resale homes.  Our specific experience with the impact is that open houses have been more productive, calls are coming in from buyers that they are ready to start looking more seriously for homes and in some areas well-priced homes are moving off the market at a quicker rate.

This may be a small step amongst all the doom and gloom, but it is a step in the right direction.

Here are five reasons why the housing market will show new life in the near future:

• Impact of Loan Mitigation and in particular, Loan Modifications
• Government Intervention
• Home Prices are Falling at a Slower Rate
• Pending Home Sales Recently Increased
• Website Traffic Has Increased

Impact of Loan Mitigation and in particular, Loan Modifications
This is becoming a viable option for many people who are faced with a hardship and consequently the possibility of losing their home.  One component of loan mitigation involves the step by step process of where a homeowner or a third party loan mitigator attempts to negotiate a modification to the existing loan. This is a very time consuming process and can take months to complete.  However, more and more banks are realizing the importance and cost effectiveness of loan mitigation. By keeping people in their homes, this will minimize the amount of short sales and foreclosures set to come on to the market and, at the same time, will limit the amount of write-offs that the bank will have to take. At Loan Mitigation Advocates, we have helped numerous individuals modify their loans and stay in their homes.  We will spend time with you assessing your situation and help you determine if you are a good candidate for a loan modification. If you need to discuss your current situation, feel free to call our 800 number or email us directly.

Government Intervention
Potentially the biggest X factor in the group.  It is truly an unknown in terms of how much and what type of government intervention will occur. We have already seen the government’s willingness to step in and save faltering banks. To what extent the government will step in and continue to aid homeowners directly is yet to be seen.  However, we do know that if past history is any indication, they may be willing to help when it is needed.

Home Prices are Falling at a Slower Rate
There are numerous areas across many regions of the country where home prices are now falling at a slower rate. This is after nearly two years of decline. The Standard and Poor’s S&P/Case-Shiller Home Price Indices has shown a slowdown in the fall-off in home prices in recent months. Other data also suggests signs of “bottom-like” symptoms for house prices.

Karl Case, co-developer of the S&P/Case-Shiller Home Price Indices and whose research has focused on real estate markets and prices for over 20 years, said certain regions of the country now look similar to when they bottomed in past down cycles.

Pending Home Sales Recently Increased
Information gathered directly from the National Association of Realtors identified that during the summer months and into the early fall, U.S. home sales contracts unexpectedly rose across the country to their highest level since October 2007. This is important for two reasons.  First, it usually indicates that inventory numbers will begin to stabilize or decrease.  The second reason is that this could indicate that investors and other buyers believe that home prices have come down enough for them to start jumping back into the real estate market.

Website Traffic Has Increased
It has been reported that several real estate websites have seen an extraordinary amount of activity over the past several months.  This is compared to the significant drop in traffic over the last year. Birdview Technologies President, Bedros Bedrosian stated, “The sustained upswing we’ve seen so far this year at the very least signals that buyer interest has returned to the marketplace at levels seen during the boom years.  Buyer demand is not necessarily indicative of increased transactions, but it’s certainly a necessary ingredient in finding a bottom to the present downturn.”

Here are five reasons why the housing market is in for a long recovery period:

• Restricted Credit
• Home Sale Prices are Less than the Amount Owed by Sellers
• Number of Defaulting Prime Mortgages
• Number of Homes Currently on the Market
• Additional Rounds of Adjustable Rate Mortgages are Scheduled to Reset

Each one of these reasons is damaging to a housing market in itself.  However, when combined, we could be in for a much longer road to recovery than some think.

Restricted Credit
One component that has played a role in a slower housing recovery is the ever-changing lending world.  Lending standards have been tightening over the last few months and a tightening effect will make it more difficult for new borrowers to find loans.  The result will be less demand for homes and, in turn, inventory may increase.

Home Sale Prices Are Less that the Amount Owed by Sellers
More homeowners than ever are selling at a loss. Zillow.com reports that nearly 25% of all homes sold nationwide (in the last year) sold for less than sellers originally paid. Homeowners are walking away with less in their pocket when they sell.

“It’s stunning what’s happening out there,” said Stan Humphries, Zillow’s vice president of data and analytics, who looked at statistics that date back to 1996. “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.”

Here are some other statistics from Zillow that magnify the problem in certain areas: Over 60% of sellers in Stockton, Calif., lost money during the same period,  about 60% in Modesto, Calif., 55% in Las Vegas and 38% in Phoenix.

View Loan Mitigation Advocates’ blog on “The Most Underwater City in America is…”

Number of Defaulting Prime Mortgages
The growing number of defaulting mortgages is a problem for our housing market.  But did you know there are various types of mortgages defaulting, and that each one has their own impact? One such mortgage, the subprime loan, has been wreaking havoc over the last two years due to the shear number of defaults occurring for this type of mortgage.

A second type is the recent flood of Alt-A loans that have defaulted. For those of you who may not know, this loan product is a class between prime and subprime loans. In most cases, it does not require strict documentation of a borrower’s assets or income.  These two loan types factored into helping set the housing meltdown in motion.

The item that may keep us in a housing predicament for longer than some expect, though, has to do with the prime mortgage. Prime mortgages are starting to default at an alarming rate. According to LoanPerformance, a company that analyzes residential mortgage statistics, the delinquency rate for prime mortgages worth less than $417,000 was 2.44% in midway through the year, compared with 1.38% a year earlier. Delinquencies for prime loans of more than $417,000 (jumbo loans) exploded to 4.03% of outstanding loans midway through the year, compared with 1.11% a year earlier.

Number of Homes Currently on the Market
One statistic that we closely watch is the month to month adjustment in the number of homes available for sale.  For many parts of the country, inventory numbers have remained relatively the same over the last year.  This indicates that even though the market may be transacting, inventory is quickly being replenished with new active homes.  If we start to see more foreclosed properties enter into the market, this will only add to an already large supply of homes on the market.

Additional Rounds of Adjustable Rate Mortgages are Scheduled to Reset
According to the National Association of Realtors, more than $200 billion in adjustable rate mortgages are scheduled to reset during the second half of 2008. The change in the adjustable rate on consumer’s mortgages may put some in a position where they may not be able to afford their monthly payment.  This may lead to even more short sales and foreclosures entering in to the market.

Mountain House is clearly a microcosm of this widespread problem. Many families located in this area and people across the nation are adjusting their spending habits due to the depressing economy and the burden of paying a high mortgage.

“Most people pay very little attention to what their equity stake is if they can make the mortgage,” said First American CoreLogic’s chief economist, Mark Fleming. “They think it’s a bummer if the value has gone down, but they are rooted in their house. When my house is valued at 50 percent less than it was, does this begin to challenge the way I’m going to behave?”

If Mountain House and the impact on the surrounding area are any indication, the answer is yes.  Cutbacks by residents are having a dramatic effect on the sustainability of many small business owners. According to the NY Times article, strip malls are tenantless, business revenue is down, advertising in the local newspaper and luxury magazines are sluggish and owners are cutting employees.

If you feel underwater on your home mortgage, please contact us at Loan Mitigation Advocates.  We are well-versed in the path to preserve your home ownership, including guidance on your current mortgage with the goal of keeping you in your home.  Please feel encouraged to contact us today – we’re ready to help.