Mortgage Rate Forecast: Esko Kiuru - Las Vegas NV Mortgage Consultant (FHA, VA, Conventional, Refinance, Jumbo)

The present housing and mortgage overload is by some estimates only halfway through its painful cycle, still desperately looking for traction to solve high mortgage foreclosure numbers, underwater homeowners by the millions, home loan providers with books still loaded with toxic paper and persistent oversupply. The complexity and severity of the collapse is testing the skills, creativity and persistence of the public and private sectors alike. Progress has been made on many fronts, but a lot more needs to be done.

While the focus now is largely on turning the pummeled housing and mortgage markets around, a new fee is quietly being introduced to be part of a real estate transaction. Here are the basics of it. Whenever a home sale is closed in the next 99 years, a 1% fee of the price is paid to the original developer or can be split between other parties and investors. The seller pays it to a third-party trustee, and if he doesn't do so, the deal is off. The reason is that a special lien is attached to the underlying land, called a private transfer fee covenant. It stays with any home tied to the program for the set period of time. It has nothing to do with a government transfer tax, HOA fee or environmental protection concerns.

If a home covered by this setup is sold 15 times during this 99 year run, the 1% transfer fee is paid 15 times. That of course generates an inspirational stream of income to the developers and investors at the receiving end. For what, some may ask? From the looks of it there is no economic benefit anywhere in the program, so the sole purpose seems to be to create a 99-year money machine for them. Many real estate industry experts are already calling it a scam or a fancy pyramid scheme. The program is promoted by Freehold Capital Partners out of New York who supposedly have a "patent pending" structure in the works. And its website declares that it has so far signed up partners with real estate projects worth about $488 billion on their drawing boards. That's very impressive, except that none of them are actually named.

The scary part is that Freehold is supposedly in talks with the investment community to securitize bundles of these transfer fees, in other words planning to turn out bonds backed by future cash streams that can be sold to investors. Does that smell like the chopped up subprime mortgage loans shaped into securities no one fully understood that just a few months ago wrecked the home loan industry? Very much so. A good-size red flag right there for the regulators.  

Many real estate trade groups, among them National Association of Realtors ( NAR ), National Association of Home Builders ( NAHB ) and American Land Title Association ( ALTA ), aren't convinced that this is the direction to take. There are many pitfalls in the program, besides the money grab. It complicates property transfers by making them uncertain and more costly. The title is clouded for long periods of time and to get releases from the original owners could be impossible. The American Law Institute claims that these transfer fees are "arbitrary, spiteful and capricious" and an "unreasonable restraint on alienation." That's of course lawyer speak. It lowers home prices due to the built-in feature of a fee encumbrance and making them harder to sell.

As of right now, the majority of states have no limits on these types of fees, so housing trade groups against the program are gearing up to spread the word nationwide and stifle its advance. Preferably bury it for good. Home buyers predictably are out of the loop and should be on the lookout for it, specifically asking whether there is a private transfer fee involved when contemplating a real estate purchase.

Home loan scams are really part of the real estate landscape in any market, but generally speaking affecting only a small percentage of consumers. Now, however, things are very different. This housing and mortgage meltdown ranks right up there among the worst ever to sweep across from coast to coast. It brings with it some juicy opportunities for the con men among us and are they ever trying to take advantage of it.

Many have zeroed in on the mortgage loan modification programs heavily promoted by the government, but only tepidly adopted by the private sector. That has left a huge void for them to slither in, to the detriment of unwary mortgage borrowers. The media continuously reports on the extent of the problem and new twists to the scammers' arsenal to sound the alarm, but the mayhem marches on. Distressed homeowners are promised lower monthly payments and stoppage to the foreclosure process and all sorts of other goodies, anything to make them take the bait. At the end of the day the scammer pulls a Houdini with a pocketful of money from the borrower.

HUD is now taking a tougher stance on the issue. It just unveiled a website www.preventloanscams.org to try to put a stop to this bloodletting. It's doing this together with the Loan Modification Scam Prevention Network, a national group of private and public entities tasked to power up efforts to fight these vultures on local, state and national levels. The network is run by the Lawyer's Committee for Civil Rights Under Law. The website is the go-to place for homeowners to report anything that smells like a scam and hopefully they'll start using it as needed.

Southern Nevada - including Las Vegas, Henderson, Mesquite, Summerlin, Anthem and Mountains Edge - mortgage borrowers and those in other hard-hit areas around the country are being relentlessly pursued by con artists working this angle. So far law enforcement has had only marginal success combating this scourge. The new website will give homeowners an easy access to a national complaint resource that is designed to expedite enforcement on the local level. It's a weapon that will help keep these scammers in check.   

Photo by tomsaint11

FHA-insured home loans have carved a large chunk of the market during this prolonged housing meltdown. Conventional mortgage lenders have withdrawn in large numbers into the shadows to get TLC from the government just to be able to survive. Many have plain vanished from the scene, generally swallowed by a little stronger bank.

FHA has become the favorite of first-time home buyers for its more lenient underwriting guidelines and lower down payment requirements. Its programs, however, are open to all applicants and many refinances have been done through it. Since FHA started gobbling up market share a couple of years ago, to some degree it stepped into the subprime vacuum left by conventional mortgage providers, real estate values have continued to lose ground in most areas of the country and that has caused scores of its insured home loans to go sour. Borrowers often found themselves upside down in a matter of months after closing if they only put down the minimum of 3.5% allowed by FHA and quickly became vulnerable to drawing a distressed status label.

Now HUD - US Department of Housing and Urban Development - has begun a review of mortgage lenders, actually already served them subpoenas for documents and information, who have a "significant" amount of claims against the FHA mortgage insurance program. HUD suspects there is more to the high default rates than just declining prices. It's looking closely at each mortgage lenders' underwriting practices to determine whether further action is needed. The list of the 15 home loan lenders receiving the subpoenas can be found here.

Climbing foreclosure numbers at FHA have forced HUD's hand. With these subpoenas it's looking into possible fraud as one of the reasons to FHA's problems. It is also determined to manage risk better from here on out. Its actions will obviously create a tighter mortgage approval regime, thus to some degree dampen demand, delaying any meaningful housing rebound. Yet, it's better to have a solvent FHA issuing mortgage insurance at a slower pace than none at all.

Underwater - or upside down - home ownership got worse as the past year wound down. First American CoreLogic published a new research paper on the issue stating that over 11.3 million homes were upside down at the end of 2009, meaning that 24% of all residential real estate with mortgages was carrying that unwelcome label. At the end of the third quarter of 2009 there were 10.7 million houses underwater, so in three months about 600,000 additional properties got whacked.

To stay with the statistics, First American CoreLogic further reports that 2.3 million more homes were heading towards the famous freezing submergence, these being units that had less than 5% equity cushion at year's end. Put together with those already underwater, the picture becomes increasingly bleak, because it now translates to roughly 29% of all mortgages holding that classification.

Nevada continues to top the list of states with the most underwater mortgages, coming in at 70%. Las Vegas area - with communities of Mountains Edge, Summerlin, Anthem, Henderson, Canyon Gate and Rhodes Ranch - predictably hoards the majority of those on account of being the population center.

Underwater mortgage in itself is a serious problem. The homeowner is trapped. He can't sell the property unless he brings hard-earned money to the table to close a deal. He can't refinance either, for the same reason. Generally, no one will do that. This effectively removes a large segment of current mortgage borrowers from the real estate market, putting a sizable dent on the demand side.

Secondly, upside down homeowners are more liable to default on their mortgages. The more they are in negative equity, the more likely it is that they'll lose the property, be it a short sale, foreclosure or deed in lieu. As their FICO scores get dinged badly, they'll be unable to get mortgage approvals for a few years, dealing another heavy blow to the demand function.

Simply looking at what underwater mortgage can do to demand sends shivers down the spine of policy makers, home loan providers, real estate experts and other interested parties. A major headache indeed. Or worse.

 Photo by krossbow

Some national housing reports lately have been cautiously positive. Prices have stabilized a bit in scattered real estate markets, a good example of that is Las Vegas. Sales have gone up here and there, spurred on by affordable mortgage money and of course record-low price levels. All this is still short of kicking off a full-blown recovery, but at least it's something to work with.

Despite that, TransUnion, one of the big three credit bureaus, now says that mortgage delinquencies of 60 or more days climbed to a new high of 6.89% in the fourth quarter of 2009, translating into a 12^thquarterly increase in a row. A year earlier, in Q408, the same number stood at 4.58%, so the annual jump amounts to around 50%. A major leap up. Nevada continues to lead the pack in most delinquencies at 16.19%, most of it coming from Las Vegas, and Florida follows close behind at 14.93%. On the other side of the equation, North Dakota topped the list of fewest delinquencies at 1.84%. One might ask, "Where have they been?"

At this stage in the economic cycle it appears that unemployment is the most weighted factor in determining mortgage delinquency levels. The jobless rate in Las Vegas, for instance, is well into double digits, pushing many borrowers - whose income sources fell from two to one or in worst case scenario from one to none - into home loan payment difficulties. Mortgage providers are surprisingly dormant in working with them to find common ground in efforts to keep them in their houses, adding to their woes. On top of that, scores of them are upside down - the mortgage balance is more than the home's value - by a wide margin, effectively preventing them from doing a refinance with today's low rates.

Housing will struggle for the foreseeable future, the only conclusion that can be drawn from TransUnion's research. Some regions with a better than average job growth will emerge from the swoon sooner than others. Southern Nevada - including Summerlin, Canyon Gate, Spanish Trail, Mountains Edge, Henderson and Anthem - appears to belong to the tail end of that, since there is a lot of ground to be covered before unemployment numbers sink to where they should be. Besides, mortgage lenders are still licking their wounds from the thorough whipping they just absorbed, have tightened underwriting guidelines as a result and that is another obstacle to a transition into a meaningful growth pattern.

Home loan modifications have the potential to remedy the housing market swoon currently severely affecting most of the nation. They have to be done right for them to work, though. Thus far the government has been the driving force behind loan mods, urgently pushing the private mortgage sector to follow its lead. But the response has been disturbingly lukewarm, so far.

Innovation in the home loan business has been robust in the past but somehow now that new ideas are desperately needed there isn't much to write home about. Option ARMs, Alt-As, NINA products and many others flooded the real estate market not so long ago and smoothly fueled a tremendous bubble. To be truthful, the subsequent Armageddon wasn't entirely their fault. These exotic programs were practical in certain niche situations, but were roundly abused and flat out over-hyped.

Now it appears that the mortgage industry is slowly getting into gear to find creative solutions to this meltdown. One idea to go along with loan mods is a shared-appreciation mortgage, or more affectionately SAM. In its present simple form it lowers the borrower's payments in exchange for a share of any future appreciation going to the lender, conditional on the home's value climbing over the existing balance. That's basically it. For the homeowner it would avert a foreclosure that has many undesirable side effects. The mortgage bank would sidestep high carrying costs and possibly pick up a slice of equity down the ways. And reap some goodwill, too. They sure haven't got much of that lately.

In Las Vegas valley - hosting communities like Spanish Trail, Mountains Edge, Rhodes Ranch, Summerlin, Henderson and Southern Highlands - it would probably find many takers as long as the mortgage lender would agree to a long-term contract that would allow the housing market to sufficiently recover to lift prices over loan balances. Homes built here in the last seven or so years ago were way overpriced and are now, today, desperately underwater, so to do a SAM on them would require a lot of patience. The home loan providers, for that reason, might for the most part shun Las Vegas. And some of the other harshly-clobbered areas as well, like Florida and California.

As a fresh idea from the private side to deal with this perilous mortgage market situation SAM is good news. This mess is not going get resolved solely by the government with its deep pockets, deep but not bottomless. Wall Street has to show that it can be a responsible partner in this, and act accordingly. SAM just needs other similar initiatives to complement what it aims to do. 

The government has burned the midnight oil for months in an effort to help distressed homeowners deal with mortgage payments they can't afford and possibly find a way for them to stay in their homes. HAMP, or Home Affordable Modification Program, and other similar programs haven't really produced the results they were designed for, though. It is also almost single-handedly running the massive mortgage market today, pumping sufficient liquidity into it that in turn has kept interest rates record low. Despite its pro-active programs it can't do it alone. It needs the private home loan industry to play ball, which it simply hasn't done.

Lately the private mortgage brotherhood has given some indications that it's willing to shift gears, as it obviously is learning the hard way it really should do so. For instance, when a foreclosure claims a home it often gets thrashed inside and outside. Appliances, cabinets of all sorts and other equipment also tend to slide right out the door. To bring the property back to normal for resale can quickly become an expensive endeavor.

CityMortgage just kicked off an experiment that will offer wayward homeowners who can't qualify for loan modifications incentives to make their eventual exit venom-free. For starters, it'll allow some distressed mortgage borrowers to continue living in the house for an extra six months without any payments so long as they voluntarily give up ownership, called deed in lieu of foreclosure in the legal world. The program also dangles $1,000 or more in relocation costs once the move-out time comes, sometimes called cash for cooperation or cash for keys. The property has to be kept in its present condition, is the stern requirement from CityMortgage. For now it'll only be good in a handful of states.

Nevada is not among them. Especially distressed Las Vegas mortgage borrowers would like to see anything that could help come their way. In fact, it's a bit surprising that the pilot program doesn't include Southern Nevada, for here if anywhere the mortgage and real estate calamity has flared tempers against the banking sector and something like this would ease those hard feelings. True, some mortgage lenders presently have the cash for keys going on in Vegas, but since the problem is so widespread much more is needed.

If CityMortgage's initiative proves halfway fruitful for everybody, then it's reasonable to assume that other home loan providers will jump in with their own projects. Who knows how much this type of thing will help, but at least it's an adjustment in the right direction.

Mortgage lending today is mostly in the hands of the government. Just about all new home loan financing or refinances are either purchased, securitized or insured by government agencies, the likes of Fannie Mae, Freddie Mac and FHA leading the charge. Then there is the Federal Reserve that has filled the gaping void left by scared and loss-licking private investors in the secondary mortgage market. Without the Fed rolling up its sleeves and operating there that key segment would resemble a person from "Honey, I shrunk the kids." If so, the real estate market as it has been known until now would've basically vaporized.

Repairs to the home loan industry are underway. That's the good news. Underwriting standards have been reworked all across the long list of important steps to get borrowers approved and closed. More skin in the game is now required, employment and assets are much more carefully verified and appraisals get additional scrutiny, among other adjustments. Sometimes, though, the tightening has gone a little too far, denying solid prospects an opportunity to buy a property. Still, stronger guidelines will produce mortgages that are easier to market on the ever-cautious secondary market.

Private investor confidence in residential mortgage paper is still weak, however. Updated underwriting standards help, yes, but much more is needed. Mortgage rating agencies have come under some serious fire for their poor work and for obvious conflict of interest charges in getting paid by the same banks whose paper they were rating. Government regulators have been less than diligent in oversight, not only with rating agencies but many other procedures and rules they were supposed to watch. Pressure is growing from many directions to get new and meaningful laws passed to address the shortcomings in the secondary mortgage market and while that is going on Wall Street is mounting its own campaign to keep any changes to a minimum. As expected. This is surprisingly self-centered.

A vibrant real estate milieu - a strong recovery in essence - calls for a healthy secondary mortgage market. Private investors won't return there until they see substantial changes made that will give them the transparency they are looking for. They are watching and thus far what they see isn't enough. The regulatory upgrades should be introduced rather soon, for the government can be bankrolling just about every mortgage that comes across only for so long. The Fed is set to wind down its program of buying mortgage-backed securities by the end of March, but it may have to extend it, because it seems the private sector wouldn't be stepping in sufficiently to replace it.

Mortgage paper by the millions has been lately marked with a big fire-red stamp BAD. Or some home loan industry observers prefer to use the equally merciless description TOXIC. There probably are a few other choice words floating in the media about them. Nevertheless, these mortgages in default are a major weight on the books of anyone who holds them - generally portfolio lenders and investors - and that being so, they want to get rid of them, if at all possible.

Fannie Mae and Freddie Mac, the colossal GSEs, which make up a large chunk of the secondary mortgage market, have their fair share of this undesirable material. Their auditors are now quite active in combing through their holdings for home loan provider underwriting mistakes and other problems that would allow them to send them back to the originators. As a rule when Fannie and Freddie purchase mortgages they also enter into a contract with the sellers stipulating the rules of the acquisitions. They've discovered quite a bit of mayhem in their portfolios, which comes as no surprise.

Therefore, as it so happened, Freddie Mac made mortgage banks take back $2.7 billion in loans in the first 9 months of 2009, according to Wall Street Journal. That amounts to a 125% leap over the previous year. Fannie Mae did the same to the tune of 4.3 billion during that time frame, says Inside Mortgage Finance. And investors who have purchased mortgage-backed securities over the years are also demanding buy-backs. Who then might be the lenders in the hook the most? No surprise here. Bank of America and J.P. Morgan Chase, among other large operators, are allegedly on top of the list, according to these publications. Interestingly enough these are the same huge finance companies who have pointed a heavy finger at mortgage brokers as being largely the source of the current meltdown. Hmmm!!?

Repurchasing bad mortgage paper will muddy up these banks' already ugly books even further. The mega operators usually are better able to absorb the hits than the regional and smaller banks. These numbers in the estimated low double digit billions of dollars in buy-backs thus far isn't that much from the total mortgage market that hovers in multiple trillions. But if the trend continues, it may start creating real trouble for the sector, putting additional hurt on the hoped-for real estate recovery.

Mortgage lenders and servicers have been reluctantly doing loan modifications mainly by paring back interest rates and stretching terms, thereby managing to reduce borrowers' monthly payments to some degree. But obviously that strategy is not working as well as many had hoped for. Restructured home loans keep defaulting at an alarming rate.

DBRS, a debt rating agency, now figures that more than half of them are two or more months behind or sink into foreclosure inside six months from the mortgage modification. Clearly, that's hardly the way to resolve the home loan mess. To get to the core of the problem a new direction in thinking has to be found. Actually a doable solution has been debated for some time now, but mortgage lenders haven't put their arms around the idea much. It's called principal reduction.

Home loan providers and servicers have been pulled kicking and screaming into looking at the idea again, and slowly they seem to be warming up to it. Recent statistics prove that. In the first quarter of 2009 3% of mortgage loan modifications included principal cutbacks, reports confidently DBRS. In the second quarter the number grew to 10% and in the third it stood at 13%. The trend is obvious. It appears the mortgage industry is finally seeing the light, but it sure took them a long while to get there.

Las Vegas valley - including Henderson, Mountains Edge, Silverstone Ranch, Rhodes Ranch, Summerlin and Spanish Trail - mortgage recipients are glad to see this development. Scores of them are seriously underwater and without principal cutbacks they would have little incentive to make payments even if they could afford them. To many it just doesn't add up to keep pouring hard-earned money into a losing asset. If the mortgage lenders here bring the loan balance all the way to market, they'd have a lot of eager homeowners sending payment checks in. And the currently high foreclosure rate would be drastically improved. If they do so only part way, it would predictably still prevent a host of mortgage borrowers from going into default.

Should this trend continue it would begin turning the pummeled mortgage and real estate markets in Las Vegas and nationally around in a decisive manner. At this stage in the game this is about the best way to go about it.