Mortgage Rate Forecast: Esko Kiuru

Early on after the real estate bubble burst the home loans that went bad were largely subprime and the general feeling then was that the defaults would pretty much stay in this particular segment. Lo and behold, slowly the Alt-A type of mortgage, once thought to be on really solid footing, started feeling the heat, too. The avalanche didn't stop there either. Defaults are now hitting the luxury homes that were supposed to somehow bypass the wrath of the mortgage gods, at least that's what many industry observers believed.

Mortgage payments on roughly 12% of loans over $1 million nationwide were 90 days or more past due in September, reports First American CoreLogic, Inc. a California research shop. Let's compare that to some other numbers. For home loans under $250,000 the corresponding figure was 6.3%, about half less. For every mortgage around it stood at 7.4%. One more. In September of 2008 it was 4.7% for mortgages north of $1 million. In short, in one year the figure has nearly tripled and that is mildly alarming.

Las Vegas valley - with communities like Summerlin, Anthem, Southern Highlands, Mountains Edge, Lake Las Vegas, Spanish Trail and Canyon Gate - luxury homes probably have even higher default rate due to the serious downturn of the once-booming housing market. Parts of Arizona, California and Florida, at least them, are other areas similarly affected. No market segment obviously is immune to the economic forces of the real estate collapse.

Many high-end homeowners have resorted to short sales to deal with the issue, so long as the mortgage lender goes along with the plan. It can be a tricky proposition, however. Let's say a nice mansion has a mortgage of $1.5 million on it and now the price is only $900,000, a 40% drop. The property is gloriously underwater. The bank would have to take a bath to the tune of $600,000, if sold like that. That's tough to swallow all in one shot. In comparison, a house with a $300,000 mortgage that is 40% underwater would be sold for $180,000, amounting "only" to a $120,000 write-off. Big, big difference for the mortgage lender.

When things fail to work out some homeowners decide to tiptoe away in the thick of night from the property, becoming a so-called strategic default, or a walkaway. These terms really have been absent from the everyday real estate vocabulary up until recently. Now they are being talked about from coast to coast over micro beers and at water coolers, and in high places, too, as it is becoming a growing pain for those dwelling in corner offices with a view.

Jumbo mortgage defaults will keep banks that have a bunch of them in their hack-proof electronic ledgers in a precarious position for a while. Some will never make it, some will do so over a long, painful stretch of time. Overall, it'll limit mortgage liquidity and prolong a true recovery. But, it also could be the end of the default cycle that kicked off with the subprime product. If so, then after this latest mess is sorted out the mortgage and housing markets can begin rising from the fog of misery to once again become power players in the national economy. Can't wait.

The home loan mess is a tough customer to bring under control. Everyone agrees with that. The government and the private sector have tried all sorts of cures to change its course, with very little so far to show for their labors. Mortgage foreclosures are going to continue by some reliable estimates at least at the current pace well into the new year.

There is, however, a new creative initiative afoot to help restore the tattered mortgage market to health.

Behind the effort is a man called Lewie Ranieri, who is largely credited with crafting the mortgage-backed securities in the 1980s.These instruments turned out to be a great catalyst to increase home ownership by funneling money from investors to mortgage firms for making loans to buyers. Today's immense problems are unrelated to the basic concept of these innovative securities, although some tend to disagree with that.

To fix the current mortgage chaos Ranieri has cooked up a rather workable plan. To execute it he founded the Selene Residential Mortgage Opportunity Fund that has raised thus far $825 million from various investor sources. First Selene purchases delinquent home loans at a serious discount, for which there should be plenty of opportunities now as more lenders are teetering on the edge. It, for instance, just won the auction for a portfolio of foreclosed properties for $80 million from the bankrupt Taylor, Bean & Whitaker Mortgage.

It will then work with the delinquent homeowners to get them up to speed with their mortgage payments.First off the principal balance is slashed to somewhere where it makes sense to the borrower. Selene workout specialists help them out with budgeting by acting as counselors, and not as debt collectors. For the plan to bear fruit it's important to get the borrower to believe in home ownership again, have pride in the property and make timely payments. Selene is spending lot of time on this step, it appears.  

Over time these mortgage loans will have a stable payment history, according to projections, and then Selene will sell them at a profit. This is the third step. The current investors will get a juicy return and predictably this success will inspire others to buy into the plan, making even more money available to help distressed homeowners. Right now the project is still quite small, an $825 million fund is a drop in the bucket in the huge residential mortgage market. But the formula is simple and makes sense and has a lot of upside to it.

Southern Nevada - including Las Vegas, Mesquite, Summerlin, Mountains Edge, Henderson, Green Valley and Aliante - mortgage borrowers in distress could be beneficiaries of this program, as long as the loan they have ends up in Selene's portfolio. The home loan foreclosure outbreak is still with us and any new ideas that could help resolve it should be readily looked at, tested and preferably accepted. So far the foreclosure prevention work has been lender-oriented and with meager results. This plan puts much more emphasis on the mortgage recipient and shows good promise.

Mortgage and real estate market aficionados continue to debate how to fix this bone-chilling mess. While the back and forth is going on the government has taken a leading role in actually doing something. It had to act because the private sector - let's call it Wall Street - ran itself to ground, effectively scuttling the chance it could be of any help. Despite plenty of initiatives to stem mortgage foreclosures Washington has had limited success, however, in turning things around.

It seems that identifying the real problem has been botched, to put it bluntly.

So argues a seasoned MBS, or mortgage-backed securities, analyst from Amherst Securities. Up to now efforts to prevent mortgage foreclosures through loan modifications have generally been focused on lowering the payment via lower interest rate and extending the maturity date. That, of course, has only had a marginal impact at best on the problem, as everyone knows now.

The energy should be spent instead on solving the negative equity - or underwater - headache, she asserts. Principal reduction on first mortgages should be back on the table, despite the fact that a bill allowing bankruptcy judges to do that was just recently tossed in Congress. The other key concern is the second mortgage. Investors in them have been dragging their feet in dealing with loan mods, often flatly refusing to go along with any reasonable proposals. First or second mortgage holders still are slow in accepting the uncomfortable truth that giving up at least some principal would likely be to their benefit. Coping with the costs of fixing foreclosed homes and paying taxes, attorney's fees and real estate agent commissions can pile up over time and put a genuine dent on the bottom line. Near as anyone can tell, bankers do lose sleep over that.

Las Vegas valley - with Henderson, Southern Highlands, Silverstone Ranch, Summerlin, Anthem, Rhodes Ranch and Mountains Edge among its communities - mortgage borrowers know all about being underwater. Increasingly they are walking away from their homes, leaving their lenders with an asset that will bring them much less than owed on it in a foreclosure sale. Besides, now they have a vacant property in their hands to maintain. Lenders have been faithfully praying for a quick housing market turnaround here and throughout, but it's still many moons away. They need to wake up to the real world.

Perhaps the government can lend a hand here. Nobody wants to lose money, that's for sure. If mortgage lenders were to write off the loss of principal reduction all in one shot, good many of them would be wiped out just like that. This is where Washington comes in. It, the regulators there, could allow the loss to be phased out over a number of years; whatever, five or eight or ten years. That predictably would save the mortgage lenders and investors by giving them time to tidy up those ugly balance sheets. An incentive like this just might be the game breaker that's now needed.

A new twist is emerging in the ongoing real estate overload. There have been a few of them already as mortgage borrowers wrestle with all sorts of challenges that can put their home ownership in jeopardy. This probably won't be the last one, either. Times are rather unusual and fragile not only in the housing market, but also in the beat-up financial industry and the entire economy.

Historically mortgage payment has ranked as the number one priority for consumers, to be made before any other financial obligation. It assures that the roof over the head of one's family stays there, an important incentive. It also makes up for most the largest debt commitment they'll ever agree to and therefore is given extra weight, as it should be. Unblemished mortgage payment record can be a symbol of financial responsibility, and of pride, too. When FICO software figures out a score it thinks in those terms as well.

Mortgage payment has now lost its seemingly everlasting top spot, though, as was disclosed by Auriemma Consulting Group, or ACG, in its latest market research report called Cardbeat. Credit card bills have come from behind and cruised right past it, leaving it fuming in second place, and stunning some industry observers. Struggling consumers have obviously shifted their priorities in a major way.

Take the Southern Nevada - with communities like Henderson, Southern Highlands, North Las Vegas, Summerlin, Rhodes Ranch, Silverstone Ranch, Anthem and Mesquite - real estate market for instance and there are some clear answers to that change. Scores of homes are underwater - the home is worth less than the mortgage balance - quite a bit and with that comes the unfortunate feeling that making payments on a losing asset isn't that prudent any more. The more underwater the property is the more likely it is that the payment will lose weight. Also, it's possible the housing recovery here in Las Vegas will be slow and bumpy, offering little help for homeowners to erase all the negative equity any time soon.

The weakness of the national economy has left the consumer short on cash and left many of them jobless, too. Now they are thinking that credit cards will help them better with everyday living expenses. If something has to give, it's the mortgage payment before plastic. Besides, banks are canceling accounts for late payments, or for no reason at all, and often cut credit lines without blinking an eye. Those rascals. So card holders do their best not to fall behind.

The consumer is responding to what is happening around him in order to survive, that's all. In time the economy will grab and claw itself out of the murky depths and then the mortgage payment will again claim its spot on top of the list.

Second mortgages are now starting to make their way into the ever-shifting foreclosure battlefield. As the housing market fell famously to pieces and took real estate values down with it, pushing scores of homeowners underwater, first mortgage holders were left holding the bag. That is if they had the only loan on the property. During the bubble that just visited the housing market home buyers often used a second mortgage to keep the down payment to a minimum, or nothing at all, and avoid paying PMI, or private mortgage insurance. 100% financing became quite popular those days.

When a foreclosure hits today, the second mortgage holder, or a debt collector who has purchased the second lien, often gets nothing at all because of the merciless erosion of home prices. The first may get something close to what the actual balance is in a short sale or as a REO sale. In the most affected areas during this downturn like Las Vegas properties frequently are way upside down and the first position gets pinched quite a bit, too.

Home loan providers and debt collectors who own second mortgages are beginning to hone their skills to grab something when a homeowner is in danger of a default. One of the new tactics they've come up with is get a judgment from a court to freeze the homeowner's bank account, or allow them to clean out the account altogether to satisfy their claims. The other one is to get a court to approve garnishment of paychecks. 

This of course weakens a homeowner's position to seek loan modification. He is already struggling to make mortgage payments as it is and all of a sudden the paycheck is cut, or bank account frozen, that likely will negate a possible solution where he can keep his house. Moreover, now the first lien holder finds itself in a bind, too. The chance it had to salvage something out of this through modification is greatly diminished. It may now actually seek legal action of its own against the second mortgage holder, who essentially appears to be carrying out an end-run over the established foreclosure process.

Las Vegas valley - featuring communities like Henderson, Mountains Edge, Silverstone Ranch, Summerlin, Green Valley, Rhodes Ranch and Charleston Heights - homeowners ought to be aware of this possibility. There are scores of homes in here with second mortgages that are underwater and many could easily get snagged in this type of a game.

The property owner who is already in the weeds knee deep with mortgage payments could now find himself in the middle of a brewing lender duel. What a mess.

The agonizing mortgage and housing downturn has brought FDIC to the forefront of efforts to keep the financial system from being sucked into a dark, unpleasant place. The Federal Deposit Insurance Corp. takes over failed banks and then allows other healthier financial institutions to acquire the wrecks. So far this year it has shuttered 124 banks, absorbing losses in the billions.

Mortgage portfolios have played a large role in the total assets FDIC then offers up for acquisition. Typically when a bank purchases assets it also signs a loss-sharing contract with FDIC. In this current recession they generally have agreed to a forbearance clause and/or lowering the interest rate on the underlying home loans. Now FDIC, seeing its insurance fund shrinking perilously, is seeking to shift more of the loss-sharing to the acquiring banks.

To do that it plans on requiring banks to lower the principal on the mortgages they acquire. This particular course of action has been debated for months now, only to draw lukewarm acceptance from the financial sector. Washington has also floated the idea of allowing the courts to slash principals closer to market, but it has been quietly shoved onto a shelf in some remote closet on Capitol Hill, thanks to pressure from Wall Street.

Banks see bright red when the topic of mortgage principal reduction is brought up for conversation. They have been doing everything thus far in their dog-eared playbooks to avoid doing so. Obviously they have been calling on any available higher authority willing to listen to bless the real estate market for a quick recovery that would then prop up their damaged balance sheets dragged way down with almost worthless mortgage paper. It hasn't happened, though, and seems to be at least a few more moons away.

Cutback on mortgage principal would undoubtedly slow down the still-active foreclosure tsunami and thus help FDIC and even the banks. Homeowners would have a much better chance of meeting their payment obligations, likely keep them in their houses and largely arrest the loss of property values. It would also give them a psychological boost in that they would then be living in a place that is only marginally underwater, if at all.

Southern Nevada communities - Summerlin, North Las Vegas, Henderson, Mountains Edge, Anthem, Mesquite, Rhodes Ranch and Silverstone Ranch - would certainly gain from this adjustment, if enacted. Upside down homes saturate the landscape here, as it does in many other areas throughout the country. Banks may still throw tantrums over it, but that frankly appears to be the only sensible way out of this prolonged mess.  

Photo by greenbroke.

The current housing market turmoil has delivered the conventional home loan sector a hard uppercut on the chin, sending it reeling, which left a huge void in its wake. This gave FHA, rather dormant home loan insurer in recent years, an opening to regain some its past luster and it has steadily gained market share ever since. Its low down payment requirement and more lenient underwriting criteria have allowed many of today's mortgage borrowers achieve home ownership. Many well-meaning industry observers have also dubbed FHA the new subprime lender.

FHA has run into trouble of late, though, like who hasn't, due to growing defaults on mortgages it insures. That has prompted it to tighten the guidelines under which it operates. Now it is planning to make more adjustments in a further attempt to lower risk and shore up its leaky insurance fund.

The oven-fresh proposal calls for increased net worth requirement for approved mortgage lenders. The minimum would be $1 million in the first year and would go to $2.5 million by the third year. The current threshold is $250,000, so the hike would be substantial and would predictably lead to many of them giving up their status. It would then consolidate FHA-insured lending to a fewer home loan companies, on one hand, but they would also be stronger in dealing with adverse situations, on the other.

Another significant change under consideration is that third-party mortgage brokers would no longer need to have direct FHA approval. The FHA-approved home loan firms would be responsible and liable for the loan files they get from mortgage brokers. In essence, they would then be approved by these FHA-endorsed lenders, creating a similar arrangement that currently exists with Fannie Mae and Freddie Mac. That actually makes sense, streamlining the major government-affiliated mortgage programs.

Las Vegas valley - featuring Summerlin, Henderson, Mountains Edge, Anthem, Southern Highlands, Aliante and Rhodes Ranch - mortgage borrowers would probably end up having more FHA brokers to choose from, should these changes be enacted. As it seems, they would be relieved of the present net worth requirement and just get okayed by the various large FHA-approved mortgage lenders. More brokers would lead to more competition and the consumers ought to be clinking beer glasses over that possibility.   

The unprecedented real estate bubble the nation just experienced was partly created by the credit rating shops that were tasked to value mortgage-backed securities, or MBS. The three large agencies doing that are Fitch Ratings, Moody's Investors Service and Standard & Poor's. The ratings the three arrived at were then attached to MBS issued by Wall Street firms and subsequently offered to investors who were seeking to invest money based on their own risk preferences. Obviously what the large investors world over were seeing made them confident that MBS were sound and worth acquiring, so they bought boatloads of them, stoking the fire under the housing bubble even more.

Las Vegas mortgage recipients, like those in the other seriously mauled areas of Arizona, California and Florida, were caught up in this frenzy and are now paying dearly for it.

Ever since the home loan and real estate market implosion there has been talk about how these ratings actually were sugar-coated and inaccurate, giving investors false impressions on their true value. Naturally the three agencies under scrutiny are adamantly defending their business practices.

Ohio attorney general has now filed a lawsuit against these three agencies on behalf of five Ohio public employee pension and retirement funds, claiming that the MBS ratings were inflated, often giving triple-A scores to mortgage-backed securities that in fact were rather risky. Moreover, the issuers of these bonds themselves, the lovable Wall Street crowd, were paying hefty fees for the ratings, creating an apparent conflict of interest issue. Conceivably the more fees a Wall Street issuer paid, the better an MBS rating would be.

The lawsuit seems to have decent merit now that the housing market has largely tanked and those MBS have lost most of their value, showing that in fact they were not quite triple-A vehicles but rather the high-risk variety. The Ohio attorney general has already filed seven other lawsuits against financial and investment companies since the economy turned sour and has collected thus far $2 billion in damages. This then isn't his first rodeo, so evidently he's onto something everybody should be paying attention to.

It just makes people wonder why Washington mortgage industry regulators are still sitting on the sidelines. This appears to be what they should be keeping an eye on and taking corrective action when needed. Does Wall Street have too much influence there? Well, at least some of the states have taken the initiative seeking to make the marketplace more responsible for its greedy and deceptive actions.

When the Southern Nevada - including Southern Highlands, Summerlin, Henderson, North Las Vegas, Anthem, Mountains Edge and Green Valley - housing market tripped into a free fall it was a foregone conclusion on many lips that scam artists would soon surface to try take advantage of the situation. And have they ever. What the local media has reported on the magnitude of the issue is undoubtedly only a tip of the iceberg. This, of course, isn't only a Las Vegas problem either, it covers the whole nation.

The scam artists generally employ a few basic practices that have all too often worked on unsuspecting homeowners facing mortgage payment challenges. One of them is the promise that the shady operator guarantees to put a halt to a foreclosure or to modify a home loan. Another is where he requests a large advance fee. They also like to ask for the borrower to stop paying the mortgage lender and send the payments to them instead. All of these are red flag events for homeowners thinking about foreclosure rescue or home loan modification.    

In addition, some operators will brag about their excellent track record and pledge to make refunds in case they fail to deliver the goods. And then there are those who say they are affiliated with the government or the mortgage company in question, when they are not. It's important to check on the legitimacy of any foreclosure rescue shop or home loan modifier before engaging them.

Because mortgage-related scams just continue gaining speed the FTC, or Federal Trade Commission, has launched a new program to attempt to slow things down. It's called Operation Stolen Hope. It was recently announced in a press conference held in Las Vegas, one of the cities most affected by the housing collapse where many hustlers have set up shop to ply their slimy trade. FTC is actually joining forces with at least 25 state attorneys general to thwart these deceptive, fraudulent and unfair business practices the scammers like to pull off. 

Operation Stolen Hope must be the result of ever increasing amount of mortgage borrower complaints. What FTC has done so far obviously hasn't been enough. Sometimes people wonder why regulators have to receive thousands of complaints before they start taking their mandate seriously. Why not do their job right from the get-go so there won't be that many disgruntled mortgage borrowers to make those breathless phone calls? Anyway, if FTC has the resources, organization and will it can make a big difference on the struggling homeowners' behalf.

The housing debacle in Las Vegas and throughout the country is testing consumers' patience in a major way. Real estate values have eroded without mercy in many areas, to the tune of double digit percentages. Some Southern Nevada - featuring Summerlin, Mountains Edge, Henderson, North Las Vegas, Pahrump, Southern Highlands and Anthem - communities have seen drops in the 50 to 60% range. Many homeowners here and elsewhere, as a result of that, find themselves underwater, meaning the underlying mortgage is higher than the property's value. The foreclosure epidemic hasn't let up yet, either. There really isn't much to write home about.

Those applying for a mortgage loan nowadays have run into their own set of issues, largely thanks to the unstable housing market.

To approve and close a mortgage took 30 days in 2008, but this year that time span has grown to almost 47 days, asserts J.D. Power and Associates in its recent study. That is a serious jump and Las Vegas mortgage borrowers certainly can identify with it. Main reason is the added scrutiny every home loan application now receives. Mortgage providers continue walking on thin ice and are doing everything to avoid approving loans that may not work out. A half inch mortgage file can balloon into a 2-inch thick stack after all the supporting documents the nit-picking underwriter requests are in. That kind of stuff can test any applicant's staying power.

Also, home loan firms seem to have shifted some resources away from origination to deal with foreclosures, short sales and mortgage modifications. And what not. It obviously will slow down the already lengthy process even further. So, when J.D. Power comes and asks How did it go?, the consumers will first take a deep breath and then happily let it all out.

There is a way, however, to keep mortgage applicants more or less happy. It has been tested time and again and it works. It's called communication. Home loan originators, and even real estate agents, could include a brief explanation about the current thorny state of the market and the potential challenges it may present early on in the process and that would help prepare them for the journey to a satisfying closing. And a new home.