March foreclosure data was released today, and the numbers are grim. Lenders initiated foreclosure proceedings for nearly 300,000 homes, a 20% increase from February. On the bright side, March witnessed only 39,000 actual repossessions, down from 87,000 in February. Still, “Since the mortgage meltdown hit in July 2007, 1,447,866 homes” have already been repossessed. Nationwide, a home is now repossessed every 13 seconds.

While foreclosure is increasingly becoming a national trend, data indicates that some regions remain more at-risk than others; “RealtyTrac…today released its Metropolitan Foreclosure Market Report for Q1 2009, which shows cities in California, Florida, Nevada and Arizona accounted for the 26 highest foreclosure rates in the first quarter among metro areas with a population of 200,000 or more.” In Las vegas, 1 out of every 25 mortgages is now involved in foreclosure proceedings.

Detailed national data is still hard to come by, but “a new report from a Minnesota non-profit revealed demographic and financial information about people facing foreclosure.” Minnesota isn’t a perfect microcosm of the national housing crisis. Still, it represents a nice cross-section of people effected by foreclosures, and the report contains some interesting data. For example, “Homeowners with subprime loans sought counseling at a much higher rate than these loans exist in the market…While the default of subprime mortgages has received considerable attention, 59% homeowners receiving foreclosure counseling had prime, fixed rate loans.” In other words, while subprime borrowers certainly deserve the attention they are receiving by the media, creditworthy borrowers are also being hit hard.

Foreclosures can provide some aggregate benefit to the economy by way of nudging housing prices towards ’sustainable’ levels; “In areas hard hit by foreclosures such as Florida, California and Nevada, some neighborhoods peppered with boarded-up homes with overgrown lawns now are showing signs of revitalization. In addition, homebuyers can take advantage of depressed prices by purchasing nicer homes than they would otherwise be able to afford.

Generally speaking, however, foreclosure is a painful and tedious process, for both lender and borrower. As a result, it is something that both parties try to avoid at all cost. The diagram below illustrates the ample opportunity provided to borrowers in foreclosure to avoid actual repossession. In some states, “a lender foreclosing on a mortgage must first provide notice to homeowners about the availability of foreclosure counseling services in their area.”

Meanwhile, the Obama administration recently expanded its foreclosure prevention plan to try to keep as many people in their homes as possible. “Under the expanded plan, some homeowners could see their payments fall significantly and the interest rate on their second mortgage pushed down to 1 percent.”

As a result, 250,000 homeowners teetering on the verge of repossession were spared in March, and were instead offered loan modifications or repayment plans. “Repayment plans merely postpone payments for delinquent borrowers without making them any more affordable. Mortgage modifications are changes in the terms of loans that reduce or freeze interest rates, extend the life of the loan, reduce loan balances or any combination of those three, to, ideally, lower the amount borrowers pay monthly.”

You can see from the following chart the various avenues that can be pursued to avoid repossession. The chart is built from Minnesota data and evinces a 55% foreclosure prevention rate. A similar program in Philadelphia has achieved a 78% success rate, so there are definitely reasons to be optimistic.

In short, the federal government in conjunction with non-profit organizations and lenders themselves, are trying to make it easier for you to avoid foreclosure. If you are already facing foreclosure or fear that such proceedings might be imminent, it would be advisable to review your options. The US Department of Housing maintains an excellent Guide to Avoiding Foreclosure, complete with a listing of foreclosure avoidance counselors.

The Mortgage Bankers Association just released its weekly data dump, showing a downtick in mortgage applications. “Raw mortgage application activity slid 18.1% in the week ending April 24…The four-week moving average fell 4.9% after remaining up 0.3% the previous week…The volume of applications for refinance plummeted 21.9% while the…refi share of total mortgage applications fell to 75.3% from 79.7% the previous week.” [Chart courtesy of WSJ].

On the surface, it conveys a precipitous drop, and the numbers wouldn’t look out of place in any article on the ongoing housing bust and economic recession. But actually, the weekly decline contradicts the upward trend in mortgage applications that began in late 2008. “The MAX’s [another industry association] virtually static results from the week, combined with the MBA’s dive in raw activity, suggests interest by number of households remains unchanged.”

As reported yesterday, mortgage rates remain near record lows, so application volume should remain strong: “The average interest rate for 30-year fixed-rate mortgages fell to 4.62 percent from 4.73 percent, with points increasing to 1.14 from 1.12.”

As the data suggests, a large portion of the mortgage activity corresponds to re-financings. CNN reports that “While the keenly watched spring sales season should entice more potential buyers to deeply discounted prices, refinancing is expected to continue to dominate mortgage demand.” This is hardly surprising, given that banks are still highly risk-averse as a result of the sub-prime fiasco, despite the government’s best efforts to stimulate mortgage lending; “The government has rolled out a series of programs in recent months to lower mortgage rates and boost the struggling housing market. The Federal Reserve in November announced plans to buy mortgage-backed securities, while the Obama administration has rolled out programs to encourage strapped homeowners to refinance.”

Furthermore, given the tightening of lending standards, it’s likely that a smaller portion of mortgage applications are ultimately approved.  Combined with the fact that the overwhelming majority of new mortgages pertain to re-financings, it’s not clear whether the increase in applications will trickle down and boost home prices.

As far as the economy is concerned, “Any boost to consumer spending is likely to be small. Even if about $1.5 trillion of mortgages are refinanced in the next year, with an average reset of about one percentage point, that would amount to just $15 billion a year, a tiny share of overall consumer spending.”

Depending on your specific circumstances, it might be a good time to refinance. Based on anecdotal evidence, it’s more difficult/time-consuming than during the last few years, when rates were also relatively low and the approval process required only a few days. In addition, a lower rate doesn’t inherently justify a refinancing. It’s important to weigh the fees, for example, against any direct savings from lower monthly payments.

Freddie Mac’s chief economist just announced that “Interest rates for one-year ARMs exceeded those for 30-year fixed-rate mortgages over the last two weeks; this is the first time this has happened since Freddie Mac began collecting data for ARMs in January 1984.”  This is a pretty monumental occurrence, but it seems to have been received with surprisingly little fanfare.

One would naturally expect long-term rates to be higher than short-term rates, since the inherent uncertainty of the future must be priced into loans. As a result, there is a trade-off between duration and the rate of interest that a borrower must come to terms with when taking out a mortgage. If you want a long-term mortgage, you should pay a higher rate of interest in order to compensate the lender for future uncertainty surrounding your personal financial situation as well as the macroeconomic situation. In other words, the lender (bank) will charge you a higher premium because it doesn’t know where interest rates will be 15 years from now and also doesn’t know whether your ability to make payments on your mortgage will change over time. The disappearance of this trade-off means that borrowers can effectively borrow for a relatively longer period of time without paying the associated higher rate of interest.

It’s not clear exactly what’s responsible for this development. The benchmark 15-year fixed mortgage rate has gradually declined since the inception of the credit crisis; at 4.48%, it is currently hovering around an all-time low. This is also surprising, given that one would have expected the jump in risk aversion to be accompanied by a surge in mortgage rates. After all, it was excessively low mortgage rates which caused the crisis. The credit for keeping rates low probably belongs to the Federal Reserve Bank, whose “current policy during the financial crisis is to keep mortgage rates low….The effort seems to be working. Bankrate’s benchmark 30-year, fixed rate has been under 5.5 percent since the beginning of February.”

As for short-term rates, they are also falling, just at a proportionately slower pace than long-term rates.

Since this is the first time that the mortgage yield curve has (partially) inverted, it’s not clear what the implications are. An inversion of the Treasury yield curve is often seen as a harbinger for economic recession. In this case, however, recession has already descended upon the economy. Maybe it means that the recession will continue to worsen. Maybe reflects the possibility of deflation. Or maybe it is simply a reflection of supply and demand for mortgages.

Regardless of what it means, it is certainly a welcome development for home-buyers.