Nearly one year old, the federal government’s loan modification efforts continue to languish. In an attempt to galvanize the program, it has taken to releasing updates and report cards with increasing frequency. Unfortunately, these too appear to be having little success, which is why I have taken it upon myself to write my own progress report, for your viewing pleasure.

According to the latest figures, over 650,000 loans have entered the trial modification stage, during which point they must demonstrate their sincerity, eligibility, and capability, before they can be converted to permanent modifications. Specifically, they must make 3 payments under the new terms and submit certain documentation, that proves they are legitimately entitled to a modified loan. You would think that this wouldn’t be too difficult, but to-date, only 30,000 temporary modifications have been converted.

Naturally, there is no shortage of blame to go around. The government is blamed for not spurring more trial modifications (it originally estimated the pool of eligible borrowers at four to seven million). Lenders are blamed both for taking too long and for not granting increased leniency to borrowers, some of which are still seeing an increase in their monthly payments following modifications. Lenders counter that borrowers are also to blame, both for failing to make the required 3 payments under the trial modification and for not submitting the necessary paperwork.

Representative Jeb Hensarling’s assessment reflects what everyone is undoubtedly thinking: “Taxpayer-funded foreclosure mitigation programs have been an abject failure.” He and is leading the campaign to completely abolish the program. I’m partially playing devil’s advocate here, but perhaps it’s time to face the fact that this initiative was designed to fail. 25% of borrowers that received temporary modifications ultimately defaulted, while a handful of modifications have been handed to borrowers that weren’t even behind on making payments. Then, there are those that deliberately fell behind on their payments in order to receive payments, and those that are “naturally” behind by avoiding modifications because of the hit to their credit score that comes with the delinquency denotation reported to the rating agencies.

For better or worse, the program refuses to die; a new executive order prevents lenders from canceling temporary modifications “scheduled to expire before Jan. 31 for any reason other than property eligibility requirements.” Progressive Congressman, such as Barney Frank, are advocating alternatives, such as a program in Pennsylvania that makes low-interest loans to the unemployed that can be used to make mortgage payments. He is also trying to re-introduce a “cram-down” bill, that would give judges discretionary power to modify mortgages as they see fit. Finally, under pressure from the government, lenders have redoubled their efforts, in some cases bringing on more staff and opening new centers staffed exclusively to make loan modifications. Maybe there is hope after all…

As I mentioned in my previous post, one of the big unknowns for 2010 is the role of the government in the mortgage market, especially via the FHA and Fannie Mae / Freddie Mac. On the one hand, these entities now account for a tremendous (and still growing) portion of overall mortgage activity. On the other hand, all are heading towards insolvency, which means their future is in jeopardy at the very time that their existence has grown to become indispensable. For better or worse, the federal government has already come to terms with this reality, and is already moving to ensure their survival.

In response to Fannie and Freddie’s increasingly precarious financial positions, the Treasury Department recently announced that it would no longer cap the amount it could spend to keep them afloat for at least three more years. (Previously, a cap of $200 Billion per institution applied to government bailout efforts.) The move was incredibly controversial, since it deliberately circumvented the Congressional approval that would have been required had the Treasury waited until after the new year to act.

To be fair, Fannie and Freddie combined have received “only” $110 Billion in taxpayer subsidies to-date, so it seems unlikely that it will have to draw upon the complete $400 Billion that had previously been allocated. By removing the caps, however, the Treasury has simultaneously given itself more flexibility and assured the markets that it stands behind the two mortgage buyers. In addition, the funds have not been given away free, as the government has received dividends and stock warrants, as well as full decision-making authority, in exchange for its investment.

As for why the government wants to continue throwing money into these two black holes, well, that’s not difficult to comprehend. As the Washington Post reported, “By promising to keep the companies solvent, the government can maintain its sweeping power over the housing market. Fannie Mae and Freddie Mac have played a central role in Obama administration policies to keep mortgage interest rates low, restructure unaffordable mortgages, stop foreclosures and funnel money to housing programs around the country.” In other words, the federal government’s housing policy is largely being conducted through Fannie and Freddie, and to relinquish control over the two organization (and/or let them slide into bankruptcy) would give it fewer tools to prop up the housing market.

Turing to the FHA, the federal government also has a plan, though it’s slightly different. Rather than pump taxpayer money into the beleaguered organization, the government is more likely to implement certain “austerity” measures, so that it can remain self-sufficient. Whereas there’s no pretense that Fannie/Freddie can survive without the assistance of Uncle Sam, the goal is to make it so the FHA can remain solvent without an outside capital infusion.

Towards this end, it will probably raise down-payment requirements, so that borrowers “have more ‘skin in the game‘ and a stronger equity position in their loans.” Credit standards will probably raised (in order to mitigate against the possibility of default), as will mortgage insurance premiums. FHA mortgage rates – currently hovering around all-time lows – shouldn’t be affected.

As for the long-term plan for all three entities, it appears that they will gradually return to a mission of helping low-income borrowers – a mission that FHA has moved away from, but that Fannie/Freddie have actually moved towards, in recent years. As for everyone else, well it looks like you’ll soon be on your own.

US News & World Report just released its guide to the status quo of mortgages (Getting a Mortgage in 2010: 10 Things to Know). While the guide is fairly broad, it falls short on depth; I would like to summarize, simplify, and elaborate upon it below:

1. Tighter Lending Standards: Given the deteriorating credit positions of lenders, it’s no surprise that lending standards have tightened dramatically, to the point that it might now be impossible for certain parties to receive loans. Documentation has also become more strict. The days of “Liar Loans” are behind is. Instead, expect to provide verifiable proof of both income and assets, and expect that both will have to meet very rigid ratios, with very little leeway.

In addition, credit history should be impeccable (in the 730’s or above) in order to obtain a mortgage with the most favorable terms. As usual, borrowers should check their credit report in advance to make sure there aren’t any errors (you are entitled to view it free once per annum), and to scrub them accordingly. According to US News, 2010 could witness “additional belt tightening” as banks move to implement “sustainable” lending practices.

2. Lower Interest Rates: Behold one of the paradoxes of the housing market crash. While lending standards are tighter (to mitigate the perceived higher risk), lending rates are also lower (facilitating more risk taking). In other words, while lower interest rates would normally compel more borrowers to enter the market, many are simultaneously deterred because of tighter credit requirements. As a result, lending rates have continued to trend lower, following a brief uptick over the summer. They now stand at record lows.

Going forward, it seems rates must go up. The Fed’s asset purchase (known as quantitative easing) program is already winding down, and formal rate hikes probably aren’t far off. In addition, with investors nervous about the growing US national debt, they might curtail their purchases of Treasury securities, which would send Treasury yields up, and bring mortgage rates with them.

3.. Down Payments: Only a couple years ago, borrowers could purchase a house with zero money down. Not anymore. Nowadays, you should expect to put down at least 20%, which was standard before the housing bubble. FHA and other government-sponsored mortgage programs often carry less rigorous down-payment requirements, but carry higher interest rates to compensate for the additional risk. Either way, you will probably be required to obtain private mortgage insurance (PMI) if you want to put down less than 20%.

4. Government Loans and Incentives: Speaking of the FHA, it’s unclear how long its loans will be so readily available, due to its growing financial problems. It has already lowered the maximum loan amounts for reverse mortgages, and may do the same for conventional mortgages.

The other government program that you should be aware of is the tax credit for first time home-buyers. The credit has been extended until May, and most of the requirements have been loosened, to the extent that virtually all homebuyers can find some way to qualify.

If a recent WSJ piece is any indication, then it looks like speculators are diving back into the housing market. According to the article, investors comprise a growing percentage of buyers in Phoenix foreclosure auctions, with the goal of buying properties on the cheap and flipping them quickly to “legitimate” homebuyers. Shockingly, in some cases, the turnaround time was a matter of weeks, and yielding profits in excess of $50K per property.

Of course, it’s impossible to know whether we can extrapolate from this onto a nationwide scale. Still, anecdotal evidence suggests that it’s the case. Bidding wars have become commonplace at foreclosure auctions, with investors competing to outbid other investors and homebuyers being largely shut out of the process. Stories abound of homebuyers excited to snatch up homes at bargain basement prices, only to be over-matched by investors, who tend to be more experienced and better capitalized.

Speculators tend to have the upper hand in this aspect, since foreclosure sales are often conducted with cash only. There aren’t many real homebuyers that can afford – nor are willing – to pay $500,000 cash for a house at auction. To echo the advice of Charlie Rose, then, “Don’t try this at home kids. It’s still a risky business.” Not only must the homes be purchased with cash, but the decision to purchase must be made immediately, often without first having the opportunity to survey the property. This is an awful drawback, not only because it makes it difficult to know how much to pay, but also because many of the homes have been deliberately vandalized by the evicted homeowners, sometimes requiring tens of thousands of Dollars in repairs. Not to mention that there might also be other liens on the homes which are assumed automatically by the new owner and must be repaid before the home can be sold.

It’s hard to say how who this phenomenon is benefiting. Some would argue that speculators are yet another (useless) layer separating homesellers from homebuyers, collecting a fee merely for finding the property and underpaying for it. Given that many of these properties are “flipped” in a matter of weeks, there is certainly a shred of truth to this argument. At the same time, the system appears to benefiting all parties involved. Lenders are happy because they get paid cash for properties that they can then clear off their balance sheets and stop worrying about. Homebuyers are happy, because the houses being sold by investors are necessarily in livable condition, whereas the same cannot be said for homes purchased at foreclosure auctions. Speculators are naturally happy because they can earn a tidy profit in the process. The previous (evicted) homeowner probably isn’t happy, but they can’t rightfully blame speculators for their plight.

I always try to conclude all of my posts by underscoring how readers will potentially be affected by whatever phenomenon is being examined. In this case, it’s hard to say definitively. If you are considering jumping into this business, it goes without saying that you need to have done your homework first. From the standpoint of the housing market, it makes me nervous that speculation is picking up just as housing prices appear to be stabilizing. The demand created by speculation is temporary/artificial/illusory, and isn’t consistent with a real housing recovery.

A delinquent mortgage is generally understood as one whose borrower is more than 60 days late on making payments. With the ratio of such borrowers already at a record high (6.25% at last count) and climbing, it’s a condition that’s relatively widespread. As a (potentially) delinquent borrower, it’s important that you’re aware of your options, which are more diverse than you might think.

Under the best-case scenario, the missed payment would have been a fluke, and you would resume making payments as normal. Given that for the majority of borrowers, delinquency is a precursor to foreclosure, this probably isn’t a realistic expectation. The alternative, then, would be to speak immediately with your lender, to determine if/how it is willing to help you.

Ideally, your lender will immediately consent to a loan modification, with both a reduced principal and lower interest rate. Unfortunately, this remains remains the exception, even given government incentives. In fact, the federal program has succeeded in catalyzing the conversion of an abysmal 4% of temporary modifications into permanent modifications. If you were to expand the denominator to include all delinquent mortgages – and not just those that have already received a temporary modification – this 4% figure would become so small as to be essentially meaningless. In other words, if you’re facing foreclosure, you probably can’t count on your lender to voluntarily save you.

Well, that’s not entirely true…Citigroup has announced a temporary moratorium on foreclosures until the conclusion of the winter holidays, and Fannie Mae has encouraged other lenders to follow suit, which means that at the very least, you can stay in your home for another couple weeks. But don’t worry, state and local governments have you covered. New York, in fact, is just the latest state to implement a new statute that requires lenders to submit to mandatory “mediation” with a third party prior to foreclosure. This initiative also aims to connect delinquent borrowers with counseling agencies, so that they can better understand the predicament and the choices they face.

If in spite of the government’s efforts and mediation, you are still facing foreclosure, you may want to consider a short-sale. Under a new set of regulations currently being mulled by the federal government, lenders would be required to adhere to “nationally uniform documents, timelines and financial incentives” when evaluating short-sales, which would greatly streamline the process. Of course, the burden would still fall on the borrowers to convince the lender/investor that a short-sale is in their best interest (when compared to a foreclosure), but anything that simplifies/expedites the process is certainly welcome. [By the way, for those who aren't familiar, a short-sale refers to a special type of home sale, whereby the proceeds of which are less than the value of one's mortgage. It is usually understood that the buyer will be "forgiven" the difference.]

Failing a short-sale, borrowers can plead their case in court. A handful of “activist” judges have handed down incredible rulings in recent months, in some cases absolving the borrower of all of their mortgage debt. Again, this remains the exception. Since the “cram-down” measure (which would have given judges discretionary power to modify mortgages) was defeated in the Senate, it looks like borrowers are back on the defensive on this front.

In the end, you may have to “settle for foreclosure. But don’t despair: according to a recent academic paper that has received a tremendous amount of publicity, foreclosure is not nearly half as bad as people think it is, from a legal/financial perspective. (Obviously, the emotional/practical side of foreclosure is tragic, but the paper ignores these considerations). In fact, some people are deliberately jumping straight from delinquency into foreclosure and skipping all of the hassle in between, in part of a growing trend known as “strategic default.” The author of the paper reckons that those with underwater mortgages could spend decades rebuilding the equity in their homes, or simply walk away “and their credit rating could recover enough in two years for them to qualify for new home loans.” Sounds like a no-brainer to me.

Today, we bring you an interview with Somesh Gaur, editor of Housing Bubble Bust, which takes a quantitative approach to understanding housing prices. The site also offers an excellent “Anatomy of the Housing Bubble” and data feeds on everything related to the housing market.

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Shamed from its failure to prevent the housing bubble and wary of being stripped of its regulatory powers by the still gestating Consumer Financial Protections Agency, the Federal Reserve is stepping into high gear. Six months ago, the amended Truth in Lending Act (TILA) officially went into effect, and followed this up last month with the implementation of new “Regulation Z” to this act.

For those of you unfamiliar with this enhancement in regulation, the amended TLIA mandated an increase in transparency in the mortgage application process. According to the Fed, this act “requires creditors to give good faith estimates of mortgage loan costs (”early disclosures”) within three business days after receiving a consumer’s application for a mortgage loan and before any fees are collected from the consumer, other than a reasonable fee for obtaining the consumer’s credit history.” Previously, these disclosure rules only applied to primary residences; now they apply to “all dwellings.”

According to the Fed, “Uniformity in creditors’ disclosures is intended to assist consumers in comparison shopping” and prevent them from feeling pressured to close a deal right away. Towards this end, borrowers MUST wait at least 7 days after receiving the initial good-faith estimate before they can close on the loan. During this period, they can thoroughly evaluate the lender’s offer and even consult with other lenders. Additionally, if the final APR rate is off by more than .125% from the good-faith estimate, then borrowers MUST wait another three days before closing.

If the original act was designed to increase transparency during the application process, then the new Regulation Z (which goes into effect immediately, but which lenders technically have 60 days to implement) should increase transparency after the mortgage has already been completed. Specifically, if the loan is sold or transferred to a new lender/investor/institution, then the acquiring entity has 30 days in which to inform the borrower of the change.

This regulation, while seemingly trivial, should address the massive uncertainty that has arisen over the last decade, as mortgages change hands at an increasingly rapid speed. Only recently, with the CDO fiasco, has the complex chain of mortgage lending that stems from origination to “packaging” to investing come to light. For the most part, borrowers are blissfully ignorant to this process; all they care about is to whom they should mail the monthly mortgage payment to. Only recently has this become a problem, as delinquent borrowers have sought loan modifications, but must first track down the current owner and obtain his permission before such is possible. As a result of the new rule, fortunately, the current owner’s identity will no longer be a mystery requiring the prowess of a homicide detective to unravel.

Overall, these regulatory changes do essentially nothing to prevent a repeat housing bubble from inflating. Still, that they increase the transparency of the system is laudable in its own way. Borrowers can no longer complain that they weren’t given adequate time to consider a mortgage offer, or that the original good faith estimate differed drastically from the final numbers, or that they don’t know who owns their mortgage. If knowledge is power, than borrowers now have some muscle!

It seems mortgages are no longer just for regular folks. So-called Jumbo Loans have witnessed a surge in popularity over the last decade, thanks to the same explosion in easy credit that also made conforming loans easier to get. Still, these loans are relatively rare, especially in the current lending environment.

Before I go any further, I want to clarify the distinction between conforming and jumbo mortgages. The distinction is made solely in regards to loan size, for no other reason than loans above a certain (some would say arbitrary) threshold are considered more risky. The exact thresholds vary by region, in accordance with local housing price levels. In the majority of cases, the limit for a conforming mortgage is $417,000, while in Los Angeles, for example, it’s $729,750. Anything above must be financed using a jumbo mortgage.

You should be aware of this distinction when shopping for a home. If possible, you should plan/negotiate to purchase a home below the cutoff, in order to make the financing process easier, as I’m about to explain. The first thing you will notice when shopping for a jumbo loan is that they are mostly adjustable rate loans. When interest rates are low (as they are currently), that can work to your advantage. When they rise, however, this will make your already expensive mortgage even more expensive. Second, down-payment standards are more rigid; in order to obtain a jumbo mortgage, you should be prepared to contribute at put down at least 20% in equity. Compare this to the 3.5% that is required with FHA conforming mortgages.

In addition, lending standards for jumbo loans are generally more strict. You will most likely be rejected if your projected monthly mortgage payment exceeds 38% of your income. Your credit history should be stellar, and you will be required to thoroughly document your income and assets when applying. Those who were hoping to obtain a Liar’s Loan need not apply. Finally, mortgage interest on jumbo loans can only be deducted on the first $1.1 million (recently revised by the IRS from $1 million). I shouldn’t broadcast this, but tax experts have found ways to get around this, usually by pooling mortgage interest with other investments.

While precise figures on jumbo mortgage lending are hard to come by, it seems there are 130,000 currently outstanding mortgages with loan balances of more than $1 million. 3,000 of these loans have balances of more than $3 million, and a handful over $20 million. Interestingly,these mortgages are plagued by the same rates of default as effect conforming mortgages. At the end of the day, I guess the super-rich are just as prone to poor financial decision making as the rest of us…

These are exciting times to be a mortgage blogger; rarely is there so much fodder for posts! For example, in the last couple weeks, mortgage rates dropped to record lows across-the-board, and housing data indicated that the housing market is still in recovery mode. With both of these developments, one has to wonder whether they are sustainable?

Let’s begin with the mortgage rates story. According to the most recent Freddie Mac Primary Mortgage Market Survey, the average 30-year Fixed Rate Mortgage can be had for the jaw-droppingly low rate of 4.71%. The average rate for a 15-year fixed rate mortgage, meanwhile, is now only 4.27%. Both of these represent record lows. While the Fed has basically stopped buying housing securities, this slack has been picked up by private investors, that are buying Treasury securities (for reasons basically unrelated to the housing market), and sending mortgages rates lower in the process.

One would thing that rates would have fallen enough to entice a fresh group of borrowers to enter the market, but apparently this just isn’t the case. Perhaps, this is due to tighter lending standards, such that the problem is not a lack of potential borrowers, but rather a lack of eligible borrowers. “Credit standards are ‘definitely tighter than they were’ in previous years, said a [real estate agent]. “At least two years of job history, low debt and a good credit score are essential to securing a loan. ‘You have to have all three, you can’t be missing one,’ he said.” In any event, “Mortgage applications for home purchases in the U.S. have fallen to the lowest level in 12 years,” according to the Mortgage Bankers Association.

Despite lower demand for mortgages, demand for homes is generally picking up. This is supported by the data: “Sales of new homes rose more than 6 percent in October…Home prices rose in 11 major metro areas in September.” There has been a “24% gain in existing home sales since January…[and] 22% increase in new-home purchases…[and] 40% rise in single-family housing starts.” Meanwhile, inventory is sinking, and “It would take 7.5 months to sell their inventory at the September sales rate, down from a peak of 12.4 months in January.”

On the other hand, all of the indicators remain down on a year-over-year basis, and there remain significant discrepencies in the data that are skewing the results. For example, prices are still falling in a handful of cities (9 at last count), while some regions (the south and midwest) are stronger than others, and lower-end home prices are rising faster than their higher-end counterparts. In other words, the data remains muddled. The best that can be said is that the US housing market has stabilized on an aggregate basis; unfortunately, this isn’t very meaningful.

Going forward, the picture is even more unclear. The National Association of Realtors (which has a vested interest in rising prices…) is “forecasting 5.69 million existing home sales in 2010, up from an anticipated 5.01 million this year….’The fear factor will no longer be at play in 2010.’ ” said the association’s Chief Economist. There are certainly reasons to be optimistic, considering that supply is shrinking and the economy (and jobs situation) is improving.

On the other side of the debate are those analysts that have used expressions such as “rocky rebound” and “double dip” to describe their forecasts, with one prominent economist declaring pointedly that “The housing crash is not over.” Such analysts have argued that a combination of sustained high unemployment and a release of the so-called shadow inventory will cripple the market over the next couple years, before it ultimately recovers.

This shadow inventory consists of homeowners that want to sell but will instead wait until prices rise before attempting to do so, as well as foreclosed properties that are being held off the market by lenders, and properties that have not yet been foreclosed upon but probably will be in the next couple years. For example, “7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.” In addition, government efforts aimed (separately) at limiting foreclosure and stimulating demand continue to distort the market. When they expire in 2010, it seems that a correction will have to take place.

In short, it’s impossible to say whether this is the time to enter the market. Prices are rising, but could fall. Rates are low, and could rise. The government will give you $8,000 to buy a house, but perhaps houses will fall by more than $8,000 after this artificial support structure is removed. Still, if you forget about the future and concentrate solely on the present, being a buyer has rarely been so sweet!

Today, we bring you an interview with Peter Peter Giardini of Bigger Pockets. Pete is a successful real estate investor who started with $25K in 2001 and has never looked back.  He took full advantage of the “craziness” of the market and sold his entire rental portfolio at the very top in 2006. In addition to his own investing, Pete founded The Club, LLC, a real estate investing coaching program that focuses on strong relationships, accountability, one-on-one coaching and strong local resource networks.  You can find out more about Pete here or via his coaching program.  Pete can also be heard every Thursday night at 11PM on his radio show.

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