According to an article in The Wall Street Journal, many who support a government-backed housing finance system are predicting calamity for the housing markets without government mortgage guarantees, yet the Federal Reserve is telling a different story. Reserve data shows that nonbank institutional investors had assets of $28 trillion in the fourth quarter of 2010. The WSJ article went on to explain that about $13 trillion of this amount was invested in fixed income or debt securities, but only $1.8 trillion was invested in U.S. government-backed securities.

Home sales in the Hamptons are dropping. Bloomberg.com reported that the summer playground for wealthy New Yorkers has seen a 22% drop in the first quarter, plunging to 309 transactions from 396 the previous year. This drop was the largest since the second quarter of 2009. The drop isn’t due to lack of demand but, rather, the relentless snow and poor weather that kept Manhattan buyers away from the market.

Reverse Mortgage Daily recently reported that the reverse mortgage market index dropped 18% from peak levels in 2006. The latest data from the Reverse Mortgage Market Index (RMMI) shows that the amount of home equity held by seniors fell to $3.3 trillion at the end of 2010. According to RiskSpan, the growth or decline of the reverse mortgage market largely depends on the senior population growth, housing prices and senior debt levels.

The Home Equity Conversion Mortgage (HECM) is expected to generate $304 million of receipts in 2012, as reported by Reverse Mortgage Daily. This growth is largely due in part to the Federal Housing Administration’s new HECM Saver program, which gives borrowers access to home equity in amounts that are between 10-18% less than it would have been available with the HECM Standard option.

Wednesday’s Newsday article reported that the number of closings on Long Island fell in March. Last month, there were 1,902 sales closings on Long Island, down 9.3% from February, based on data from Multiple Listing Service of Long Island. However, the number of contracts, or pending sales, in the month of March was up 38% from the previous month. MLSLI also reported that the median home closing price fell in Nassau County from $397,000 in February to $390,000 in March. In Suffolk County, prices stayed the same at $300,000.

Bankrate.com reported that, as of April 13, home equity loans averaged 6.95% nationally, a drop of three basis points from a week earlier. (A basis point is 0.01 of a percentage point.) The typical home equity line of credit had a rate of 5.55%, down one basis point from last week.

Reuters reported that applications for home mortgages fell to their lowest level in three months. The Mortgage Bankers Association released data on Wednesday that the seasonally adjusted index of mortgage application activity — which includes refinancing and home purchasing applications — fell 6.7% in the week ending April 8. It was the third straight week of declines and applications were at their lowest level since the week of January 21. The index of refinancing applications declined by 7.7% and applications for loan requests dropped 4.7%, according to the MBA.

The Wall Street Journal reported that the Securities and Exchange Commission is set to issue draft proposals requiring firms that package loans and other assets into securities to hold a portion of the credit risk on their balance sheets. The rules, mandated by the Dodd-Frank Act, will surely affect everything from car loans to mortgages. The law requires issuers of securitized assets to retain 5% of the credit risk on the theory that they will adopt more prudent lending requirements. Banks and financial institutions that meet certain conservative lending standards will be exempted from the risk-retention requirement.

Thursday’s Daily Real Estate News reported that a housing shortage is on the horizon which may propel construction of new homes. According to a survey of 41 U.S. cities by Metrostudy, 78,000 houses are either vacant and for sale or under construction, 25% below the levels of those in 2006. Between the decline in new construction and falling housing prices, demand will increase as a severe housing shortage take place, the survey says. This will mean a demand for more homes to be built.

Reverse Mortgage Daily reported on Thursday that a new industry study aims to change people’s attitudes when it comes to reverse mortgages. A study conducted by Reverse Mortgage USA finds that, through reverse mortgages, Americans could save billions of Medicaid dollars and help reduce the U.S. deficit. The study says that those who use reverse mortgages to pay for long-term care could save the government-funded Medicaid program $5 billion a year. This could be help reduce the budget — now at $1.6 trillion — in which 58% of the budget is slated for Medicaid, Medicare and Social Security. In addition, senior citizens ages 62 and over hold $2 trillion in home equity, which is untapped for long-term care costs; it is exempted for Medicaid eligibility limits and is usually projected against Medicaid estate recovery.

HARP initially had a goal of helping around four to five million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance and lower their monthly mortgage payments. According to the Treasury Department, so far, the program has helped around 220,000 homeowners. 

While banks usually require homeowners to have at least 20% equity to qualify for refinancing, this proved to be a problem during the current crisis, where homeowners have been faced with falling home prices. HARP was created to help these borrowers whose home values have fallen and who owe more than their homes are worth by taking advantage of the lower mortgage rates and refinancing their homes. 

Earlier, the program targeted borrowers who owe slightly more than their property values. Later, it was expanded to include those with loan balances of up to 25% more than their home values. 

So far, the program has struggled to meet its goals. The program is limited in reach since it only includes loans backed by the federal mortgage agencies, Fannie Mae and Freddie Mac. Homeowners with second mortgages or private mortgage insurance cannot qualify for refinancing and very often, the closing costs and refinancing expenses are not worth the lower interest rates.

Earlier this morning the Commerce Department reported that newly built single-family homes fell by a larger-than-expected 7.6% in December.  Bad weather may have played a role in the December new home sales data.  Last month was the 14th coldest December and 11th wettest in 115 years of record keeping according to the National Climatic Data Center.  Bad weather or good — the housing market recovery is showing some signs of fatigue after a mid-year surge in sales as first-time homebuyers rushed to take advantage of a popular tax credit, which had been scheduled to expire in November.  As most readers of this commentary are well aware, the original homebuyer tax credit program has been expanded and extended until June this year.  Most analysts expect home sales to pick up as a result, though most don’t expect the pace to be quite as strong as it was under the initial program.  Mortgage investors essentially shrugged this data off this morning and remained far more focused on the upcoming Treasury auctions, Fed meeting, and the last minute political wrangling surrounding the likely reappointment of Fed Chairman Bernanke.

Next up for mortgage investors is this afternoon’s $42 billion 5-year note auction (concludes at 1:00 p.m. ET) followed within an hour or so by the release of the much anticipated post-meeting statement from the Federal Open Market Committee.

Yesterday’s $44 billion two-year note auction attracted solid demand, with the total number of bids strongly higher than the average for the 12 auctions of two-year debt that took place last year.  It’s a decent start to this week’s three-part Treasury auction and let’s hope the momentum is sustained.  Aggressive bidding and solid foreign investor participation at today’s 5-year note auction will tend to be supportive of the prospects for steady to slightly lower mortgage interest rates.  In the unlikely event today’s 5-year note sale is a bust – look for mortgage interest rates to finish the day higher.

It is Wednesday morning which means the Mortgage Bankers of America have released their mortgage application survey for the previous week.  During the week ended January 22nd the MBA said overall mortgage loan demand dropped 10.9% from the previous week.  The purchase index fell 3.3% while the requests for refinance loans fell 15.1%.  Refinance applications accounted for 67.6% of all applications – down slightly from last week, when they were 71.1% of the total.

Flat early this morning; the 10 yr note unchanged at 7:00 and remained unchanged through 9:00; mortgage prices also essentially unchanged. At 9:00 the DJIA futures -12 points. At 9:30 the DJIA opened -36, the 10 yr note gaining ground, +7/32 at 3.60% and mortgages at 9:30 +3/32 (.09 bp) frm the close yesterday.

The MBA applications survey for the week ending January 22, 2010 out at 7:00.  The Market Composite Index decreased 10.9% from one week earlier. The refinance Index decreased 15.1% from the previous week. The purchase Index increased 2.8% compared with the previous week and was 4.5% lower than the same week one year ago. The four week moving average for the market Index is up 2.6%. The refinance share of mortgage activity decreased to 67.6% of total applications from 71.7% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 4.7% from 4.1% of total applications from the previous week. The average contract interest rate for 30-year fixed-rate mortgages increased to 5.02% from 5.00%, with points decreasing to 1 from 1.05 (including the origination fee) for 80% loan-to-value loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 4.34% from 4.33%, with points decreasing to 1.14 from 1.19 (including the origination fee) for 80% loans. The average contract interest rate for one-year ARMs increased to 6.84% from 6.72%, with points increasing to 0.33 from 0.31 (including the origination fee) for 80% loans.

At 10:00 Dec new home sales, expected to be up 3.5%, were down 7.6% to 342K units frm 370K units annualized in Nov. Nov sales were revised from -11.3% to -9.3%. The median sales price $221,300.00 and down 3.6% from Dec 2008. The initial reaction rallied interest rates and turned equities lower.

At 1:00 this afternoon, the Treasury will conduct the second of three auctions this week with $42B of 5 yr notes. Yesterday’s 2 yr note auction was just OK with the rate slightly higher than what traders were expecting. The 5 yr may be a little more sticky as the term moves out the curve; however, markets continue to expect decent demand for treasuries. With equity markets teetering on a major decline treasuries will continue to see increased demand on safety moves.

At 2:15, the FOMC will release their policy statement. Unlikely there will be anything in it that will roil markets, but talk is cheap and traders are always suspicious of anything coming from the Fed these days. The Fed will continue to talk of improvement in the economy but slowly, and will keep rate low on the FF rate for the foreseeable future. Recent comments from Fed officials that suggest the Fed is considering any tightening by increasing the rate on excess bank reserves held at the Fed, thus continuing to drain reserves that essentially would increase rates on loans and restrict unreasonable lending may lessen the focus on the the FF rate as the key to tightening when the time comes.

Finally today; the State of the Union speech this evening. After the recent election re-buffs the Pres is doing a major reversal. More consideration to the people instead of trying to ram rod the health care mess through Congress. Taxpayers sent a strong message that the big government is out of control; Obama will make a strong case he is back in the game and “concerned” that there is little progress in improving the economy. Yes; GDP will be up 4.5% in Q4 but it has little to do with consumers, housing, and unemployment.

Should be choppy today with not much change, at least until 2:15 when the FOMC statement hits. If nothing new there markets are likely stay close to unchanged with the State of the Union speech this evening. Still however, its the stock market that is moving the rate markets. Equity markets are increasingly suspect to a major decline; more belief that stocks are over-valued and that while the economy has improved consumers are still reeling. Consumer credit has collapsed in the past eight months; not in the game of spending and banks unwilling to pass out credit cards to anyone breathing. How many times in the past year has anyone heard the mantra that dominated until the banking crisis, that consumers account for 70% of GDP growth? Hardly anyone wants to face that reality, especially those on The Street that want us to believe we can have a consumer less recovery —a true oxymoron in a world presently awash in oxymorons.

In a short sale, a homeowner owes more than what their home is currently worth. To avoid foreclosure, the homeowner settles with the mortgage lender to accept less than what they owe on the property. As a result of this agreement, the seller is able to fend off foreclosure, the lender avoids taking on the burden of selling the property and the new buyer gets the property at a reduced price. Additionally, the seller will not be required to pay for the deficiency on the loan. 

According to a recent research report released by the Boston-based National Consumer Law Center, mortgage companies are more likely to foreclose on homeowners than modify their loans or agree to a short sale because they make more money off foreclosures. 

In May 2009, President Barack Obama announced the Home Affordable Modification Program (HAMP) to reward mortgage servicers who successfully modify home loans and prevent foreclosures. On November 30, the U.S. government released a guidance for the adoption and implementation of the Home Affordable Foreclosure Alternatives (HAFA) Program, a part of HAMP which provides financial incentives to servicers and borrowers to lean toward short sales rather than foreclosures. 

Under the guidance, mortgage servicers have 10 days to either approve or deny a request for a short sale, after which the borrower must be fully released from the debt. The guidance also prohibits mortgage servicers from reducing the commissions of Real Estate Agents who make a short sale. In addition, the subordinate lien holders’ aggregate proceeds would be capped at $3,000. Some Real Estate Agents have argued that, in a foreclosure, subordinate lenders have profited the most as they demanded more money from the first lender, seller, buyer or Agent in exchange for releasing their claim, while primary lenders have lost money on such transactions. 

With a more streamlined process for short sales now being put into place, we should see fewer foreclosures, helping to stabilize the housing market in the near future.

This increase seems to be driven by an uptick in demand for home refinancing loans, which rose by an unadjusted rate of 0.9 % during the same week ending December 11. Refinance mortgages comprised of 75.2% of all mortgage activity during the last week, an increase from 74.4% over the previous week. This represents the highest shares of refinancing recorded by the survey since the week ending April 24.

Compared to refinances, adjustable-rate mortgages (ARMs) comprised of 4.1% of the applications, a decrease from 4.7% the last week, which is the lowest ARM activity since mid-June. Rates on one-year ARMs decreased from 6.55% to 6.52%. The average interest rates on 30-year fixed-rate mortgages averaged 4.92% last week from 4.88% last week. The rates on 15-year fixed-rate mortgages averaged 4.33% last week, the same as the previous week.

The slight rise in mortgage applications is probably the result of the extension of the $8,000 first-time homebuyer tax credit and the tax credit of up to $6,500 made available to existing homeowners, announced by the government last month.

In the current environment, the Federal Housing Administration’s (FHA) 203 (k) Loan program, first established in 1978, becomes even more important. The program’s main goal is to make it easier for buyers to refinance existing mortgages and cover additional rehabilitation costs for single home properties. Very often, home buyers who want to purchase property need to take three separate loans – short-term loans to purchase the home, another one to cover rehabilitation costs and permanent financing to repay the first two loans. The 203 (k) Loan program allows home buyers to take out a single mortgage loan at a long-term fixed or adjustable rate that covers both rehabilitation and purchase or refinance costs. 

According to the FHA, the program can be used for rehabilitation and/or improvement of an existing one-to-four unit home in the following ways:

• To finance the rehabilitation of an existing property;
• To finance the rehabilitation and refinancing of outstanding indebtedness (mortgages) of a property; and
• To finance the initial purchase and rehabilitation of a property.

 Many lenders have been using the FHA 203(k) Loan program in combination with other programs such as the U.S. Department of Housing and Urban Development (HUD)’s HOME, HOPE, and Community Development Block Grant Programs to help homeowners rehabilitate their properties.

 The following are the highlights of the 203 (k) Loan program:

• Applicable for one to four unit family homes, condominiums (subject to conditions).
• There is a minimum requirement of $5,000 in repairs. Some of the eligible improvements include structural alterations and reconstruction, elimination of health and safety hazards, reconditioning or replacement of plumbing, flooring, tiling, carpeting, roofing, gutters and downspouts.
• The loan amount is based on what the U.S. Department of Housing and Urban Development believes the home will be worth after the rehabilitation is complete, including the cost of the repair work.
• The total value of the property must be within the FHA mortgage limit for the area in which the property is located. The value of the property is determined by a) the value of the property before rehabilitation plus the cost of rehabilitation or b) 110 percent of the appraised value of the property after rehabilitation, whichever is less.
• To reduce the risk borne by the mortgage lender, the mortgage loan is fully insured as it is eligible for endorsement by the HUD as soon as the mortgage proceeds are paid and a rehabilitation escrow account is set up.  

Streamlined 203 (k) Limited Repair Program

 In 2005, to supplement the existing 203 (k) loan program, the HUD introduced a new 203 (k) Streamline Loan program, which is a limited repair program that allows homebuyers and those looking to refinance to borrow up to an additional $35,000 into their mortgage to rehabilitate their home before they move in. This allows them to secure more funds to pay for property repairs and improvements, which can be suggested by a home inspector or FHA appraiser.

 With an increased maximum limit from $15,000 to $35,000 in rehabilitation costs, the Streamlined 203 (k) program recognizes the increasing cost of materials and allows homeowners to make more extensive improvements and also make their homes more energy efficient. The Streamlined program also removes the minimum repair requirement of $5,000. However, for repairs over $15,000, the borrower is required to undergo an inspection to determine that all listed repairs have been completed.

The Streamlined 203 (k) program is also available for mortgage refinance transactions including those where the property is owned “free-and clear.” Only credit-qualifying, “no cash out” refinance transactions with an appraisal are eligible for the Streamlined 203 (k) program.

 Besides extending the tax credit for first-time homebuyers, the program also makes a tax credit of up to $6,500 available to existing homeowners who are looking for a ‘step-up’ by selling their current home and buying another one during the same period.

 While the first-time homebuyer tax credit has already helped many potential homebuyers transition into their first homes, expanding the credit to existing homeowners may help push more qualified buyers to purchase homes. Experts are debating over whether this extension will help revive the housing market and increase home sales or if it would only create another bubble in the market.  

Below are the highlights of the new tax credit law:

For First-Time Homebuyers 

• First-time home buyers can claim the $8,000 tax credit by signing a sales contract before May 1, 2010 and close on the sale before June 30, 2010.
• Those who serve in the military and who are on extended duty outside the United States can claim the credit till July 1, 2011, provided they sign the sales contract before May 1, 2011.
• The maximum income limit for receiving the tax credit has now been raised from $75,000 for single buyers to $125,000. The income limit for married couples has also been raised from $150,000 to $225,000. A partial tax credit is available for single buyers making between $125,000 and $145,000 and for married couples making between $225,000 and $245,000.
• The tax credit does not have to be repaid unless you sell your home within three years.

For Existing or Repeat Homebuyers 

• Homebuyers who have lived in their current home for at least five years and wish to buy a new home are eligible for a tax credit of up to $6,500.
• The deadlines and income limits for repeat homebuyers are the same as first-time homebuyers. Both existing and first-time homebuyers are not eligible for the tax credit if the purchase price of the home is more than $800,000.
• The new home must be the homebuyer’s principal residence; the tax credit cannot be used to buy a vacation home.

Anti-Fraud Provisions 

• After the Treasury reported that many taxpayers who were not eligible for homebuyer credit had wrongly claimed it, certain anti-fraud provisions have been added to the new law.
• Those listed as dependents on someone else’s tax returns cannot claim the tax credit. Taxpayers must also be at least 18 years of age of the date of purchase to be eligible for the tax credit.
• Homebuyers will not be required to attach a copy of their settlement agreement to the tax return.

With foreclosure rates rising, it is important for homeowners to be educated about how they can prevent foreclosures. Though the Federal Government’s $75 billion loan modification program has achieved its goal of beginning trial loan modifications for 500,000 financially-troubled homeowners, a large number of homeowners are still at risk.

Though many lenders consider troubled homeowners for a mortgage modification to avoid foreclosure, more borrowers could face foreclosures as their moratoriums end. Homeowners should be given the opportunity and help needed to keep their homes. The loan modification process can be very confusing for homeowners. The fact is there are no real set parameters that qualify a homeowner for a modification.

Currently, most banks are taking between six months to a year to make a decision on a mortgage application. Quite often, after waiting for so long, the loan modification is denied and the homeowner has to eventually face foreclosure. Buyers who apply for loan modifications should first understand what the process entails. Loan modifications can affect your credit rating by a 50-100 points. If your financial situation is only temporary, it may not be the best option since it would be difficult to rebuild your credit.

To prevent a foreclosure, borrowers should contact their lender to discuss foreclosure prevention options as soon as they realize they have a problem making payments – the longer they wait, the fewer options they may have. They should also be wary of foreclosure recovery scams and educate themselves about their mortgage rights and foreclosure laws and time-frames in their state.

At Affordable Financial, we believe the best way to stay in your home with an affordable payment is to assess the current situation and determine what steps are necessary to qualify for a refinance. A refinance has set parameters that have to be met in order to qualify, which helps our loan officers determine what needs to be done to make the refinance a reality.