Fitch Ratings announced on Wednesday that it is unveiling a new model to determine potential losses from securities backed by U.S. home mortgages. The new home price model will help predict which borrowers will end up “underwater” — that is, owing more than what their home is worth. This system will help investors who buy mortgage-backed securities. Fitch plans to seek comments on its new modeling system for the next 45 days from investors.

The Mortgage Bankers Association predicts that residential mortgage lending is expected to shrink to its lowest levels since 1997 as demand for home refinancing plunges due to higher interest rates and stricter lending requirements. The MBA says lenders will underwrite $966 billion on mortgages in 2011, down from $1.505 trillion in 2010 and $1.995 trillion in 2009. In 1997, mortgage originations were at $833 million. However, mortgage bankers expect an increase in loans for home purchases from $473 billion last year to $614 billion this year.

The Washington Post reported Tuesday that more people near the end of last year did “cash-in” refinancing of their mortgages, mostly to qualify for interest rates that were at near-historic lows. In the fourth quarter of 2010, 46% of borrowers who refinanced their primary mortgage brought cash to settlement to lower the balance on their loans, according to Freddie Mac. That is the highest percentage of “cash-in” refinances since the company tracked such numbers in 1985.

REALTORMag reported today that home values are declining in the third quarter in 2010. According to Zillow Real Estate Market Reports, home values fell on an average of 25% below its peak at June 2006. This current quarter marks the 17^th straight quarter in which home values have declined. Numbers from Zillow showed that 23.2% of single-family homeowners with mortgages were underwater — up from 22.5% in Q2 2010. Eleven markets tracked by Zillow had negative equity above 50%; Las Vegas topped the list with 80.2%.

Some good news: Another article from today’s REALTORMag showed that the number of mortgage applications increased, beating analysts’ expectations. Mortgage applications were up 5.5% last week, compared to the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association weekly survey. On an unadjusted basis, purchases increased 3.1% compared over the previous week. This is the third straight week that mortgage applications rose and they are at the highest level since May.

According to the NAR, existing home sales — which are completed transaction that include single-family homes, condominiums and co-ops — were up 10.0% to a seasonally adjusted annual rate of 4.53 million units in September, compared to a downwardly revised rate of 4.12 million units the month before. However, that number is 19.1% lower than the September 2009 figure of 5.60 million units.

There are some factors that may be attributed to this upward trend. Those looking to buy a home did so before the new regulations for prospective homebuyers took effect on October 4, which now requires higher credit scores and larger down payments. Interest rates were at record lows as well; according to a Freddie Mac survey, the average rate for a 30-year fixed-rate mortgage fell from 4.43% in August to 4.35% in September.

It remains to be seen whether this surge in home sales will continue. The recent foreclosure moratoriums might have a negative impact on the housing market and the economy in general. In addition, mortgage applications may decline as fewer people may afford to buy a home and underwater homeowners may not qualify for refinancing. However, some experts say the housing market will recover over the next few months, albeit slowly.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, was down 10.5% for the week ending October 15, compared to the previous week. The MBA’s refinancing index decreased by 11.2% last week — the sixth decline in seven weeks, according to Reuters. The purchase index fell 6.7% last week.

Meanwhile, the average interest rate on 30-year fixed-rate mortgages was up to 4.34% last week, compared to a record-low 4.21% the week before. The MBA said that 15-year mortgage rates averaged 3.74%, compared to 3.62% last week — the lowest rate on record. One-year adjustable-rate mortgages went from 7.03% two weeks ago to 7.17% last week.

Experts say many factors could be attributed to the drop-off in applications. Some point to the expiration of the federal tax credit, which spurred a home buying frenzy when it was enacted. Others say the more restrictive qualifications to buy a home — such as larger down payments and higher credit scores — play a role. The decrease in refinancing applications could be attributed to the fact that many homeowners with underwater mortgages are ineligible for refinance loans because of the negative equity in their homes.

There was one piece of good news on the housing front this week. The U.S. Commerce Department reported yesterday that housing starts rose unexpectedly last month to a five-month high. Experts say home sales and housing construction should improve next year while home prices continue to fall over the next 6-9 months before it bottoms out. But they say the recovery will be slow — very, very slow.

The MBA’s seasonally adjusted index of refinancing applications decreased 10.8% the same week, its lowest level since the week ending August 6, Reuters reports. The seasonally adjusted purchase index fell by 0.4%, the first drop in four weeks.

The rate for 30-year fixed-rate mortgages averaged 4.47% last week, down 0.03% from the previous week, according to the MBA. Fifteen-year fixed-rate mortgage rates averaged 3.96% last week, down from 4% the week before. Rates on one-year adjustable-rate mortgages dropped from 7% to 6.89%.

Analysts say that many borrowers may want to refinance, but could not do so because of job loss or exorbitant closing costs. Also, many homeowners are underwater and so now is not the right time to refinance. And with the expiration of the federal tax credit, prospective homebuyers are sitting on the sidelines.

The federal government has set aside $14 billion as a way to modify between 500,000 and 1.5 million underwater loans that could be modified through the program. Under the new “short refinance” program, banks and other creditors that write down mortgages to less that what the property is worth can, in essence, hand off the reduced loan to the government. The process involves refinancing borrowers into loans backed by the Federal Housing Administration, according to the WSJ article.

Some of the concerns regarding the revised program include the burden on the taxpayers based on officials’ estimates that 20% of those loans in the program could default. According to data from CoreLogic, about 11 million U.S. households, or about 23% of homeowners with mortgages, had negative home equity in the first quarter of 2010. (Here in New York State, 7.1% of homeowners have negative equity — far below the national average).

Another concern is the administration’s intention to concentrate solely on loans bundled by Wall Street firms and sold as mortgage-backed securities. Investors are worried that, if the balances are greatly reduced, they would be wiped out. Mortgage servicers — who handle loan payments and decide on loan modifications — would drown in paperwork and sued by investors who lose their money on risky loans. Borrowers who receive a reduction in principal fear that it will negatively affect their credit score.

But government officials say they are receiving positive feedback on the program from mortgage servicers and investments groups that are able to write down loans. Analysts say that the modified program would most likely succeed on bank-owned loans. In addition, the program could provide investors with a vehicle for getting rid of loans that have been modified and are current again.

MarketWatch reported today that “cash-in refinancing” is the new trend in which borrowers tap their home equity and, instead of putting it into their pockets, are putting that money into their mortgages, especially when they want to refinance. And with mortgage rates at record lows — 4.56% for 30-year fixed-rate mortgages and 4.03% for 15-year fixed-rate mortgages for the week ending July 22, according to Freddie Mac — people will reduce their debt significantly.

Many homeowners are resorting to paying down the mortgage instead of investing in CDs or stocks. CDs don’t have the same high yields as in years past and the stock market’s volatility have made many people bearish.

Some of the advantages of a cash-in refinance include:

● By using the extra cash, borrowers would no longer have to pay private-mortgage insurance (PMI), which is required when the mortgage is more than 80% of the home’s value. The extra money would allow borrowers to eliminate PMI, thereby saving monthly premium costs.

● Borrowers can use the extra money to help them get the lowest rates possible, provided the loan-to-value ratio is less than 60% and the borrower has a FICO score above 740.

● The extra money brings the homeowner’s mortgage under the conforming loan limit so they do not have to pay higher jumbo rates. The money can also help homeowners reduce their mortgage term from 30 to 15 years to make their monthly payments more bearable.

According to Freddie Mac, 18% of all refinanced mortgages in the first quarter of 2010 were cash-in refinances — less than half of what it was in the previous quarter. However, many underwater homeowners may consider a cash-in refinance if they can find no-cost refinancing or get help from the government’s Home Affordable Refinance Program (HARP), despite being short on home equity.

REALTOR Magazine recently reported that the Dodd-Frank Wall Street Reform and Consumer Protection Act included several sections in the 2,300-page bill regarding real estate finance, including mortgage reform. The bill would require lenders that originate loans to consumers to ensure that the borrowers are able to repay the loan.

Part of the reason for the bill, lawmakers say, was to curb the dishing out of subprime loans, which caused the housing bubble to burst. These loans were given to people who realistically could not afford to pay them back. As a result, the housing market crashed, home values declined and homeowners were underwater — that is, they owed more than what their home is worth. In addition, people found themselves in foreclosure or walking away from their mortgage payments altogether.

After the 60-38 Senate vote in favor of the bill, many hailed this bill as long overdue, but it was not without its critics. Republicans decried this as another example of the Obama administration’s overreach into the financial markets. Other critics said the bill does not go far enough. But with the residential real estate market going nowhere and nobody ready to make a home purchase — despite near-record-low interest rates — the Wall Street reform bill might not have an effect on the mortgage lending industry at all.

The Times article explained that more people whose homes are in foreclosure are taking this “free ride” by no longer paying their mortgages and, instead, are using the money to get back on their feet. Those with underwater mortgages claim the lenders offered them loans they knew they could not afford and, when the housing market crashed, the lenders wouldn’t help them. But lenders are warning those who are shirking their financial responsibilities that they will have to pay sooner or later.

According to data from LPS Applied Analytics, the average borrower in foreclosure has been delinquent on payments for 438 days before they are evicted, up from 251 days in January 2008. In the past 18 months, more than 650,000 homes have not made a payment. In the U.S., New York leads the way with properties averaging 561 days in foreclosure (Florida is second with 518 days).

These lenders are seeking to collect, but in New York and Florida, lenders need to undergo the legal process, which can be very long and drawn-out. But in states such as Texas and California, lenders can eschew the legal process and go after the borrower’s assets quickly.

With 1.7 million homes currently in foreclosure and the economy showing no real signs of improving, people are taking this “free ride” for the time being. But lenders are telling homeowner to enjoy the ride now because, sooner or later, the ride will be over.